Import Restrictions Spell Disaster for Argentina’s Economy

By: Iván Cachanosky - @ivancachanosky - Jul 16, 2014, 1:00 pm

EspañolThe latest report from the Argentinean Commercial Exchange, which releases the nation’s trade balance data, continues what has persisted for months: both imports and exports are dismal and what was promising growth has been trending downwards. In the year leading up to May 2014, exports collapsed by 16 percent, while imports did even worse, down by 17 percent.

So far in 2014, exports and imports have declined by 11.8 percent and 7.9 percent, respectively. The natural question is, why the severe slowdown? What is getting in the way of trade between Argentina and the rest of the world?

The root of the problem is the series of restrictions on imports imposed in late 2011. As the balance of trade was trending downwards, those in President Cristina Kirchner’s administration started to worry. A misguided attempt to recover the trade surplus led them to lock down imports.

This approach is theoretically impossible. One must understand that exports and imports are related, since to export one must also import — something must be traded. That is why in the long run the two variables tend to equalize: supply creates demand.

In every commercial exchange, one person provides a good or service for something in return. If person A gives good X to person B, and the latter in return gives A good Y, then we can clearly see that A exports X but imports Y. In terms of value in our scenario, the exports and imports are identical. Locking down imports, by definition, would lock down the exports as well.

When money is introduced into the analysis, it only acts as a means of exchange and doesn’t affect the core of the problem. The difference is that you can borrow money and generate imbalances. However, this does not take away the fact that exports and imports are two sides of the same coin and will eventually move in the same direction. The graph below clearly makes this point in the case of Argentina. The annual change in 12 months of the moving average is considered, in order to remove seasonality.

Argentina's annual variation of exports and imports, seasonally adjusted
Annual variation of exports and imports, seasonally adjusted. The vertical line marks the beginning of the import restrictions. (Liberty and Progress Foundation, Argentina)

One can observe that once barriers to imports were introduced, both imports and exports began to decline. As a result, the only thing achieved was a reduced number of transactions made ​​between individuals from different countries. This is not good, because free trade — whether within or across borders — benefits those involved. Unfortunately, the measure taken by Kirchner has not only reduced the amount of international transactions, it has jeopardized local production.

Fewer Imports, Higher Prices

When trying to make imports expensive to reduce them, the president forgets that Argentina, in order to produce locally, needs products from other countries. If, for example, an owner of a small enterprise needs to import some materials from another country to use in his own production process, the lockdown on imports will impede his local production. This translates into an attack on the domestic industry, which directly contradicts the official political discourse often heard from government officers.

Now, for several months Argentina has not met the global standards of international trade, as it has hidden behind protectionism. It is no coincidence that the World Trade Organization (WTO) sees Argentina as a violator of trade rules, given open opposition to imports.

According to the WTO, “since 2008, Argentina has expanded the list of goods subject to non-automatic import licenses, delaying the entry of laptops, appliances, machinery, and equipment, automobiles and auto parts, chemicals, textiles and clothing, among other products. And [traders] complain that the country does not respect the procedure to grant the license within 60 days. Others do not get the green light to sell their products, and without explanation. ”

In Argentina, the government defends itself by saying that it does not violate international trade rules and carries forward these barriers to promote the belief that this measures will favor the balance of trade. However, as noted in the chart, both exports and imports fell.

Nations experience growth by expanding international trade, not hindering it. At this point, the theory of import substitution, which promotes trade isolationism and infant industries, should be obsolete. Over the last 200 years, trade has improved the health of nations and people enormously, destroying the myth that the economy is a zero-sum game.

Translated by Adam Dubove.

Iván Cachanosky Iván Cachanosky

Iván Cachanosky holds a bachelor's degree in business administration and a master's degree in applied economics. He's currently an instructor at CMT-Group. Follow him on Twitter at @ivancachanosky.

Surprise! Puerto Rico’s Public Debt Is Far Larger Than Stated

By: Belén Marty - @belenmarty - Jul 16, 2014, 12:25 pm

EspañolPuerto Ricans awoke this Tuesday with the news that the commonwealth's debt is about US$110 billion, not the official $72.796 billion. This substantial increase was made public in a report released by Puerto Rico's Association of Authorized Public Accountants (CCPA), which also offered recommendation for how to rectify  the economic and fiscal crisis. With this document, the board of experts suggested that the time has come to recognize the magnitude of the fiscal crisis on the island. They hope Puerto Rico can achieve national unity, regain public confidence, and put together an economic development plan that includes fiscal discipline. "In 2014, we added $3,500 million of debt for a grand total of $72,796 million. But the level of debt does not address an actuarial deficit of about $37 billion, bringing the debt to over $110 billion. The debt level becomes an extreme concern when we see how it has soared in relation to the gross national product, reaching a ratio to public debt  — excluding the actuarial deficit — of almost 100 percent," states the 16-page report. The report explains that the administrations of the last 14 years, "issued debt to subsidize operating expenses." The authors warn that the consequences are arriving and that the administrations have simply chosen to ignore the severity of the problem. While the accounting board raises the necessity of an increased tax burden to alleviate the debt, they explain that this is not a long-term solution. That must come with fiscal discipline — avoiding the frequent practice of funding ongoing expenses with long term debt — and a reduction in public spending: "Raising taxes may be a part of the solution, but not the solution. We must follow the pattern of other countries, where the crisis has been addressed with a substantial cut in public spending, combined with a hike in taxes … That is to say, do not allow the tax system to obstruct the productivity of the country." In a telephone interview, Luis Dávila — a lawyer, news analyst, and radio host in Puerto Rico — affirms that the document reveals the island's gigantic public debt. In that regard, he says that Puerto Rico is the "world champion" and outruns even the levels of Argentina, Japan, and Portugal for public debt. Let's see how long it takes to the press to report the bomb thrown by Azote: the debt is not $73 billion but $110 billion. Dávila says a percentage of the public debt "was hiding in the books" and this is related to the debt of the pension plans handed to more than 100,000 state employees: "Their pension plans are stuck in a Puerto Rican trap, because the state has no funds to pay them," he added. Outlook for Puerto Rico According to Dávila, it is going to be very difficult for Puerto Rico to change its position given the last law the commonwealth government has just passed: "What makes everything more complex is the legislation that allows public corporations to declare bankruptcy and default on their obligations." With this law, Dávila says, Puerto Rico is sending the signal that they won't honor their obligations and "given these numbers, markets start to consider the island a 'disaster zone,' generating as an immediate effect a denial of access to international financial markets." “For decades, they spent more than what they could generate, and when they must tighten the nut, they try to do it with taxes. This is what happens with Puerto Rico; the government has raised taxes so much that they have wrecked business and eroded the tax base of the state; and by doing that, they kill the economy. An economy in recession that undoubtedly will end in a depression," the lawyer concludes. Dávila also points out that economic growth on average in Latin America ranges at 3-4 percent. That is very different from what happens in Puerto Rico, which has had nine years of economic contraction. Meanwhile Aníbal Jover Pagés, president of the CCPA, expressed more optimism for business: "Puerto Rico is a great place to do business. We have a first-class infrastructure, maritime and air transportation, telecommunications, and internal roads. For foreign investors, we are a country with a stable currency, and above all, political stability. Do I think we can improve? Of course I do." Translated by Adam Dubove.

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