Argentina - positive natural resource shocks and domestic adjustments

Leandro Serino, CAPORDE colleague, has a paper out on the 'Positive natural resource shocks and domestic adjustments in a semi-industrialized economy: Argentina in the 2004-2007 period'

Abstract

This paper evaluates the domestic adjustment to recent positive external shocks in Argentina's natural resource sectors. Although there is no single, exclusive determinant of Argentina’s fast economic growth in the period 2003-2007, the paper illustrates the favourable contribution of certain economic policies to this outcome.

According to counterfactual simulations performed with a dynamic Computable General Equilibrium (CGE) model especially designed to capture structural features of the Argentine economy, export taxes on natural resource products and Argentina’s competitive exchange rate policy have counteracted Dutch disease adjustments associated the positive terms of trade shock (which may be contractionary in the medium-term if no economic policies are implemented) contributing to productive and export diversification and to bring about output growth.

The analysis also shows that in a context of strong demand impulses spending the income collected with export taxes may not be beneficial for the overall competitiveness of the economy, hence counteracting one of the purposes of the tax policy. This implies, first, that subsidies to producers of wage-goods may be ineffective to control overall price increases, and second, that optimizing the contribution of public investment in infrastructure to improve the competitiveness of the economy requires special attention to the timing of public investment.

Click here to download the full text of the working paper

About the author

Leandro Serino has recently obtained his PhD in Development Studies from the International Institute of Social Studies (ISS) of Erasmus University Rotterdam, The Netherlands. His thesis is entitled: 'Productive diversification in natural resource abundant countries: limitations, policies and the experience of Argentina in the 2000s'. He graduated as an economist at the University of Buenos Aires (UBA) and completed a M.Sc. in Development Economics in 2003 (jointly dictated by the ISS, Free University Amsterdam and Wageningen University). Until recently, he worked at MECON as an adviser to the Secretary of Economic Policy and coordinated a research unit. In addition, Leandro has been consultant for ECLAC Argentina, where he developed the demo of an encyclopedia on development economics (http://www.cepalnacionesunidas.com.ar). He was also involved in teaching and research at the University of General Sarmiento and UBA in Argentina. At present Leandro is working as a lecturer at the University of General Sarmiento (UNGS) and is participating in a project to update Argentina’s Social Accounting Matrix at the Ministry of Economy and Finances - MECON (Argentina) . Source: ISS

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 11^th. 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 29^th-April 4^th, 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 21^st 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.