Other than any political reasons—that I won’t discuss here—the conflict government-rural sector in Argentina results mainly from an economic inconsistency. Of course, there are additional important issues. I want to focus on what I understand is one of the basic origins of the problem.
As already reported before, Argentina has a high inflation bias generated by the over-use of the different policies (monetary, fiscal, and exchange rates) to keep demand higher than in equilibrium. Argentina also claims to be free of any effect of the current international financial crises due to strong fiscal and current account surpluses. I do not agree with this. Especially when dealing with the fiscal surplus.
The main source of the current primary surplus is essentially based on
1.The high prices of some of the key Argentine exports: soy, corn, etc. The problem is that these high prices are essentially temporary shocks. Even though there might have some permanent component due to the China, India effect (and thus related to the “decoupling” effect, something that I do not believe to exist), the speculative component is probably bigger. I see the latter as if a big share of the so-called savings glut was driven to commodities’ markets.
2. The increase in aggregate demand (through a standard multiplier process) derived from the consumption but mainly investment that the rural sector is generating—the sector internalizes that this is a transitory shock and thus invest now, anticipating the future correction (to long-run equilibrium prices) in commodities’ markets.
3.The inflation tax that result from (1) and (2) above plus the huge level of government expenditures (reflected, e.g., through VAT and profits tax revenues).
4. Although probably of second order, the consumption-credit expansion—as opposed to an investment—credit expansion.
The government tries partly to control the high inflation rate by an immense and increasing amount of crossed-subsidies. I would also expect that, unless the government seriously sits down to control inflation using the appropriate polices, these subsidies are likely to increase at an increasing rate.
A second element of the government inflation strategy is the flow primary fiscal surplus. The government is forced to have this surplus. The more so as time goes by. Why? Notice that Argentina was almost out of international financial markets in the last couple of years, when the global economy was expanding and there was plenty of international liquidity. Currently things in international markets are becoming more stringent and this phenomenon is likely to remain with us for some time.
Thus, for all of the above Argentina does not have other choice than keeping a high fiscal surplus—whether they like it or not. Then it either increases taxes or reduces expenditures. There is no doubt that the latter would be the sensible way to do it. It would increase the surplus at the same time that it would reduce the intertemporal fiscal fragility that I posted on several times before. It would contribute to reduce long-term inflation expectations. It would even contribute in a non-inflationary way to depreciate the real exchange rate. It would even potentially allow for expansionary fiscal polices if the international financial crises ends hitting hard on Argentina—something that although with still low probability can not be disregarded yet. Why not saving in good times for a rainy day?...And the list goes on.
But the latter would go against the whole economic philosophy of the Kirchners’ administration—and it would imply reckoning the multiple mistakes that they have incurred in. I would presume that the administration will not be willing to do it.
Therefore, the government is forced to increase taxes. Based on its (mis)understanding of the economy, it is then pushed into trying to increase export taxes further up. This is quite risky, though.For it is using transitory positive shocks to increase its permanent sustainability needs—and erroneously thinking that this will anchor inflation expectations.
So, this is my short-version of the economics that triggered the conflict. Let me conclude by highlighting that I think that this conflict is currently a political issue. But my understanding is that the roots of the problem lie on an incorrect reading of the economy, especially trying to sustain long-term growth based on temporary shocks—and without using them (or letting them be used) to invest in long-term productivity. As a result the administration prefers to increase taxes instead of reducing expenditures in still relatively (temporarily) good times—which it would allow for higher degrees of freedom if things get worse in the future. It thus implies that the government is not anticipating rainy days in the near future…
