Decoupling internal prices from external ones is generating more poverty and unemployment

Roberto H. Cachanosky

Member of the Academic Council of Libertad y Progreso. Degree in Economics from Universidad Católica Argentina. He is an economic consultant and author of the books "Economía para todos" (Themes, 2002) and "El SindromeArgentino" (Ediciones B, 2006). He serves as a columnist in the newspaper La Nación. Previously, he worked the same task for the newspapers La Prensa (1985-1992), El Cronista Comercial (1992-2001) and La Nueva Provincia de Bahía Blanca (1992-1998). He's the host of the cable TV show "The Economic Report." Lecturer in Applied Economics of the Master of Economics and Administration of ESEADE, senior lecturer in Macroeconomic Theory of the Master of Economics and Administration of CEYCE. President of the Center for Economic and Institutional Studies. He was Economic Adviser to the Argentine Chamber of Commerce (1983-2002) and to the Argentine Chamber of Importers (1992-1993).

As they do not want to take charge of the inflation that they generate with the monetary issue, the Government appeals to the argument of imported inflation and brings its failed solution of curbing exports, leaving more people unemployed and an economy that produces less goods

Once again Kirchnerism returns to the discourse of imported inflation and decoupling domestic prices from international prices.

Regarding imported inflation, they still do not realize that one thing is a change in relative prices and quite another is that all prices rise at the same time. For different reasons, at any given time the prices of some goods can go up and others go down. This is called a change in relative prices. If a country imports goods that have risen, it is not importing inflation, it is simply importing a good that has risen in price. Failure to distinguish between a general increase in prices and a change in relative prices is a gross misconception of economics. Something that is learned in introduction to economics. It is a very basic concept for an economist to be unaware of.

When all prices rise at the same time, although some faster than others, it is because the relative price of currency merchandise is changing versus the price of the rest of all other goods in the economy. In other words, it is not that prices rise but that the currency depreciates. And in terms of monetary destruction and generating inflation, Argentina holds the world record for an inflationary country and destroyer of currencies. It does not need to import inflation, it produces it internally with impressive speed.

Of course, the government’s discourse aims to blame others for the monetary destruction it did throughout 2000, with a monetary expansion that doubled the amount of pesos in the market.

The other issue that they seem not to understand is that the price of commodities is determined by the international market. Argentina is not a price maker and among beef exporters it ranked seventh in 2000. The most important beef exporters are Australia, the United States, Brazil, the EU and Canada, which are ahead of Argentina. Not even beef is among the main exporting complexes in Argentina.

The most important export complex in Argentina is the soybean, then the automotive, the corn, the oil and petrochemical industry and only in fifth place does meat and beef leather appear. In addition, of the total that is slaughtered per year, only 27% of the total slaughtered is exported.

But this attempt to separate domestic prices from international prices through export duties, quotas and other types of restrictions was already done in the previous period k and it was a total failure.

The most categorical example that can be given in this regard is that of gas. Argentina became a large gas producer and exporter until Kirchnerism arrived and separated the domestic price from the international one. In other words, it set a maximum price for gas producers who stopped having an interest in producing gas. Thus, gas reserves were depleted and without investments, what was consumed was not replenished until the point was reached where liquefied gas had to be imported on ships at twice the price that could have been paid to domestic producers if they had not been separate the domestic price from the international.

As can be seen in graph 1, gas production remained in permanent decline throughout the 3 k periods. It is worth remembering that of all the energy produced in the country, 50% is generated from plants that run on gas. In other words, the electricity that reaches homes is generated from plants that run on gas. When gas was lacking, power was lacking and power outages appeared, in addition to problems of lack of maintenance in the distribution.

This decoupling of domestic and foreign prices to curb inflation was applied to meat, wheat, corn, dairy, gas, and various other products. However, Kirchnerism failed to curb inflation to the point that the INDEC no longer reported a reliable consumer price index and it was necessary to start using the CPI – Congress.

Graph 2 shows the monthly inflation rate in annual terms from May 2003 to December 2015. Even “decoupling” domestic prices from international prices, the inflation rate grew to such an extent that from a minimum of 2% in March 2004 reached 41% in October 2014 and delivered, with delayed rates, depressed exchange rate and other distorted prices, an annual inflation of 25.5% per year. That is, 25.5% was from repressed Gelbard-style inflation.

The policy of decoupling domestic prices from international ones was such a failure that the poverty rate was stopped from being published on the grounds that the poor were stigmatized and the former chief of staff, Aníbal Fernández even stated that Argentina it had fewer poor people than Germany.

What is the government trying to do by decoupling domestic prices from international ones? Simply set a maximum price limiting external demand. This is achieved with export rights, quotas, permits, etc.

What happens when the government sets a maximum price? When a government sets maximum prices, it does so below the market price. It does not make sense to put a maximum price at the same level that the market is operating or at a higher price.

Table 1, a typical table given in introduction to the economy, shows the effect of maximum prices. In the first column we see that the market price is 100 and the three producers have different costs (for example, one is further from the port and has more transportation costs than its competitors). All three can produce and remain on the market because their production costs are below the market price. Even with higher production costs, producer C can earn less but still operate.

Now the deputy Fernanda Vallejos comes and proposes decoupling internal prices from external ones, which is the same as setting a maximum price indirectly. The resulting maximum price is 90. What happens? Producers A and B can stay in the market because they have production costs that are below the resulting maximum price, but producer C is out of competition, with which they have to close, lay off staff and people are unemployed, at the same time that there is less production.

What deputy Vallejos achieves with her proposal to decouple domestic prices from international prices is to temporarily make strip roast cheaper, but at the cost of more bankruptcies, unemployment and poverty.

In short, since they do not want to take charge of the inflation that they generate with the monetary issue, they come with the history of imported inflation and its magic solution of curbing exports, leaving more people unemployed and an economy that produces fewer goods.

These proposals are true factories of poverty, destitution and unemployment. Perhaps that is the goal, as is usually the goal of any populist model.

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