Why Argentina’s Economy In Constant Cliffhanger Mode? Part-1

It is challenging to perceive a positive scenario for Argentine businesses and the general economy with a gross domestic product of around US$ 450 billion (world bank) one of the biggest economies in Latin America. The business sector is fragmented and finance which has all but dried up. Argentina’s ongoing economic crisis derives from historical problems as well as more recent developments. This leads to a question why Argentina’s economy is in a constant crisis? What are the reasons?

Healthy public finances and accelerated economic growth

Public finances in Argentina have not had stability since the early ’90s. Between 1988 and 2008, Argentina has changed its tax policy 80 times; fiscal policies have been amended 14 times, while budgetary rules 16, so it is crucial to analyze how the country has been creating its public debt. How taxes are collected is essential to understand the cyclical course of the Argentine crisis, where the country’s productive sectors have been reducing, while indebtedness has increased. (Bonvecchi, 2010)

The sharp reduction in the deficit has not been able to reach levels consistent with macroeconomic balances, and the growth in collection fails to generate resources to finance public expenditures. These features, plus the problems derived from the crises, and the provisional reform, on the one hand, and relations with the provinces, on the other, are the central characteristics of the Argentine fiscal problem and the formation of the public debt. . (Oscar & Francisco, 2002).

ECLAC (Economic Commission for latin America and the Caribbean) has considered, since the ’90s, that one of the indicators of economic stability in the countries has been that of moderate public finances, where public spending does not more than double the income obtained in a year in each state, likewise, that its capacity to pay the debt is through the responsible management of public finances, through the collection of taxes. Although this is a general guide for all Latin American countries, Argentina has encountered numerous obstacles, making it difficult to reach the margin of these recommendations, since social problems and the international context have been adding to the economy recovery problems.

Constants in economic failures.

Even though there are authors who consider Argentina as the quintessential example of the failure of the neoliberal model, it should be noted that no economic model is 100 percent effective. History has shown us the fall of models opposed to neoliberalism as communism and socialism. These models exist in some Latin American countries. They have also demonstrated their failure with their peculiarities since, in all of them, there is the constant of social backwardness and economic vulnerability, which makes them objects of study in the political and economic sciences. As an excellent example of this, we also have Argentina, whose failures in the various attempts at liberal policies have led to subsequent failures of socialist economic policies, from Peronism in the 1940s and 1950s to the most recent mandate of Ernesto Kirchner and later Cristina Fernández.

In a sense, Argentina illustrates the failure of the neoliberal model. In no other country was the recipe for privatization, liberalization, capital account, and rigid exchange rate applied so literally. However, the political regime was not orthodox in fiscal matters, nor institutional issues. (Cruz, 2002)

Change in Argentina’s economic growth strategy

Since 2015, Argentina began to opt for a daily adaptation scheme instead of drawing up an economic plan that would predispose the government to not profoundly correct its financial path. With this bold decision, the Argentine government could approach a more detailed analysis of what it would be to face in economic matters immediately, without having to fit into the unequivocal compliance with an Institutional Policy that would become an obstacle, trying to disband the difficulties posed by globalization in countries with high debt.

With the example of Argentina, regarding prudence in over-indebtedness, some paradigms that the IMF had as a recipe for developing countries were modified, highlighting the importance of being able to refinance their debt as their economic growth allowed to pay it, that is how stricter measures were taken, regarding the acquisition of liability of the countries.

A global theoretical scheme was not applied to a coherent and predicted reality, but it was governed in an initial chaotic situation, which was transformed over time. Argentina, in 2015 is very different from 2003. There was no perfect economic plan, but the daily confrontation with the need to govern based on gaps with few coherent basic ideas of a political nature. (Calcagno, 2015).

Argentina’s main problem is to postpone

Many of the problems that Argentina faces in economic and social matters today are due to the governments’ decision from the ’90s to postpone the discussion on preventive measures and necessary action regarding tax policy. They opted to obtain debt as an ambitious project of redistribution of wealth, as if it were a matter of prescribing placebos to a sick economy, thus being able to maintain power and pass “the hot potato” to the next government. (Serra, 2005).

Not all the problems Argentina currently faces are the product of external factors, if not the apathy of implementing restrictions on public spending by promoting social assistance instead of promoting efficient, productive strengths and betting on investment instead of debt for almost over a century.

For a long time, it was believed that the way to attract foreign currency to Argentina was governed by international trade and that this was what could generate the economic growth that would guarantee the country’s stability. However, it was insufficient, as well as not very efficient, Since Argentina did not give the conditions of these international exchanges. However, by its buyers and foreign partners, when the amount of foreign trade did not meet Argentina’s economic needs, the model failed, in terms of job creation, It was compromised when jobs were not only insufficient, but also, being mostly from non-industrialized sectors, they were poorly paid, and with it increased poverty in the population. (Grimson, 2018).

Although the devaluation of real current spending fell, the public accounts were not cleaned because the debt did not decrease, but increased. Not only for the obligations already recognized for damages caused by the government’s decisions, but also for the liabilities that eventually appeared for the same causes; besides, the devaluation increased the debt. In the unit of account, the government collects its taxes, the Peso. It was necessary to reach a long-term payment agreement to clean up the finances and ensure a solvent status, but, to achieve these agreements, a policy of fiscal surpluses had to be implemented at the same time (not covering up expenses with debt issuance), In order to comply with the commitments that were assumed, it was not straightforward, because the measures to be adopted would provoke resistance in those who wanted to continue receiving state benefits and those who wished to taxes not to be increased. (Cortés, 2003).

To be continued in part 2

 

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Image: Claudio Bianchi 

 

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