New Year's Resolutions for Argentina

New Year's Resolutions for Argentina
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The first year of the Macri administration has been difficult. Pretty much all of Macri’s agenda was dominated by efforts to clean up the economic and institutional time bomb President Cristina Fernández de Kirchner left after 12 years of authoritarian populism and economic interventionism. During 2016 Argentina struggled with an inflation rate of about 40 percent (due to high public spending and an expanding money supply), almost 10 percent unemployment, and more than 30 percent of the population under the poverty line.

<p>Argentine President Mauricio Macri</p>

Argentine President Mauricio Macri

In order to fix this disastrous economy, Macri adopted an agenda of gradual change. In September, during his opening remarks at a conference for top global CEOs and investors he said: “We cannot change everything in a day or in a year or during one presidency; what is important is that we have started going in the right direction.” And indeed, one year after Macri came to power significant changes have already been made. Argentina has opened up to the rest of the world, openly criticized the Venezuelan regime and its human rights abuses, opened for a dialogue with the opposition, liberalized restrictive media laws, etc.

But if Argentina wants to achieve sustained economic and institutional success, it needs to put away gradualism and start carrying out more rapid reforms. In Latin America, Chile and Peru began major economic reforms in the 1970s and 1980s, respectively. They implemented free-market policies that led to economic takeoff. So, what is the Macri administration waiting for?

Here are four recommendations the current administration should include in their New Year’s resolution list for the upcoming year.

  • Reasonable monetary policy. One of the main concerns of Argentineans is the high inflation rate. Fortunately, the current government has apparently understood that inflation is a monetary phenomenon and decided to decrease the annual growth of the money supply to 20 percent —during Cristina Kirchner’s last two years in office it reached nearly 40 percent. And although many predicted that the inflation rate will start slowing down in 2017, the government is not planning on tackling the root of the problem: government spending.
  • Cut government spending. Argentina has a long history of addiction to high government spending which has caused chronic fiscal deficits. During the Kirchner’s 12-year rule, public spending went from 30 to almost 50 percent of GDP, and the fiscal deficit was financed through printing money. Although the Macri administration reduced the money supply, it has decided to finance the current fiscal deficit with debt. In order to avoid future economic crises it is necessary to cut unsustainable public spending, thus reducing the fiscal deficit and the need to finance it through more debt. How to reduce government spending? By ensuring that government spending grows more slowly than the private economy (golden fiscal rule), terminating unnecessary regulatory agencies, boards, or functions of government (sunset laws) or implementing a zero-based budgeting method.
  • Lower taxes and reduce regulations. One of this administration's goals at the beginning of the year was to attract foreign investment. But, who will invest in the country if almost 40 percent of what is earned is taken by the government through taxes? According to the Doing Business 2016 Report, moreover, it takes around a month to register a firm in Argentina, 359 hours to prepare, file and pay the corporate income tax, value added or sales tax, and labor taxes, and 51.5 days to register a property. In OECD high-income countries these figures are much lower: 8.3 days, 163.4 hours, and 22.4 days, respectively. Aside from encouraging investment and creating wealth, cutting taxes also keeps the government from using more money inefficiently. Here are more good reasons to cut taxes.
  • Tariffs. A recent article published in the Austrian newspaper Die Presse, referred to Argentina as “the land of protectionism.” It says that in Chile many goods such as clothes, shoes, computers, and toys for kids cost half or even a third of what they cost in Argentina. Why? Over the last decades Chile has signed 26 free-trade agreements and permitted duty-free entry of goods and services from 50 countries. By contrast, import restrictions in Argentina have become so ridiculous that it is cheaper to fly from Argentina to Miami and buy an iPhone there, than to just buy an iPhone in Argentina. Although the benefits of free trade have been well-documented, in a recent interview, secretary of Commerce Miguel Braun stated that he “will not allow an indiscriminate entry of imports.” As Adam Smith warned long ago, that is political jargon for protecting favored firms at the expense of everyone else: “In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest. The proposition is so very manifest, that it seems ridiculous to take any pains to prove it; nor could it ever have been called in question, had not the interested sophistry of merchants and manufacturers confounded the common-sense of mankind.”

Again, the evidence shows rapid reformers tend to outperform gradual reformers on many economic and institutional measures. Why should Argentina be the exception?

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