Argentina’s imaginary miracle «

Argentina’s imaginary miracle


By Andrés Velasco and Eduardo Levy Yeyati

SANTIAGO/BUENOS AIRES – Argentina has achieved a miracle in its economic response to the COVID-19 crisis, the Nobel laureate economist Joseph E. Stiglitz claimed in a recent commentary. The white knight in this saga, according to Stiglitz, is President Alberto Fernández, who inherited a mess on taking office in late 2019 and introduced policies that spurred high growth and a rebound in employment and investment. Stronger activity, coupled with higher and more progressive tax rates and a debt exchange in 2020, in turn improved the public finances.

It certainly does look miraculous. Unfortunately, the data tell a different story.

The oldest statistical trick in the book – one for which progressive Latin American economists have often and correctly chastised their conservative counterparts – is to label as growth what is just a rebound from a massive output dip. That is exactly what has happened in Argentina. In 2020, the economy contracted by a whopping 10%, the second-largest slump in the region, after Peru. Argentina’s rapid recovery in 2021 – like that of most of its neighbors – thus came as no surprise, but output has yet to return to pre-pandemic levels.

Moreover, the recovery does not look especially healthy or sustainable. It has been driven in part by low-return construction projects, as local investors bet that real estate will remain shielded from Argentina’s high and rising inflation rate. The expanding automotive, clothing, and electronics sectors are protected from external competition not only by import barriers, but also by the huge gap between the official and the free exchange rate: firms import inputs at the official exchange rate, and sell final goods at a price consistent with the market rate.

That subsidy will end sooner or later, and long-term growth prospects are not promising. Although real investment in 2021 was higher than in 2019, it remained far below 2018 levels, at a dismal 17% of GDP. Meanwhile, the recent massive power outage in Buenos Aires highlighted the deleterious effect of insufficient investment in citizens’ welfare and economic development.

Argentina also has a reduced stock of human capital. Schools have been closed for 79 weeks during the pandemic, compared to 40 in neighboring Uruguay. The loss of learning will likely be evident once the results of December’s standardized tests are made public.

As Stiglitz tells it, Argentina is becoming the kind of “learning society” that he advocated in one of his books. But, in addition to underperforming schools, the large exchange-rate gap is damaging the country’s nascent tech sector, where businesses are increasingly offshoring services or simply moving to neighboring countries. Knowledge-based exports remain stagnant, at roughly 20% below their 2017 peak.

A structural shortage of foreign exchange has long held back Argentina’s growth, and the problem is getting worse. While export revenue increased in 2021, owing largely to a short-lived commodity-price surge, export volumes are still below 2019 levels – except for primary exports, which benefited last year from a one-off backlog from 2020 but are expected to fall significantly in 2022. Imports outpaced exports in 2021 as producers hurried to purchase – or invoice – capital and intermediate goods at the subsidized exchange rate, resulting in a depletion of liquid international reserves.

If the 2020 debt exchange was meant to restore Argentina’s creditworthiness, then it has failed. The country’s sovereign spread, currently above 1,800 basis points, is the region’s highest after that of Venezuela, and the government remains shut out of international capital markets.

Stiglitz’s narrative also claims miraculous improvements in Argentina’s public finances, but the data reveal a more nuanced picture. In 2021, government revenues remained at 2019 levels, with two exceptions: an ephemeral jump in export-tax income because of the brief commodity-price spike, and new wealth taxes (one of which will not recur in 2022). The higher taxes yielded additional revenue equivalent to about 1% of GDP, half of which will be gone next year.

Argentina’s lower-than-expected primary budget deficit (which excludes debt payments) partly stems from the International Monetary Fund’s allocation last year of special drawing rights, the Fund’s reserve asset, which the government counts as primary income. It also reflects the jump in inflation from 36% in 2020 to 51% in 2021, which eroded the real value of public-sector wages and, most alarmingly, of social expenditure. Because pensions and transfers in Argentina are indexed to past inflation, their purchasing power falls whenever inflation accelerates. With social-security outlays declining by 6% in real terms, and energy subsidies for middle- and high-income households increasing, it was not the rich, it seems, who paid for the fiscal correction.

Moreover, Argentina’s social indicators are anything but miraculous. According to the United Nations Economic Commission for Latin America and the Caribbean, Argentina experienced the region’s largest pandemic-related increase in poverty in 2020. Today, 40% of the population lives under the poverty line. With just one in five workers formally employed by the private sector, good jobs are scarce, and labor’s share of GDP has declined by four percentage points in the past two years.

Former President Mauricio Macri’s previous administration made many policy mistakes, but that neither justifies nor explains the numerous blunders committed by Fernández and his team. Nor is it useful to cast Argentina’s complex economic predicament as a Manichaean battle between right and left. Plenty of heterodox innovations could help diversify Argentina’s exports and reignite growth, but there is little that is innovative or progressive in what the current administration is doing. Previous populist governments engineered boomlets predicated on foreign-exchange gimmicks or fiscal profligacy, and they often ended in disaster.

In 1982, Carlos Díaz Alejandro, arguably the greatest economic historian of Argentina, wrote scathingly of “politically or financially ambitious academics.” Ensconced “in their Northern universities, disciplined by their colleagues, they are cautious scientists.” But, “during their summer tours of the periphery, their libido imperante unleashed,” they let ideology run roughshod over analysis.

Díaz Alejandro was referring to the orthodoxy of Milton Friedman and his disciples, but the same can be said of the heterodoxy of today’s northern preachers. They do not subject their own students to sloppy statistics or intellectual sleights of hand. Why should the citizens of Argentina be treated differently?

Andrés Velasco, a former presidential candidate and finance minister of Chile, is Dean of the School of Public Policy at the London School of Economics and Political Science. Eduardo Levy Yeyati, a former chief economist of the Central Bank of Argentina, is Dean of the School of Government at Universidad Torcuato Di Tella, Faculty Director of the Center for Evidence-Based Policy, and a non-resident senior fellow at The Brookings Institution.