Report Nº: 100926/03/2023
Accelerating inflation increases poverty. There is no compensatory State policy that will reduce poverty without reducing inflation. What is needed is to question the consensuses that support the bad policies that generate the State’s chronic financial and management deficits.
February’s inflation rate (6.6%) was higher than January’s (6%) and probably lower than March’s (estimated at 7%). The inflation decrease, according to the government, to a monthly rate that will start with a “3” in April will be another unfulfilled promise. In February, the items that rose the most were food, where a 21% increase in meat stands out. The acceleration of food prices has an impact on the Poverty Line, which is the value of the basic consumption basket below which families are considered poor.
For the time being, the official response to the increase in poverty is to promote the reopening of bargaining agreements, so that nominal wages match inflation, and to redouble efforts to control food price agreements. The underlying logic is that State intervention, promoting wage increases and controlling food prices, will prevent poverty from increasing.
The question is whether this strategy has a chance of reducing poverty. For this purpose, it is useful to compare the dynamics of the Poverty Line and wages over the last year. According to data from INDEC and the Ministry of Labor, between December 2021 and December 2022, it is observed that:
These data show that the wages of formal workers, who are governed by collective bargaining agreements, effectively keep pace with the Poverty Line, which grows at inflation’s pace. However, the wages of informal workers are decoupled from those of formal workers and lag well behind inflation. If informality were marginal in the economy, this would not be a problem because they could be compensated with welfare assistance. But in Argentina informality reaches 50% of workers between unregistered salaried workers and non-professional self-employed workers.
Inflation negatively affects economic activity, reducing productive investment, which discourages the generation of formal jobs. As a result, half of the workers survive in the informal sector, accepting precarious and poorly paid jobs. This is the main factor causing poverty. According to INDEC, in poor households only 15% of income comes from formal employment, another 35% comes from informal employment and 50% comes from non-labor sources where State transfers are preeminent. The data are conclusive: no matter how much the wages and welfare are increased, there is a large proportion of income -the informal ones- that lags behind the acceleration of inflation, which translates into more poverty.
The political system always finds reasons and reaches strong consensus to increase public spending, which increases inflation. For example, given the critical situation in Rosario, Congress is preparing to pass a law increasing the structure of the Judiciary. This does not take into account that, in the Judicial Branch, as in the rest of the State, there are enormous opportunities to improve services without increasing public spending. The National Judicial Branch allocates 96% of its budget to salary expenses. Instead of rethinking procedures and modernizing technology, 50 more positions for judges, public defenders, and prosecutors will be created. It is assumed naturally that the solutions always involve increasing public spending and never increasing efficiency.
The sanction of this law will imply an increase in public spending, thus in inflation and, consequently, in poverty. In other words, Congress will contribute with more cheap labor for drug traffickers. This is another testimony that there is no so-called fissure in the management of the State, but rather iron agreements around bad ideas. As long as these wrong consensuses are not broken, there is no chance of getting out of decadence.