Observatorio argentino 58: La solución a los problemas de Argentina no parece tan difícil

Really, the situation isn't that intractable!

Argentina is in the middle of an economic disaster. It’s never a good sign when the government starts publishing weekly inflation estimates.¹

The reason for the disaster isn’t hard to divine. The Argentine government spends more than it takes in and cannot borrow at reasonable rates. So the central bank prints money to make up the difference. In an election year, nobody in Buenos Aires is trying to close the gap. In fact, in a desperate hail Mary, the incumbent government is eliminating income taxes on workers making less than US$27,000 per year.² In the words of my son, “they’re betting that people hate taxes more than they hate inflation.”³

But this post is going to be optimistic! Argentina’s short-term problem is not that hard to fix. Things were much worse in 1989, let alone the nightmare of 2001.

First, the fiscal deficit was about 3.8% last year.⁴ An adjustment of that size is something many countries have accomplished without social breakdowns. How could the Argentine federal government do the same?

Well, since you ask …

1. Energy subsidies are running at 2.0% of GDP. In 2017, President Macri cut them from 2.5% of GDP to 1.2% without prompting riots. President (gulp) Milei should be able to do the same. SAVINGS: 1.0% of GDP.

2. The operating deficit for government enterprises came to about 0.8% of GDP. Four-fifths of the losses come from two companies: Aerolineas Argentinas and AYSA, divided roughly equally (data here). Aerolineas Argentinas is straightforward to fix. Just sell the damn thing. AYSA provides water and that makes it a tougher row to hoe, so let’s say only a quarter of its gap can be closed. SAVINGS: 0.4% of GDP.

3. President Macri cut the federal payroll expense by 0.4% of GDP in his first two years. Doing the same proportionately in one year will make things hard for a lot of people but it should be doable, especially with inflation still roaring. SAVINGS: 0.3% of GDP

4. In 2017, Macri slashed transport subsidies by a quarter. Do that again. SAVINGS: 0.2% of GDP.

   

   It costs only 6¢ to ride this train

5. In 2022 the federal government spent 0.2% of GDP on housing subsidies but that category was zero in earlier years. It might be risky, but zeroing it out seems doable without a social explosion. SAVINGS: 0.2% of GDP.

6. That gets you to 2.1% of GDP. For the rest … default on the debt, of course! Most of it is to the IMF, anyway. They’ll agree to restructure. SAVINGS: whatever the IMF agrees to.

Didn’t touch pensions or social spending! Of course, actual mileage will vary. And candidates not named Javier Milei might even raise some taxes a bit. The point is that historically-speaking the required fiscal adjustment is not unprecedented. Moreover, if the adjustment if concurrent with disinflation then lots of people will be better off and even more will feel better off.

Dollarization could happen in the first year but that isn’t how I would bet. Argentina would need to raise the dollars (see this post) and for that it will need the IMF’s approval, which it won’t get.

So the country will need a more traditional stabilization plan. That might involve a new currency or it might not, although I would bet on yes, especially with Javier Milei in charge.⁵ (If he can’t get the dollar immediately, at least he can introduce the “milton” or the “galt” or something. I would vote for “rando” but that won’t happen.) That will probably involve a nasty recession but it doesn’t have to be 2001 all over again unless something goes dramatically wrong.

And here is where the new government is going to get lucky: Argentina is on the verge of a new resource boom. Oil exports from Vaca Muerta are set to explode. The country has already secured financing for a natural gas pipeline to start exporting to neighboring countries. Lithium’s promise we all know about. The massive drought holding back Argentine agriculture is going to end. Whatever government is in office around the beginning of 2025 is going to enjoy some pretty good years, absent some destabilizing international event.⁶

In some ways, this election is the opposite of the 2015 contest. Back then, I wrote that the incumbent Peronists should really hope that the opposition wins the election, given the mess that they were handing off. This time, however, the chickens have already flown home and crapped all over the floor. Cleanup isn’t easy but the mess isn’t that large.

Unless the new occupants of the Casa Rosada somehow screw it up. Could that happen? If we’re talking President Bullrich, I’d say probably not. (Agreement is not universal here at TPTM on that point.) President Massa, I’d also say probably not.

But we seem to be looking at President Milei and that could get interesting …

Just because the next occupant of this place isn’t facing as hard as task as it seems doesn’t mean that they couldn’t screw it up completely

We here at TPTM are thinking about how it could all be botched right now. In fact, Leticia Abad already has some ideas about just that for the next post …

1. It’s a worse sign when the government stops publishing reliable inflation data at all. That actually happened in Argentina in 2011. The government was just making stuff up.

2. This is going pretty high up the income scale in a country where the median annual salary was only US$5,954 as of May 2023. Before the recent cuts, roughly half of all wage workers paid income tax. Now, only about 10% will. Data by sector and sex is here. Provincial data is here. National wage distributions can be found here. That said, to be fair, the fiscal cost of the move is tiny — how much could you tax people earning only a bit more than six grand per year?

3. Yes, my son decided to write an essay on inflation for his fifth-grade class. The topic could have been anything.

4. The IMF says 3.9%, which is good enough for government work.

5. Lots of Latin American countries have experienced episodes of triple-digit inflation or higher. Most of them introduced new currencies as part of the process of getting prices back under control. Chile went from the escudo to the peso in 1975. Bolivia withdrew the peso boliviano in favor of the just plain boliviano in 1986. In 1991 three countries created new currencies: Peru dumped the inti for the sol, Nicaragua created the córdoba oro to replace the córdoba, and Argentina retired the austral and introduced the peso. Brazil replaced the cruzeiro with the real in 1994. Ecuador famously dollarized. (El Salvador was not facing high inflation when it dollarized.) Mexico and Uruguay disinflated without changing the currency, although Uruguay had to knock three zeroes off the peso on two separate occasions during the inflation whereas Mexico did the same after inflation was controlled.

6. A Chinese economic collapse. A Sino-American war. Something bad out of Russia. Malicious use of super-A.I. Another goddamned pandemic. Trump wins election, abolishes NATO, and reinstates Smoot-Hawley tariff rates (technically he can’t do that, but come on). Oh, hell, I don’t know, the Rapture. It’s been that kind of damn decade. No, two decades. I’ve been lost since smartphones and the Tea Party.