A demand for the economy of 2023

By Juan Kira

Martin Kalos (**) and Nicolas Bertholet (***) The economic and political situation in Argentina has been obviously bad for more than a decade, but in 2023 it is already dire.

This is a year of inflation already above 110% per year, and continuing to accelerate while manufacturing activity is back in a deep recession (after a significant but partial recovery, it did not reach 2018-2019 levels when we were already in crisis.)

But this year’s decline rides on decades of economic disappointment. Another way to visualize the depth of the crisis is to understand that we have already gone through an entire decade with a decline in activity levels.

From now on, it will take a decade to grow at a rate of 3% per year to recover to the level of GDP per capita in 2012. We have not been able to sustain for almost 50 years and we have not been able to match the GDP per capita in 2012.

Another way to visualize the depth of the crisis is to understand that we have already gone through an entire decade with a decline in activity levels. Henceforth, it will take a decade of growing at a rate of 3% per year to recover to 2012 GDP per capita levels. Meanwhile, the world continued to move forward: growing, investing, increasing its productivity, and improving the standard of living for at least part of its population.

This is the path to development most countries are moving forward while Argentina is running backwards.

The drought was caused by poor economic management

Why is this year so bad? Simply put, to everything that was already wrong and done wrong in Argentina, the worst drought on record was added. The drought deepened two major problems affecting Argentina’s macroeconomics: underdevelopment and external control.

To get a sense of how the year will end, it’s worth a quick comparison: During the 2008-2009 drought and global economic crisis, when the economy shrank by 5.9%, there was no immediate problem of stocks or reserve shortages, inflation. was about 25%, labor income was 25% higher than the current one and this 12-year crisis burdening the backs of families and SMEs across the country has not yet accumulated and testifies to the high levels of structural poverty in our society.What is worse is that in all these years, no one has taken the basic steps necessary to solve these problems.

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. Even in 2022 there was talk of a stabilization plan that was never designed, and besides, this government lacked the economic and political conditions to implement and consolidate it.

If there was a plan, it should be aimed at a weak government (since the middle of last year, due to the lack of control of fiscal and financial variables after the resignation of Martin Guzman) relative prices (adjustment of tariffs and exchange rates) ) and with the uncertain political capacity of his own political coalition, at the same time. , reduce the deficit drastically. If it was impossible for the government to undertake such a task then, it is less so now.

Frente de Todos is in dire political conditions and economic variables have deteriorated sharply. Changing the situation and correcting the course is still essential, but that does not mean that it can be done without creating major problems and without solution. There is no stabilization program without financing in forex.

This is where the drought plays a central role, as it means dollars drained from exports. To make matters worse, the agreement with the IMF implies negative financing this year (more is paid out than received), even before it fails to meet first-quarter targets forcing the government to revise (and thus accept other, new, IMF demands). .

All of this sets a strict limit on imports that work against the level of activity. Furthermore, the current version of the exchange rate forces firms to incorporate into their cost structure both the financial cost of using parallel exchange rates to import inputs and the expectation of devaluation due to not knowing at what price the official exchange rate will be approached. Driven, it can only be post-election and slow.

Firms need to insulate themselves from the political risk and uncertainty of not knowing whether more radical positions proposing sudden devaluations of the official dollar (or dollarization, which implies such a scenario) will win elections.

In this context, there are two axes to achieve government change without a more brutal crisis: reducing the fiscal deficit and exchange and fiscal linkages to avoid a sudden devaluation of the official exchange rate. If Sergio Massa’s menu of options was reduced at the start of his tenure, they are now even greater.

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Again, drought is no doubt a big problem, but management is not looking for fundamental solutions. In fact, its biggest “achievements” came hand in hand with giving the agricultural sector (the country’s most productive) the best sectoral exchange rate available today and using its well-oiled international relations to borrow dollars from international corporations.

If Sergio Massa’s menu of options was limited at the start of his tenure, they are now even greater.

How do we follow?

In this context, there are still two axes to achieve government change without a more brutal crisis: reducing the fiscal deficit and exchange and fiscal linkages to avoid a sudden devaluation of the official exchange rate.

First, progress must continue in building the conditions necessary to launch a stabilization program. Despite the inflationary contribution, it is necessary to deepen the reduction of economic subsidies for energy and transport rates, to reduce the fiscal deficit, which today the state is unable to finance other than what it provides and which has a lag in terms of income. distribution. Recession, low tax collection and low employment should be addressed by strengthening social transfers.

Other savings that can be made on non-essential goods – various subsidies and transfers to private and public institutions, social and religious institutions or public works to be completed – should be diverted to look after the social situation. In other words:Reduce the fiscal deficit through a restructuring of spending that seeks to mitigate the impact of the crisis on the most vulnerable households

Yes, while the incentives and relative prices scheme of our economy is cloaked in rationality. In the same sense, the maintenance of positive but low real interest rates and the continuation of the official TC crawling peg are necessary to avoid a deterioration of the macroeconomic situation.

Second, you need foreign exchange. Ideally, progress should be made in facilitating an official TC management system and multiple effective or parallel exchange rates. Low exchange rates and operating terms, against the backdrop of positive interest rates and a possible change in government, may attract financial capital looking to take advantage of the low dollar prices of local assets.As crazy as it may sound, a macroprudential fund flow management plan that follows international guidelines recommended by international institutions can encourage the inflow of some funds.

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. At the same time, the government can reduce the need for reserves by transferring savings dollar purchases and card spending abroad to parallel markets; Unpleasant options, but in the current environment undoubtedly among the “lesser evils” that would avoid an even bigger crisis and would not have the appropriate inflationary impact.

Other multilateral or final sources of funding (from the 5G tender to very long-delayed agreements to trade with our key partners without the dollar) and an agreement to trigger debt repayment problems to the IMF could strengthen reserves and even offer parallel exchange rates to bridge the gap until the government changes. . It is not an exemption from instability and is not a fundamental solution, but they are necessary links to start moving towards stabilization under a more reasonable plan.

Several economic agendas are at stake in this year’s elections. On the one hand, stabilization measures to bring down inflation and stop the looming crisis around every corner. On the other hand, Argentina’s development policies address fundamental issues that have remained unresolved for decades.

We are still a long way from those discussions, and there are even political spaces that continue to offer magical solutions (dollarization, digital currency, drastic cuts to public employment, etc.) that will not work to perpetuate and deepen this perpetual crisis. In Argentina.

But in the meantime, we have to get through this election year. To that end, these two very modest objectives, but within the limits of the government’s capabilities and current political support, will allow the macro to manage until December without unrestrained deflation and its negative impact on households and firms across the country.

They may be a more reasonable starting point than the current one from which the new government can begin a stabilization program with better chances of success.

Economist and CONICET researcher

(**) Economist (**) Economist and Coniset

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