4/8/2024 - Politics and Society

Attacking the problem, not the solution

By Alejo Lasala

Attacking the problem, not the solution

Poverty in Argentina: 57.4%.

The Observatory of the Argentine Social Debt, belonging to the Argentine Catholic University, carried out an estimate of poverty, considering real variations in wages and changes in income and monetary transfer programs. According to this analysis, the poverty rate stood at 57.4%, while indigence reached 15% in January 2023. These numbers represent significant increases over the previous year's estimates, which were 44% and 9%, respectively.

However, this number could be higher than the INDEC's next measurement due to the use of different criteria and indicators, as has been the case in recent years. The main differences between INDEC's and ODSA's measurements lie in INDEC's larger sampling (25,000 households, versus 6,000 for ODSA), and in the indicators used, where the Observatory is characterized by its dimensional spectrum, covering access to health, employment, basic services and decent housing. In turn, both base their studies on establishing the monetary value, in the case of INDEC, of the Basic Food Basket (EPH) and, in the case of ODSA, of a basket combined with the consumer food price index (EDSA).

However, when we focus on the last element of analysis to construct the poverty data - the monetary one - we see that there is an issue that should not be left aside: the freezing of prices. Prices are composed of information and provide information: they are determined by the supply of the existing product and the demand for it. If the study is anchored on a price index that suffers from state intervention, subsidiary policies, exchange rate gaps and lagged inflation, it will show a distorted number of poverty equivalent to the distortion of the price system. In reality, the difference between the real price of things and the price to the consumer would be made up by the State.

Distortions in the price system

Starting with the gap between the official dollar and the parallel dollar, the current government inherited a 160% difference between both prices. This prevented a normal functioning of the economy and its diagnosis was agreed upon by a large part of the ideological spectrum: whoever took office, the gap, whose damage directly impacted the reserves and the liquidation of exports, had to be closed. However, the devaluation carried out by the Minister of Economy, Luis Caputo (from $366.45 to $800 per dollar) was the target of attacks from many quarters, to which it is worth asking whether the mistake is the devaluation itself, or the conditions that led to the rise of the parallel dollar, among them, the monetary issue.

In itself, the devaluation of the currency affects the price system, because the price of the dollar has a direct impact on the inputs of all sectors: from coffee to large machinery. This is a first major distortion in terms of measuring poverty.

But the problem does not end there. As of December 10, 2023, the backwardness of prepayments with respect to general inflation was 28.8%, and a backwardness close to 40% with respect to the prices of sanitary equipment and medicines (Invecq based on INDEC). On the other hand, energy prices were also below inflation, due to state interventionism: they showed a backwardness of 65% in relation to inflation in the period 2019-2023. In the transportation item, as of January 2024, the minimum value of colectivo ($77) showed a backwardness of 36% in real terms, compared to the same value in January 2023 (CPI - INDEC). In the electric energy item, we can see a cost in the tariff per MWh of 30USD, while in 2022 it cost 90 USD/MWh; the difference was covered by subsidies and tariff freezing, representing almost 1.5% of the GDP (CEFIP - CAMMESA).

Monetary issuance

The consequences of unsupported monetary issuance are mainly shown in the generalized increase in prices and in the devaluation of the currency. In our country, we are talking about a progressive increase in unsupported issuance since the repeal of the Fiscal Responsibility Law (2004-2009). In percentages of GDP, the CFK I administration issued in order to finance fiscal and quasi-fiscal deficits by approximately 2 points of GDP, his second term by 4 points, Mauricio Macri returned to 2% and the Alberto Fernández administration took it, in pandemic and then in 2023, to more than 11% of GDP (OJF & Asociados based on BCRA).

Therefore, we were faced with a model that exchanged price freezes and distortions for fiscal debt, whose differential between real and consumer prices was sustained by the State, although in reality, by society itself through inflation and the depreciation of its currency.

On the other hand, simulations by the Observatorio de la Deuda Social (UCA) showed, at the end of 2023, that if the State's support via transfers (called AUH, Alimentar card, among others) to the most vulnerable sectors had been cancelled, indigence, at that time, would have risen to 20% and poverty would have reached 49% of the population.

The new monetary policy

The scenario was propitious for Milei's rise: a discourse of economic-fiscal orthodoxy, reduction of public spending and shrinking of the State, combined with discursive attacks on the political leadership.

In his first months in office, not only were various prices liberalized and the dollar gap narrowed, but also subsidies were eliminated in shock, with announcements of further eliminations in the future. Sectors such as transportation and energy suffered contained increases. At the same time, a bill was announced to penalize monetary emission to finance the treasury, and a surplus was achieved in the first month of the administration.

Now, it is clear that the government has its imperfections, but is not macroeconomic stability, in the short and, especially, in the long term, the best way to eradicate poverty in Argentina?

Argentina's current situation does not respond to the false dichotomy between individualism and collectivism. Argentina's collectivism, insofar as it lacked coherence in its fiscal policies, eroded the social bases without differentiating between the individual and the collective, subsuming everyone equally in the inability to imagine and carry out individual and collective projects. Argentina's current situation simply implies returning to being a country with growth and a rational economy, without inflation or constant impoverishment. There is no need to mention our regional neighbors, but to go back a few years in time in our own country: in the Argentina of 2004-2011, the Fiscal Responsibility Law promoted by former President Néstor Kirchner (later repealed by CFK I), obliged the Executive to maintain a certain independence from the Central Bank, and limits for deficit financing. Those were the last years of low inflation, and, as mentioned by Agustín Salvia (ODSA-UCA) in his opinion article on the last measurement, the deterioration would begin a few years later (2013-2014), being now facing "the end of the cycle of an economic regime of inflation, indebtedness, chronic impoverishment and social inequality".

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Alejo Lasala

I am a Political Science student at UCA and a quality analyst in the Government of the City of Buenos Aires.

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