The dead end of the Argentine economy

The author is Associate Professor of Economics at the Metropolitan State University of Denver, PHD in Economics and Economic Point Editor.

INFOBAE – The Argentine economy seems to be locked in a dead end. Since 2011, it has not found a solution to the problem of stagflation. The costs of high inflation and currency crises are paid without any benefit on the level of output. The country’s economy, or perhaps rather the government, seems to be at a dead end.

The government seems to be convinced that the economy needs a demand boost. We must increase public spending and put money in people’s pockets so that they increase their consumption. The problem would not be the lack of profitability in the private sector, the problem is lack of spending.

There are two pieces of information that show that the economic problem is not the lack of spending. The first is the current level of public spending. The Argentine State is a serial spender and should be a world economic power if spending were the source of the income level. In fact, the state spends so much that it is unsustainable. Hence, Argentina repeats its endless cycle of currency crises and defaults. The second relevant data is nothing less than the current inflation rate. If the problem of the Argentine economy were lack of spending (aggregate demand), then we should see a deflationary scenario. Rising inflation suggests the opposite: an excess of spending financed by monetary issue. The idea of ​​public spending as the engine of the economy, so associated with Keynes, is often recommended in a context of low public spending, low debt, high unemployment, and deflation. Argentina is in the reverse scenario. The country needs to be more anti-Keynes.

If spending is not the solution, what alternatives are left? It is difficult to see a way out in private consumption. The country’s poverty levels and high fiscal cost leave nothing but a small and limited-income domestic market to absorb increased production. Leaving aside the public sector and families as potential engines of the economy, there are two candidates for Argentina’s recovery: investors and the external sector. Both require what economists never tire of recommending, a series of institutional reforms that are credible.

Argentina does not have internal savings. How are you going to have them with a history of seizures and an inflation rate above 60% per year from the mid-1940s to the present? Saving in Argentina is mission impossible. Either savings are confiscated, or they are consumed by inflation. Therefore, Argentina must turn to external investors. But attracting external investors requires that regulatory costs, labor costs, and fiscal pressure be lowered on the one hand and that country risk be reduced on the other.

The external sector remains, nothing less than the rest of the world as a potential client of what is produced in the country. Of course, for the Argentine product to be demanded by the world, it must be offered at a competitive price. This does not mean depreciating the exchange rate, but rather increasing the country’s productivity. Again, reduce regulatory costs, labor costs, and tax burden, as well as allow exporters to keep their dollars, instead of having to sell them to the central bank in exchange for pesos.

In truth, alleys do have an exit. When you accidentally enter a dead end, you turn 180 degrees and continue walking. The political leadership must do the same with the country’s economy and institutions.

The author is an economist, professor (Metropolitan State University of Denver and UCEMA) and senior fellow at the American Institute for Economic Research

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