Argentina: Understanding Argentina: A Road To Growth In The Long Term Or A Rush To The Perfect Storm?

Last Updated: 18 August 2016
Article by Carlos E. Alfaro

When Mauricio Macri took over the government and announced the first economic measures people reacted with "amateur glee". A historically unfounded optimism precipitated the belief that billions of foreign investments will "rain" into Argentina. "The world has to be prepared for major transactions in Argentina" was the rushed reaction of the international community based on the general belief that a traditional orthodox economic program was finally going to be applied in Argentina to trigger investments and create growth.

The Government reduced or eliminated withholding taxes on exports transferring more than $70 billion dollars to the agricultural sector. It eliminated restrictions to the repatriation of profits and transfer of dividends abroad. The Central Bank issued treasury bonds with high yields to lure dollars into the country. Subsidized tariffs for utilities (electricity, gas) and for transportation were reduced or eliminated. The intention to sign free trade agreements with Europe, the USA and the Pacific Rim countries was also announced. Argentina was coming back to the world.

But the reality was that the first measures of the Government failed to create the "trickledown effect" in the economy that orthodox economists predicted. There have not being more investments nor growth in the economy during the first eight months. The private sector has not helped. More than 150,000 jobs have disappeared as a result of reductions or elimination of government subsidies and of employment. Inflation is forecasted to be in the range of 45% this year and the fiscal deficit will increase in spite of some technical revision of the 2015 GDP, compared with 25% inflation and 4% fiscal deficit respectively last year.

Tax revenues have decreased as a result of the reduction or elimination of withholding exports which have caused a u$s 1700 million loss in tax collection. The increase in utilities' tariffs that ranges from 400 to 900 % triggered massive social demonstrations and judicial actions against the Government. The purchasing power of the employees and workers was reduced by more than 10% in spite of the salaries adjustments. Consumption lowered thus VAT collection. The economy contracted.

Social unrest began to show. Unions have threatened to strike every month and asked for more than a 40% increase in salaries.

History shows that Argentina is a politically and socially complex country. People should know better.

The new Government of Mauricio Macri was forced to change. Those that were expecting more rapid implementation of traditional orthodox conservative policies to control the fiscal deficit are dismayed by the recent measures adopted by Mr. Macri to control such social unrest:

  1. More than $ 2.7 billion in cash and $ 14 billion in bonds were given by the Government to the unions for healthcare services.
  2. More than $ 25 billion to the provinces (estates) in federal tax co-participation.
  3. More than $ 5 billion at least to increase benefits to families with children and retirees.
  4. A 15% return of VAT to retirees on consumer spending
  5. Payment of adjustments in retirement benefits which may total more billions
  6. The increase of the minimum non-taxable income on salaries will trigger another loss of $ 50 billion.

The Government will have to get indebted abroad in more than 20 billion dollars per year for the next four years and get additional financing from a tax amnesty to cover those expenses.

Conclusion: There will not be major transactions in Argentina nor billions of dollars flooding the country this year or the beginning of next year.

There is still a sector of the society that is asking the Government to implement a drastic adjustment. Well-known neo-liberal local and international economists blame the prior government by saying that it lied to the lower middle class by making them "believed that they have the right to mobile phones, laptops and travelling abroad"....

Another more progressive sector recognizes that a brutal adjustment is impossible to be implemented in Argentina which, fortunately or not, has a very strong union movement and a majority of socially concerned political parties.

The Government sided with the neo-liberal orthodox sector at the beginning of its term, then adopted a more practical approach to politics: in the end they have to win the mid-term elections in October of 2017. Political and social reality prevailed.

Paraphrasing Cory Booker's African proverb quoted in his speech at the Democratic Convention this year: "if you want to run fast, run alone. If you want to run far, run together."

Macri and his political coalition have realized that if they want to succeed they will have to do it with the cooperation of the unions and part of the Peronist movement.

No rush to run fast is needed. No need to drastic changes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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