Argentina’s “Emergency Law” Means More Of The Same

Argentina's "Emergency Law" Means More Of The Same

The so-called “economic emergency law” announced by the new government in Argentina is simply another massive set of tariffs and burdens on the private sector to finance the bloated public expenditure, in a country where confiscatory monetary and fiscal policy is the norm.

What is the big problem of the recent Economic Emergency Law? That it does not address the country’s massive monetary and fiscal imbalances. Moreover, the big problem of the law and, in particular, of the decisions to raise retentions to the agricultural sector, is that they aim to increase the confiscatory nature of Argentina’s fiscal policy.

With this emergency law, Argentina raises taxes -again, in the country with the highest tax wedge of the region- and puts further barriers to exporters increasing the percentage of US dollar revenues that the government keeps.

The representatives of the producers in most regions have confirmed it: These are measures that lead producers and exporters to bankruptcy, since with the current levels of withholdings for soybeans, corn, and wheat, profitability is already zero or negative in leased fields. In the case of oilseed, gross margin will be negative at 105 dollars per hectare. A ruin.

In reality, the so-called economic emergency plan functions as a huge set of tariffs against Argentine producers and the private sector. 

The extractive and confiscatory vision of the economy that has not ceased to exist throughout different Argentine governments for several decades gets even worse.

The Argentine government starts with an error of analysis. They think that putting greater retentions on exporters will improve Argentina’s battered reserves, which is simply false, and come from that extractive vision that assumes that adjustments can only be carried out destroying the export economy and savings. The evidence that it does not work is clear, the successive governments of Argentina believe that their problem is the strength of the US dollar and not their destruction of the purchasing power of the peso. However, the collapse in demand for pesos inside and outside the country is a direct cause of an insane monetary policy. Introducing higher taxes, withholdings and pitfalls to economic development does not strengthen the demand for pesos or improve the economy. These are measures that lead to Venezuelan hyperinflation.

No country has strengthened the demand for its local currency confiscating the savings and salaries through massive increases in money supply while implementing confiscatory fiscal measures. It is a double expropriation of wealth.

The idea that the economy will be relaunched with a strong issuance of pesos should be discarded. In the last ten years Argentina’s monetary base has increased by 1,414.31%, that is, Argentina is the country that has increased issuance of local currency the most after Venezuela and Iran with decreasing demand for pesos and general deterioration of an economy that has gone from stagflation to depression.

Increasing taxes and withholdings is literally the equivalent of demolishing one of the few competitive, exporting and efficient sectors that remain in Argentina only because of the refusal to touch disproportionate public spending.

Argentina will not strengthen its growth, productivity and foreign reserves by destroying the economy’s capacity to generate employment and attract investment when fiscal policy is confiscatory and monetary policy is extractive and inflationary.

It is very sad to see a country with the potential of Argentina fall back into the trap of thinking that monetary and fiscal imbalances are solved by raising taxes and printing more pesos. President Fernández recently stated that “we must end the habit of saving in dollars” while announcing a huge issuance of pesos “to strengthen growth.” It shows the refusal to understand that the citizens do not save in US dollars because they are evil or ignorant, but because they know that their few savings and real wages will be confiscated via monetary policy, diluting the country’s wealth in an ocean of decreasingly-valued pesos without any use for most local and global economic agents.

Argentine governments cannot continue to fool themselves into thinking that the problem is external. It is no accident that the country has the second-highest inflation in the region, which is also ten times higher than the average. And it is no coincidence that it has a much poorer economic growth than those of neighboring countries despite the challenges others suffer.

Argentina’s problem is not that taxes are low – it has the largest fiscal wedge in the region – nor of hawkish monetary policy – the increase in the annual monetary base is more than seven times that of the region’s average over the past ten years. It is quite the opposite. Argentina is only going to take off when it recognizes that its fiscal and monetary imbalances are not the fault of the citizens and their small businesses, but of the government that is still determined to believe that two plus two equals twenty-two.

About Daniel Lacalle

Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Author of bestsellers "Life In The Financial Markets" and "The Energy World Is Flat" as well as "Escape From the Central Bank Trap". Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Frequent collaborator with CNBC, Bloomberg, CNN, Hedgeye, Epoch Times, Mises Institute, BBN Times, Wall Street Journal, El Español, A3 Media and 13TV. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE.

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