Argentina is witnessing an experiment: the first “liberal libertarian” Government in History. The country arrives at this with prices traveling at the rate of 150% inflation, 40% poverty, 50% informality and a real salary that has lost more than 20 points on average since 2018. Improper numbers for a country with a enormous economic and productive potential, in which high-level development sectors such as the bioeconomy, energy, mining, satellite industry, among others, coexist with these figures.
Now, with the campaign over and the new Government beginning, the first steps of this experiment have not been new, but they have been quite hard. This week, the new Minister of Economy, Luis Caputo, presented a classic orthodox economic program, with no more innovation than two main axes: a depreciation of the exchange rate of 118% and a fiscal proposal to reduce the fiscal and financial deficit to zero, leveraged by a tax increase and a very noticeable decrease in public spending.
This program seeks to be the prelude to economic stabilization. What is stabilizing an economy? Correct the relative prices that are behind in order for them to “adjust” later and lower their growth rate. What was announced corrects, in this sense, the exchange rate delay and announces the correction of the price of energy and transportation rates. These corrections, as in any stabilization process, will be inflationary at the beginning of the process. Now, conspicuous by its absence is the correction of a price that has also been overdue in recent years: the salary. Or, rather, income in general. Income will be an “anchor” to give tone and rhythm to stabilization.
The new Government is betting that the correction of reactive prices, its inflationary impact and the loss of purchasing power of income will put a limit on price increases. Goods and services will rise so much in the months of December, January and February that people simply will not be able to afford them and, therefore, the price will stop rising. The process was explained with this crudeness by the new Minister of Foreign Affairs, Diana Mondino, an economist by profession, in journalistic media and at the annual event of the Argentine Industrial Union, an institution that brings together the main industries.
This strategy is very harmful for the working and salaried classes who live off their current income. Within the framework of an economy that has not grown since 2011 and aggravated its distribution problems in the last decade, this policy that deepens the erosion of income will put very strong pressure on the daily lives of citizens. Likewise, it will be a challenge for the productive sector. Construction companies that supply public works have already begun to announce layoffs, in the same way as industrial companies that sell to the domestic market (appliances, furniture, among others).
Added to the inflationary effect of the measures in the short term, it is also necessary to point out that income itself will see a nominal brake, due to the cooling of the economy itself and the announced adjustment. For example, the expected reduction in spending on pensions, which accounts for 40% of total spending, will imply either a freeze or growth in pensions below inflation. Today a minimum retirement in Argentina amounts to 90,000 Argentine pesos (112 dollars), while the basic basket of an individual is 111,000.
While the average salary of formal employees is 400,000 pesos (500 dollars), the basic basket of a household of four people (two adults and two children) reaches 345,000. If salary negotiations do not accompany this process, economic and social indicators will worsen significantly.
Not only is the success of this policy not guaranteed, but if inflation is successfully reduced within a year, an unavoidable question arises: At what cost? With what level of unemployment, poverty and informality?
As a candidate, Javier Milei promised a strong economic adjustment that would fall on what he calls a “political caste,” in a definition that varies according to the sympathies that the current president professes. Everything indicates that this will not be the case. The impact of these corrections (necessary years ago, but with an application must be calibrated) will fall on employees, retirees and independent workers. The question that Argentine politics asks today is: How long will these segments of the population last? Not only those organized in unions, but those who will see prices rise and their income fall, such as platform drivers, couriers deliveryindependent trade workers.
Leaving the social level, the success that this program can have in macroeconomic matters is also intriguing, with respect to the variables it seeks to correct. For example, an exchange rate correction like the one that took place, at this level of inflation and with the increase that it will have in the next three months, will lose competitiveness this same southern summer. In March and April, the harvest of crops such as soybeans and corn begins. How will the liquidation of these agroindustrial exports be if the exchange rate is perceived to be behind again? If the exchange rate is corrected again, then, what impact could it have on accelerated inflation whose only anchor is income? The chances of entering a vicious circle of correction-reduction-new correction are no less.
Many of these impressions are questions that require analysis in the coming weeks to better calibrate the scenarios. In any of them, what lies ahead will be hard and the uchronic question that hovers over is why a more careful stabilization could not have been done sooner, without waiting for Argentina to be subject to such a bizarre experiment, when as a country there is no margin. to risk and there is so much productive wealth to care for and develop.
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