The president makes 3 basic economics mistakes

Deputy Director of the Master's Degree in Economics and Political Science at ESEADE.

INFOBAE – The suspension of corn exports shows the misconceptions on which policy decisions are based Before the end of 2020, the Ministry of Agriculture announced that it will suspend corn exports until March in order to supply the domestic market. The measure, a clear attack on the freedom to trade, is part of three basic conceptual errors that the president himself made evident when defending it in a recent radio interview.

The first basic mistake is to believe that the suspension of exports will effectively lower the price of corn. To think about this is to take into account only the short term, at which time those who were about to sell corn abroad must sell said product in the domestic market, increasing the supply. Now, what will happen when the producers learn? Well, given the lower profitability received, they will think twice if they want to produce this good. In this context, they may decide to dedicate themselves to the production of other crops not subject to official regulation, or they may directly prefer to use the resources that they were going to use in the production of corn and send them to an account in the United States. The end result, then, is lower corn production.

This reasoning is not just a beautiful theoretical development. This was the result of the meat export ban that Néstor Kirchner promoted in 2006. The stock of cattle fell by 12 million, which finally made meat, even after inflation, more expensive than before of the measure.

The second basic mistake is to believe that the costs of production define the prices of consumer goods. The president explained by radio that, although the demand for food in the world is increasing, “Argentine producers produce in Argentine pesos and for two years they have not had increases in electricity or gas rates and the increase in fuel was very low”.

What Fernández is trying to communicate is that beyond the changes in global demand, as the costs of Argentine producers are not only in pesos, but in many cases they are frozen, prices for Argentines should not rise.

The mistake here is to believe that costs determine prices. Let’s see, it is clear that if the demand wants to pay for a ton of corn $10 and that price does not cover the cost of any producer, then no one will have any corn. But this does not mean that prices are determined by costs. What happens in the markets is that the demand shows the willingness to pay, and in the face of that willingness, one, twenty, or hundreds or thousands of companies enter to sell with different cost structures. Now if my costs are $10 and I have buyers offering to pay $20, why am I going to sell for less than $20? At best, this gap between price and cost will create an incentive for more producers to enter the market at costs higher than 10 to continue making a profit.

Prices define up to what level of costs to incur to produce something, to believe that it is the other way around (and that it is the prices of inputs that determine the price of the product) is a basic error of economic understanding.

The last mistake is to suggest that the prices of some products offered in Argentina should not be similar to those of the rest of the world. Linked with the previous comment, President Fernández rhetorically asked himself “why do Argentines pay the kilo of barbecue as a Chinese, a French or a German does?… I don’t understand why they want to charge the Argentine at the same price that world.”

Here it seems that the head of state does not know the concept of a tradable asset. In economics it is said that a good is tradable if it can be traded internationally. An example of a tradable good is a kilo of corn or toilet paper, while a non-tradable good is the hairdressing service, since the hairdresser cannot travel to Miami at 2 in the afternoon and cut the hair again at Buenos Aires at 3:30.

A particularity of tradable goods is precisely that they tend to have a single price in the global market. That is, since they can be imported and exported, a global demand and a global supply appear where the price of the product tends to be one. In this sense, it is absolutely logical that a kilo of meat tends to be sold at the same price in different cities around the world. It is that if one thinks of the producer who has the option of selling at $700 in the local market against the option of selling at $1000 in a foreign market, to the extent that the transaction costs to place the production abroad are lower than $300 (the difference between what you are willing to pay in both markets), it will choose to sell to the one who pays more.

The underlying problem is the low salary. Once it is understood that restricting exports will not lower prices in the long run, that costs do not define prices, and that internationally tradable products tend to have a single price in all countries, we get to the root of the real problem. Is that, if Argentines cannot buy meat or bread, the problem does not lie with the butcher, nor the baker, nor the exporters of these products.

The problem is that the average salary is low in international terms. And that salary is not increased by measures that destroy economic freedom (such as export bans, withholdings, exchange traps or price controls), but by doing exactly the opposite.