If Argentina wants to grow, then it must cut public spending

(Xinhua) – Argentina’s president, Mauricio Macri, will conclude his term in 35 days with “contradictions that prevented the implementation of a series of economic reforms” that, if they had prospered, would have helped “solve problems such as high inflation, poverty and unemployment” said expert Natalia Motyl today.

Motyl, an analyst with Fundación Libertad y Progreso (FLyP), said in an interview with Xinhua that “Macri’s management was plagued by political contradictions and limitations. On the one hand, his speech always pointed to the right path. However, the economic policies carried out were quite timid and slow for the seriousness of the country’s problems.

«Macri applied, endorsed in part by the International Monetary Fund (IMF), a gradualist policy, which gave him a certain air in the social peace. After a series of riots in December 2017, his Government definitely cowered with the reforms that had to be carried out and chose a scarce path of pragmatism. He bought time by borrowing from the IMF” said the economist.

The economy of Argentina, the third in Latin America, will close this year with a contraction of 3.1%, according to the IMF. The country also records with high inflation of 37.7% in the first nine months of the year, an unemployment rate of 10.6% and a poverty rate that affects 35.4% of the population.

«Argentina has a persistent high public expenditure, which exceeds its income and causes distortions in the rest of the economic variables. Because the State chooses to finance it, instead of reducing it, are the causes that produce high rates of unemployment, inflation and poverty, in addition to a stunted productive structure, which cannot cope with external shocks and economic stagnation since 10 years ago” Motyl observed.

The analyst stressed that “there are no magic recipes, but successful policies” to address the country’s economic problems: “If we want to grow, then we must cut public spending.”

«Macri, on the other hand, decided to finance this public expenditure by borrowing, so as not to generate social tension. He definitely bought time, but it wasn’t enough. It was seen that the gradualist policy of his administration was not consistent with the fiscal deficit when trying to control inflation with ‘inflation targeting’ and they definitely got out of hand” the interviewee analyzed.

Argentina last year signed an agreement with the IMF to access a loan for 56.3 billion dollars, of which it received about 44.1 billion. A disbursement of $5.4 billion is pending due to the political and financial situation in the country after the Macri setback in the general elections of October 27.

According to the Government, Argentina faces a level of indebtedness equivalent to 68% of its Gross Domestic Product (GDP), a figure questioned by the opposition, which ensures that the debt represents the entire national GDP.

The expert stressed that “if the Government had applied a shock policy, the story would have been different. A shock policy allows to quickly eliminate distortions and thus improve efficiency, increasing the well-being of the whole society. If Macri had chosen that path, today poverty would be reduced, there would be single-digit inflation and a manageable unemployment rate. Unfortunately, it was not possible to do it».

Asked about the points to be distinguished from the administration that concludes on December 10, Motyl considered that “Macri’s management has three fundamental points to highlight: institutional quality, international relations, greater transparency.”

«In 2019, Argentina rose in seven positions in the Institutional Quality Index. And from 2017 to 2019, the country went from position 142 to 112. In the Corruption Perception Index, prepared by the International Transparency Organization, our country also improved, currently positioning itself in position 85 of 180 countries,” she emphasized.

She also said that «there is no doubt on the improvement in relations with the rest of the world. Argentina managed to strengthen bilateral relations. Returning to the markets was not a simple task and Macri made a breakthrough in this area».

On the other hand, the current Government “was pending to reduce current expenditure completely, beyond achieving a primary result close to zero due to the rise in taxes, and thus return to the path of growth with low inflation and the rate of unemployment. These are the great challenges that our country has and we must face them urgently” urged the economist.

According to a government document released on Tuesday, «in 2019 the Argentine State will practically reach the primary balance, both nationally and provincially. This is something that has not been seen for a decade and that is practically an exception in the economic history of the last 70 years.

The imbalance of public accounts has been in the last decades one of the main factors of the volatility of the Argentine economy: in the last 60 years the consolidated Argentine Public Sector had, on average, a primary fiscal deficit of 2% of GDP, with maximums of 12% and an average fiscal deficit of 4% of GDP, according to that document.

«The fiscal effort (of the past four years) was achieved by preserving social investment, returning resources to the provinces and reducing tax pressure. Thus, in 2015-2019, primary spending excluding social benefits, had a reduction of 5.1 points of GDP, returning to 2006 levels, ”said the Government document.

Motyl said that the next administration, which will be in charge of the Peronist leader Alberto Fernández, “will find Argentina on the verge of suffering one of its greatest economic crises in history, with the same problems as when Macri assumed, but in this case totally indebted ».

«Clearly, Argentina does not have much room to choose a different path to pragmatism. Today the priority is to get out as airy as possible from the crisis” she summarized.

For Motyl, Argentina will recover the path of economic growth if “a labor reform, a tax reform that includes the reform of federal tax co-participation, commercial opening, an educational reform and achieving a healthy currency prosper. Each one of them are necessary and essential to be able to get out of this stagnation in which we are for a decade.

By Natalia Motyl