05 May 2008

In Argentina, the Rich are Taking to the Streets

by Leandro Serino Some Argentineans have reverted to one of the country's favorite sports: reclaiming the streets. This time, however, streets and roads are not occupied by the unemployed or by civil servants or workers from declining industries. Instead, the protests come from agricultural producers and a selective group of Argentina's urban middle and upper classes; paradoxically, some of the groups who benefited most from the recent economic recovery.

The protests started when the government modified the export tax regime on March 11th. To understand their causes, it is useful to look at the recent history of the application of a tax to Argentina’s exports of meat, soybeans, maize, wheat and related products. Export taxes were re-established in Argentina during the last economic crisis, in 2002. At the time, the rationale for the policy was simple. Argentina is an exporter of wage goods whose prices, like those of many other commodities, are determined in international markets. This means that, all other things being equal, the 200% nominal devaluation that took place in 2002 would have caused domestic food prices to skyrocket. In a context of massive unemployment and record poverty levels, it was necessary to truncate the link between international prices and domestic ones. And this is what export taxes actually do and did, for they establish a wedge between these two prices, thereby inciting local producers to sell to the domestic market.

(To have an idea of the problem this policy was trying to address, imagine -if you can- today's food price inflation, raising the concerns of international organizations such as the IMF, the World Bank and various Central Banks in both developed and developing countries, and multiply it by a three digit factor.)

The system had remained in place since then, with export taxes occasionally increasing. The second justification for this policy, even after the economic recovery, was not very different from the first one. The stable and competitive exchange rate policy implemented in Argentina (to counteract the de-industrialization experienced in the 1990s and promote new competitive sectors) is only politically sustainable in a wage-good exporter country if prices do not jump with a devalued exchange rate. Hence, until productivity and wages rise, export taxes have a role to play.

By the end of 2007, a third reason for the tax arose as increases in international food prices accelerated, fuelled by Asian giants’ economic growth, substitution of certain crops to produce fashionable biofuels, and even by speculation. The recent change to the export tax regime intends to address this new phenomenon, linking domestic prices to developments in international markets. (See ‘Mad, bad taxes on food’, The Economist, March 29th-April 4th, 2008)

This time, however, the change in export taxes is different from previous increases, for it establishes a scheme of moving export taxes. In the new regime, export taxes are not fixed but follow changes in international primary commodity prices, increasing when international prices rise and decreasing if international prices fall. In the current scenario of booming international prices, where the price of certain crops has almost (or more than) doubled in less than six months, modifications to the export tax system and the design of alternative policies (involving not only export taxes but also long-term policies for small agricultural producers and particular products, as well as countercyclical macroeconomic policies) were certainly necessary.

Protests started after the government announced the first type of policies (the change to the tax system). They emerged as a response to the lack of long-term policies for the agricultural sector, but also because, in a context of high international prices and expectations of further increases, flexible export taxes imply lower (extraordinary) benefits for the most profitable sector in the Argentine economy. The large amounts of present and future income at stake, taken for granted by some producers as a fair reward to their productive efficiency, thus represent the fundamental important reason behind the recent protests – which are likely to continue.

The dispute over extraordinary benefits, however, in no way justifies three weeks' of lock-out and piquetes affecting the entire Argentine population and especially its most deprived section. While it is fair to say that these benefits are in part a consequence of technical change and of the extension of the land frontier, they are also linked to a particular exchange rate regime and international context.

The conflict is still unresolved and open, and is transforming the distribution of ‘abundance’ as one of the fundamental political economy disputes of the 21st century.

Note

Argentina’s newspapers cover this issue daily. See Pagina12, Clarin or La Nacion (in Spanish) and Buenos Aires Herald (in English).

Leandro Serino is a PhD Candidate at the Institute of Social Studies (ISS) in The Hague, where he also completed a Masters in Development Economics in 2003. In recent years, Serino devoted most of his time to his PhD research, which focuses on the question of structural change in countries with abundant natural resource endowments, like his own country Argentina. During his ‘free’ time, Serino participated in different projects in the fields of development economics and applied macroeconomics, at the University of General Sarmiento, the ISS, ECLAC Buenos Aires and the Ministry of Economy and Production of Argentina.

2 comments:

  1. I've liked the post! And I agree with the description. I think the conflict imply a deep criticism against the going strategic of development as well. The problem goes far that percentage of export taxes (withholding). This strategic sets two exchange rates and it changes relative rate of profits and it improves the income of poor people (we are talking of wage-goods). Agricultural producers have never been happy with this kind of model (Argentina history has a long list of facts that confirms this opposition). But, immediately after 2002 crisis, they tolerated the model. However, after five years of growth, they seem to be thinking redistribution was enough. Agricultural producers are fighting to delete export tax frame because argentines are richer than five years ago and so, they must pay meat, soybeans, maize, wheat and related products at international prices. In other words, it is a conflict about how the rent is distributed. And high prices of commodities foster this kind of struggle over.
    This farmer’s rebellion opens serious questions about the link between development and politic. We really are enough rich now? Who have to say when a redistribution process is over or enough? Government doesn’t have the duty to design our tax system? Remember: just five months ago, on 2007 December, Cristina Kirchner won presidential election and her economics proposal included export taxes as axis and most of people have chosen it.
    Fer Peirano, Argentina
    PS: Congratulation for the blog!!

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  2. First of all, I would like to congratulate Leandro for bringing such an important topic to the forefront of the discussion. Both him and Fer Peirano with their insights remind us of how the study and involvement implies a necessary commitment to actual practice and implementation of policy making.

    I personally believe that the export duties are an amazing instrument to change the production pattern of an economy as the Argentinean (I tend to believe that both Fernando and Leandro will agree). Such an economy, even with a lot of intra-sectoral heterogeneity, can be characterized as a structural dual economy. The export duties allow the transfer of (not totally) static rents from a high-productivity sector to a relatively lower productivity sector.

    Obviously, this transfer collides with also structural conceptions about policy, redistribution and configuration of the policy, itself. Unfortunately, most of the policy conceptions showed by the rural sector in Argentina lacks of some dynamic considerations about the opportunities for growth and development that the duties represent (almost as their rents!). This shows us the potential constraints that the lack of coordination imposes on policies, forcing us to think how to deal with self-appointed “veto-players”.

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