Five Reasons for the Weakness of the Argentine Economy

Five Reasons for the Weakness of the Argentine Economy

Daniel Lacalle 15/05/2019 4

Argentina has been “printing money for the people” MMT-style for many years. Its wrongly-called “inclusive monetary policy” of the past - print money to finance massive government spending - has driven the country to massive inflation and depression.

Lagarde Argentina.jpg

This is the main reason why a country with an excellent education, human capital, and high economic potential has third-world inflation rates. 

Argentina inflation rose to 54% annualized this week. Bonds spreads soared to 854 Bps, the two-year Credit Default Swap (CDS) is at 1094 bps; and the five-year at 948 Bps. But the country’s governments blame inflation on anything except its insane monetary policy

The Argentine economy is more fragile and vulnerable than similar ones. However, Argentina is also one of the countries with the highest economic potential. There are five essential factors to understand the weakness of the economy:

  1. The Peso. Despite the dovish policies of the Federal Reserve and the change of course in the process of normalization, the Peso is, again, the worst performing currency against the dollar in 2019. The dollar index has not moved much against its basket of currencies, therefore, it is the disastrous monetary policy that made the Peso plummet. A weak currency is a danger to the stability of the country and the successive governments only seem to want to patch up the mistaken monetary policy of the Central Bank. A weak Peso does not make the Argentine economy more competitive or export more, as reality shows. If the country does not address in a serious and determined way the error of maintaining a currency in a constant process of destruction of its purchasing power, it will simply move from crisis to crisis again.

  2. Monetary policy is also seriously inflationary. Not by mistake, but by design. Governments prefer to see high inflation and blame an inexistent external enemy than to stop financing the bloated public spending with newly printed currency. The loss of purchasing power of the currency is added to an inflation rate that should not correspond to a country with the potential and human capital of Argentina. Argentina has been, for many years, a country with the potential of a developed economy and a monetary policy of a third-world country. It has followed the MMT recommendations for years. Many claim that dollarization would be worse because it was already attempted and led to a crisis, except that this argument is false. Argentina did not dollarize, it carried out an exchange rate subterfuge by pegging the Peso to the US Dollar with a completely inflated exchange rate that led to the accumulation of imbalances. Argentina did not have dollars, it had pesos in disguise. Dollarization is what Ecuador did, abandoning the sucre, which allowed the country to avoid a Venezuelan-style hyperinflation.

  3. Very high taxes. Argentina’s tax wedge remains the highest in the region and one of the highest for companies in the world,. This constant expropriation of wealth via currency devaluation, inflation and taxes work as a huge barrier to international investment, growth and job creation. In Argentina, one always hears that “tax revenues are low” and that therefore taxes cannot be cut.  However, raising them puts a lid on job creation, productive investment and the attraction of capital, and revenues are even lower.

  4. High government expenditure. Denying the depressive effect of extractive political spending, within a public expenditure that already reaches more than 45% of GDP, is a problem for a country with high potential. It not only is the highest public expenditure in the region but the most inefficient according to the Inter-American Development Bank. The inefficiency of public spending in Argentina reaches 7.2% of GDP.

  5. The loopholes of protectionism. According to the global competitiveness index of the World Economic Forum, Argentina is ranked 92 out of 137 countries. The deterioration trend generated between 2012 and 2015 has been reduced for three years, but the challenges are important. One of them is to eliminate the loopholes of anti-trade and protectionist measures imposed from the short-sighted perception that protectionism would replace imports and strengthen the economy while printing money would spur growth. There are still significant recesses of that period that act as a disincentive to growth and, above all, as a warning to global investors who prefer to avoid long-term and capital intensive investment in Argentina.

It is true that some measures have been taken to reverse these elements of fragility, but reforms must be more courageous to prevent the economy from falling further in 2019 and 2020.

It is not easy to change wrong “neo Keynesian” policies of the Kirchner era without recognizing the enormous monetary and fiscal hole created by the previous administration, but if the reforms are not decisive and clear, the Argentine economy will continue to be fragile and more vulnerable to economic cycles than other similar ones. Argentina is a great country with terrible monetary and fiscal policies. With such potential for growth and employment, it is worthwhile to be brave and put an end to the remnants of past wrong policies.

A version of this article first appeared here

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  • Mark Hampton

    The collapse is near.....

  • Chris Dunning

    This is literally nothing different from what happened 3 years ago

  • Rachel Mundy

    Who's going to invest in Argentina ?? Do they want to become the next Venezuela ??

  • Scott Fullwiler

    Argentina is not a monetary sovereign as defined by MMT. There are literally dozens of MMT publications explaining this. This means that if it appears that "Argentina is following MMT" this is the OPPOSITE of what MMT would be in favor of for Argentina; MMT would predict the poor results for Argentina that are described here if it tried to "follow MMT," as MMT would predict for any government that is not a monetary sovereign. The discussion of Argentina here is useful. The insertion of MMT into the post, however, shows you don't have even the most basic understanding of MMT.

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Daniel Lacalle

Global Economy Expert

Daniel Lacalle is one the most influential economists in the world. He is Chief Economist at Tressis SV, Fund Manager at Adriza International Opportunities, Member of the advisory board of the Rafael del Pino foundation, Commissioner of the Community of Madrid in London, President of Instituto Mises Hispano and Professor at IE Business School, London School of Economics, IEB and UNED. Mr. Lacalle has presented and given keynote speeches at the most prestigious forums globally including the Federal Reserve in Houston, the Heritage Foundation in Washington, London School of EconomicsFunds Society Forum in Miami, World Economic ForumForecast Summit in Peru, Mining Show in Dubai, Our Crowd in Jerusalem, Nordea Investor Summit in Oslo, and many others. Mr Lacalle has more than 24 years of experience in the energy and finance sectors, including experience in North Africa, Latin America and the Middle East. He is currently a fund manager overseeing equities, bonds and commodities. He was voted Top 3 Generalist and Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters’ Extel Survey in 2011, the leading survey among companies and financial institutions. He is also author of the best-selling books: “Life In The Financial Markets” (Wiley, 2014), translated to Portuguese and Spanish ; The Energy World Is Flat” (Wiley, 2014, with Diego Parrilla), translated to Portuguese and Chinese ; “Escape from the Central Bank Trap” (2017, BEP), translated to Spanish. Mr Lacalle also contributes at CNBCWorld Economic ForumEpoch TimesMises InstituteHedgeyeZero HedgeFocus Economics, Seeking Alpha, El EspañolThe Commentator, and The Wall Street Journal. He holds a PhD in Economics, CIIA financial analyst title, with a post graduate degree in IESE and a master’s degree in economic investigation (UCV).


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