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Why is Economic Recovery Slow To Arrive?

July 10, 2017 11:09 pm A+ / A-

Our Executive Director, economist  Aldo Abram, explains why Argentina should respect its institutions if it wants to attract investments and grow.

downloadIt shouldn’t be surprising that economic recovery is taking more time than expected and is lower than hoped for. If you evaluate Argentina’s national primary expenditure figures for 2016, you’ll see that they are not only low but have increased slightly in relation to our GDP. Some will argue that the former government’s debts were paid and that, if you take this into account, it actually decreased. This is true, but this reduction was caused by the reduction of subsidies to utility tariffs. This means that this adjustment was actually paid for the private sector, which saw its purchasing power diminish. Thus, it is not surprising that businessmen and workers have felt this adjustment as a shock. They had to face their own costs regarding the ordering of the economy and those the public sector did not feel this reajustment.

  It shouldn’t be surprised that the economic recovery is slow. We have to imagine that, since mid-2015, the productive sector has been falling into a very deep well. In the third quarter of 2016 it hit rock bottom. From there, we demanded that they made all possible efforts to climb back, tooth and nails, but having to carry a huge and useless leviathan in their backpack. Furthermore, if we don’t solve this problem the result will be that, once the private sector manages to leave the well, it will be lucky if it survives. We will have to get used to a weak economic growth of around 3% per year when Argentina could grow twice as much, performing far below its production capacity.

 The budgets of the Federal, Provincial and Municipal governments show that in 2017, once again, cuts are made on the subsidies to public service. In most cases, the tax burden has increased. The myth claims that, if public expenditures hadn’t increase, economic reactivation would have been aborted. This is blatantly false. It shows a lack of understanding of the fact that the money the government spends doesn’t grow on trees. In one form or another, this money comes out of the productive sectors pocket.

Furthermore, the public sector absorbs a good part of internal credits and then complains, claiming that local interest rates are high and financing for the private sector, scarce. In addition, the State has to place debt overseas. This reduces international credit availability for local producers and, by selling foreign currency in the local market, lowers the exchange rate. Of course, they are quick to blame it on the Central Bank, that can do very little if it wants to maintain its anti-inflationary goals.

 When the State goes even further into debt, our country risk factor increases and available financing for Argentina decreases. Thus, the productive sector looses more capacity to take on debt than the one taken by the public sector. This means internal demand decreases in the short term.  Long term growth also decreases due to a decrease in productive investments.

 Some argue that the cost of the plan for historical reparation to pensioners had to be taken over, but this is not true. They shouldn’t wait to get what is fair. However, when doing this they should have extended in time the massive plan to improve infrastructure they had previously launched. They have no excuse, even if they did receive a country with infrastructure in terrible conditions.

 We can explain it like this: let’s assume someone inherits a house from a distant relative that died 10 years ago and lacks mantainance since then. Thinking about moving there, you call an architect and ask the cost of  repairing it. The architect looks at the leaks in the roof, the broken pipes, the damaged kitchen and toilets and the old paint and budgets a cost of 80 000 US$. Before deciding to start, the person will assess his capacity to save and, only then, ask the architect to repair the leaks. Then, depending on his resources, he will solve the other problems over time. The State should be administered in the same way because its pocket, which is ours, is not bottomless.

  For decades we have let our governments construct our State that serves politics rather than citizens. We are among the 12 countries that put a higher tax burden on businesses and any work that pays income tax works half the month for the State. It’s no surprise that we trouble arriving at the end of the month. Hence, it is time for us to assume our civic engagement and demand from our politicians a smaller and more efficient State. One that we can afford and serves citizens.

Why is Economic Recovery Slow To Arrive? Reviewed by on . Our Executive Director, economist  Aldo Abram, explains why Argentina should respect its institutions if it wants to attract investments and grow. It shouldn’t Our Executive Director, economist  Aldo Abram, explains why Argentina should respect its institutions if it wants to attract investments and grow. It shouldn’t Rating: 0

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