Argentina’s economy hitting rock bottom

Bachelor of Economics (UBA). Economic Analyst of Libertad y Progreso.

DATA CLAVE – The latest economic data reflects the effects of having closed the economy for almost nine months. Added to that are the same inexpensive recipes that don’t work. How do we grow?

This week the data on Argentina’s economic activity for the last month of 2020 came out and allowed us to have a crude X-ray of the situation in which we find ourselves. Unfortunately, we were once again a regional example of what not to do in political and economic matters.

In 2020 Argentina accumulated a fall of 10.0%, having reached a bottom in April 2020 with 25.4%. This number is very similar to that of 2002, which showed a drop of 10.9%. Indeed, we are facing one of the worst crises in the history of our country.

Obviously, many would argue that the pandemic implied an exogenous negative supply shock, which later became a demand shock that affected, for the first time in the world, 90% of countries, according to the International Monetary Fund. However, it is enough to look at the same activity numbers in the rest of our regional neighbors to realize that we did something (a lot) wrong. By regions, in 2020, Brazil fell 4.05%, in Chile the fall was 6.0%, in Colombia the fall was 6.8%, in Mexico 8.5% and in Peru 11.1%. Obviously, having closed the economy for almost 9 months was not the best idea.

The pressing pace of pauperization that occurred in the productive fabric since March 2020 only worsened the quality of life of Argentines.

Moreover, from the Fundación Libertad y Progreso we have prepared an Index of Impoverishment of Workers (IPT) to be able to anticipate month by month the evolution of poverty of wage earners and the data only makes us shudder.

The Impoverishment Index measures the evolution of Argentine workers’ wages, deflated by the evolution of the total basic food basket and has been doing so since April 2016, because during Cristina Fernández’s administration the CBT was no longer published. As it is an index of monthly variation, it is possible to analyze whether since the last poverty data was published, the situation has improved or worsened.

According to this index, the situation has worsened in the second half of 2020. Moreover, if we compare it with October 2017, when there was a certain recovery in wages in relation to the basic food basket, we can see a corrosion of more of 20 percentage points.

These are numbers that highlight the economic mismanagement of 2020 in which the future of Argentines was not prioritized again. Obviously, it is not something that began in 2020 but almost two decades ago when it was decided to increase public spending by 20 percentage points since 2003. It is not only the sample of an expansive fiscal policy but the example that the State has become more dependent on the resources of the private sector.

Between 2003 and 2015, the number of public employees increased by 2.0 million and has remained until today. If we compare 2003 vs 2018 we see that the number of public employees increased by 55% at the National level, 117% at the municipal level and 77% at the provincial level.

In addition, there were 3 million people who had not contributed and retired due to the pension moratorium; which deepened a significant deficit within the pension system. In addition, we must add the increase in the minimum pension assets.

Likewise, an increase in social plans was generated, which became an instrument of political recruitment. Finally, when the devaluation began in 2002, the rates were frozen and they were delayed.

In order to increase the size of the State, two types of policies were broadly applied: i) expansionary fiscal policy via State indebtedness to finance the increase in public spending; and, ii) expansionary monetary policy.

Expansive fiscal policy only generates an overheating of the economy in the short term, with a productive structure highly dependent on the artificial injection of spending. When the State reduces its debt rate, the economy enters a phase of stagnation. Those activities inflated by the rise in initial spending go bankrupt. Thus, the private sector is forced to hand over its savings to the State to finance its indebtedness.

Finally, in the medium term we only get a group of bureaucrats to squander resources from the private sector that could be used to favor investments, innovations and increase productivity, with their subsequent impact on wages.

It is essential to clarify that there is no empirical evidence that an additional unit in the public sector compensates for the loss caused in the private sector.