Report Nº: 79807/03/2019
Argentina is at a difficult puzzle. The interest rate is very high to rebuild the credit market and, with this, propel the exit from the recession. But as soon as it is lowered a bit, the dollar tends to rise. In a bi-monetary economy, where people trade in pesos but save in dollars, the exchange rate instability generates uncertainty that does not help to contain the inflation and get out of recession. Meanwhile, the pass-through of the high devaluation of 2018 to prices continues, so that inflation in the first two months of the year was higher than expected.
When looking at the economic situation in neighboring countries, such as Chile and Uruguay, the picture is quite different. Inflation in Chile is 2.5% and in Uruguay 8.4% annually. The dollar in both countries rose just 8% throughout the year 2018. Interest rates are as low as inflation, so the credit market for production and consumption work normally. Hence, Chile grew 3% and Uruguay 1.5% in 2018, in addition to which they have been growing moderately but steadily for several years, making both countries to surpass Argentina in Gross Domestic Product (GDP) per capita.
There are many factors that explain these marked differences in performance. But a very suggestive indicator that reveals the some of the causes of the differences is the per capita exports. In this sense, according to data from the statistical institutes of the three countries, it may be observed that:
These data show that both Chile and Uruguay have the capacity to generate much more exports than Argentina. This implies that, in relative terms, in Chile and Uruguay there is more abundance of dollars than in Argentina. This allows them to import much more (Chile imports for the equivalent of USD 3,000 per inhabitant and Uruguay USD 2,500 per inhabitant) than Argentina (which imports only USD 1,500 per inhabitant) without this causing any exchange rate instability. An economy with more imports has greater diversity of prices and quality of both capital goods and inputs for production and consumer goods for the population, thus providing greater welfare.
The underlying problem of Argentina is that it generates much less foreign currency than needed to satisfy its quality of life aspirations. In other words, increasing economic activity and formal employment requires increasing imports because the productive sector consumes many intermediate and capital goods that are from foreign origin. In fact, 85% of imports in Argentina correspond to machines, spare parts and supplies. Likewise, Argentines are eager to consume foreign products and travel abroad as much as Chileans and Uruguayans do. But pretending to reactivate production, consume foreign goods and travel abroad exporting so little fatally results in currency instability and, associated with it, high inflation and recurrent recessions.
Stagnation and instability derive from a low export capacity. Given the abundance of resources available in the country to produce goods and services in high demand in the world it is even contradictory that Argentina exports so little. The explanation is in the domestic rules that make exporting from Argentina very difficult. Distortionary taxes, lack of infrastructure, poor regulations, few trade agreements are elements that conspire against the possibility of exporting more. Added to this is the instability in the exchange rate, marked by periods of exchange rate appreciations followed by strong devaluations imposed by the crisis due to the scarcity of dollars. This is a historical behavior and what is observed today as an extension of the lack of dollars and the devaluation of 2018.
The Nobel Prize in Economics, Paul Krugman, while being a critic of free trade, recognizes that the importance of exporting is that it permits to import. It is the way for people to enjoy the goods and services that are invented around the world and, in addition, improve their own capabilities to produce more dollars and thus keep importing.