A government plan that smells like a threat

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

This article was originally published in Data Clave on July 11th, 2021.

A few days ago, it emerged that the current government is preparing a “mini-plan” to sustain the economy, which is currently in an extremely critical situation. Until the midterm elections later this year.

This miniplan is focused on keeping the exchange market tied up as well as they can, re-opening collective negotiations so wages close above inflation, which will be close to 3% for the coming months. Only until the elections.

The main objective of this plan is to reactivate consumption in order to appease the social climate until November. The government always knew that part of the population deciding elections votes according to their recent economic situation. Unfortunately, with a real unemployment rate -higher than the one published by INDEC- of 10.8%, 4 out of 10 Argentines are in poverty, 1 in 10 is in extreme poverty, and 6 out of 10 children are in poverty. The social climate is impossible to reverse.

 This inability of the government to calm the waters is not only because it has little time but also because of errors in their diagnosis. Governments such as the current one consider that growth comes from the demand side and not from the supply side. However, no matter how much greenbacks rain from the sky, if there is no production, there is nothing to buy, there is nothing to consume. More so if those bills are squeezed from the producers themselves.

 Let’s look at a very simple example. Let’s suppose that Daniel, a very hardworking man, produces 100 cell phones per month and sells them every month for $ 10 each. Also, consider that only $ 1000 circulates in the economy. Daniel knows that every month his clients come and buy his 100 cell phones for $ 10. Now, if next month his clients do not have $ 1000 but $ 2000 because the Government decided to inject $ 1000 more into the economy; Daniel will have to raise the price of his cell phones to $ 20 because he only produced 100 cell phones. That is to say, this example shows that no matter how much money is placed in people’s pockets, consumption doesn’t increase since the number of cell phones remains the same. On the contrary, this type of policy adds problems to the economy.

 Now, this example was very basic. In a country like ours, Daniel must not only focus on producing cell phones or incorporating new technologies into the production system. He must spend 312 hours a year paying 106% in taxes on his net profit, carry out calculations with annual inflation of 50%, limit himself because of the impossibility of accessing credit due to high-interest rates, carry out twice as many procedures as in any other country to open his business and pray that socialists will not wake up the next day with the idea of ​​expropiating their property. Entrepreneurship in our country is a daily “come and eat you.”

 This can be seen through foreign investment in our country. We went from foreign direct investment representing 0.3% of the GDP in the 70s, to 0.7% in the 80s, 2.7% in the 90s, 2.2 % in 2010 and, finally, 1.8% today. Obviously, this doesn’t count the latest economic decisions that only aggravated the crisis of confidence markets are suffering. Under this scenario, and with institutional quality deteriorating year after year, it is unlikely that capital will enter in the coming months.

 Unfortunately, without capital, we won’t grow. While we continue to discuss problems that the rest of the world already overcame, other countries continue to advance. To ensure technological advance and productivity, we should focus on being more competitive instead of fighting for handouts from the State. Continuing to apply the same recipes is not going to transform the reality in which we find ourselves immersed. On the contrary, it will deepen the pre-existing structural problems.

  Furthermore, social unrest leaves no room for the same impoverishing policies that lead to a race to the bottom. According to Libertad y Progreso’s latest report, in April workers have moved away from the poverty line by 1.3% compared to the previous month, but they have approached 6.6% compared to April 2020. This implies, for example, that a family with an income of around 50,000 pesos lost 6.6% of its purchasing power regarding the Total Basic Basket (CBT) compared to April 2020 and 7.4% of the  Food Basket ( CBA), compared to April 2020. In other words, there are more and more people who are in poverty compared to April of last year, which was the bottom of last year’s crisis.

To alleviate the situation, Argentina needs a series of structural reforms of the private sector. We cannot continue to apply the same policies. It is necessary that men like Daniel can undertake business ventures, that their clients can consume cheaper and better-quality products and that all Argentines can achieve their objectives through opportunities offered in this country. Otherwise, the road is going to be very tumultuous for everyone.