Five reasons for the weakness of the Argentine economy

Argentina has been “printing money for the people” MMT-style for many years. Its wrongly-called “inclusive monetary policy” of the past -print money to finance massive government spending- has driven the country to massive inflation and depression.

Five reasons for the weakness of the Argentine economy

This is the main reason why a country with an excellent education, human capital, and high economic potential has third-world inflation rates.

Argentina inflation rose to 54% annualized this week. Bonds spreads soared to 854 Bps, the two-year Credit Default Swap (CDS) is at 1094 bps; and the five-year at 948 Bps. But the country’s governments blame inflation on anything except its insane monetary policy

The Argentine economy is more fragile and vulnerable than similar ones. However, Argentina is also one of the countries with the highest economic potential. There are five essential factors to understand the weakness of the economy:

  1. The Peso. Despite the dovish policies of the Federal Reserve and the change of course in the process of normalization, the Peso is, again, the worst performing currency against the dollar in 2019. The dollar index has not moved much against its basket of currencies, therefore, it is the disastrous monetary policy that made the Peso plummet. A weak currency is a danger to the stability of the country and the successive governments only seem to want to patch up the mistaken monetary policy of the Central Bank. A weak Peso does not make the Argentine economy more competitive or export more, as reality shows. If the country does not address in a serious and determined way the error of maintaining a currency in a constant process of destruction of its purchasing power, it will simply move from crisis to crisis again.
  2. Monetary policy is also seriously inflationary. Not by mistake, but by design. Governments prefer to see high inflation and blame an inexistent external enemy than to stop financing the bloated public spending with newly printed currency. The loss of purchasing power of the currency is added to an inflation rate that should not correspond to a country with the potential and human capital of Argentina. Argentina has been, for many years, a country with the potential of a developed economy and a monetary policy of a third-world country. It has followed the MMT recommendations for years. Many claim that dollarization would be worse because it was already attempted and led to a crisis, except that this argument is false. Argentina did not dollarize, it carried out an exchange rate subterfuge by pegging the Peso to the US Dollar with a completely inflated exchange rate that led to the accumulation of imbalances. Argentina did not have dollars, it had pesos in disguise. Dollarization is what Ecuador did, abandoning the sucre , which allowed the country to avoid a Venezuelan-style hyperinflation.
  3. Very high taxes. Argentina’s tax wedge remains the highest in the region and one of the highest for companies in the world,. This constant expropriation of wealth via currency devaluation, inflation and taxes work as a huge barrier to international investment, growth and job creation. In Argentina, one always hears that “tax revenues are low” and that therefore taxes cannot be cut.  However, raising them puts a lid on job creation, productive investment and the attraction of capital, and revenues are even lower.
  4. High government expenditure. Denying the depressive effect of extractive political spending, within a public expenditure that already reaches more than 45% of GDP, is a problem for a country with high potential. It not only is the highest public expenditure in the region but the most inefficient according to the Inter-American Development Bank. The inefficiency of public spending in Argentina reaches 7.2% of GDP.
  5. The loopholes of protectionism. According to the global competitiveness index of the World Economic Forum, Argentina is ranked 92 out of 137 countries. The deterioration trend generated between 2012 and 2015 has been reduced for three years, but the challenges are important. One of them is to eliminate the loopholes of anti-trade and protectionist measures imposed from the short-sighted perception that protectionism would replace imports and strengthen the economy while printing money would spur growth. There are still significant recesses of that period that act as a disincentive to growth and, above all, as a warning to global investors who prefer to avoid long-term and capital intensive investment in Argentina.

It is true that some measures have been taken to reverse these elements of fragility, but reforms must be more courageous to prevent the economy from falling further in 2019 and 2020.

It is not easy to change wrong “neo Keynesian” policies of the Kirchner era without recognizing the enormous monetary and fiscal hole created by the previous administration, but if the reforms are not decisive and clear, the Argentine economy will continue to be fragile and more vulnerable to economic cycles than other similar ones. Argentina is a great country with terrible monetary and fiscal policies. With such potential for growth and employment, it is worthwhile to be brave and put an end to the remnants of past wrong policies.

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.

6 thoughts on “Five reasons for the weakness of the Argentine economy

  1. Daniel, while the 5 “problems” are true , you are missing the mother of all problems: labor laws. Argentina gives its workers generous and unpayable benefits. This, combined with very high labor taxes, make hiring a costly proposition. Since private hiring is not growing, government hiring pitches in at national, provincial and municipal level. Most of employment growth over that last 15 years are government employees, which by law are very difficult to fire. This exacerbates fiscal deficits and you know the rest. Argentina has been borrowing dollars to cover social programs and pay public workers. Unless Argentina drastically changes its labor laws the problems will persist even in you fix the other problems.

  2. This is an interesting post on Argentina. However, by inserting MMT, you’ve shown you lack the most basic understanding of what MMT says. Argentina is the poster child for what MMT refers to as a nation with its own currency that does not have anywhere near full monetary sovereignty, in significant part because it has a large amount of government debt in non-domestic currencies. This means that MMT anyone with the most basic understanding of MMT would know that MMT would argue AGAINST Argentina doing anything like what you’ve referred to here as “Argentina doing MMT,” and that MMT would predict results similar to the ones you’ve described here if they did. There are literally hundreds of publications and blog posts going back 20+ years in which MMT economists have explained this distinction. This is the metaphorical first 10 minutes of a semester long course on MMT. When MMT’s critics don’t know this means they don’t really know anything about MMT at all and should be ignored.

    1. Dear Scott: here comes the excuse that MMT defenders repeat over and over when a nation does what MMT recommends: “it was not real monetary sovereignty”. Like socialists with “it was not real socialism”. Do you know why? Because the mirage of full monetary sovereignty MMT style is inexistent anywhere in the world. Never has and never will. Nations do not issue debt in foreign currency because they are stupid or because they don’t understand “real MMT”, but because THERE IS NO DEMAND and investors know they will destroy the purchasing power of the currency at any given chance. Even the US would be obliterated if it followed MMT principles because it would immediately lose world reserve status and see money supply destroy the currency.

    1. Argentina being a net exporter is (for you) a negative? I don´t get your message. If anything, the insane policy of limiting imports is partially to blame for Argentina’s weakness.

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