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Argentina: The Country of Steak, Wine … and Subsidies

By: Belén Marty - @belenmarty - Mar 27, 2014, 1:12 pm

EspañolAccording to the American Heritage Dictionary, a subsidy, from Latin subsidium, is the “monetary assistance granted by a government to a person or group in support of an enterprise regarded as being in the public interest.”

According to figures from the Argentinean Budget Association (ASAP), subsidies increased 34 percent from 2012 to 2013, and it seems like this year they will keep growing. Argentinean Economy Minister Axel Kicillof that the government “should continue supporting subsidies for the poor, and take them away from the well-off.”

However, the main use of subsidies is political clientelism — to buy votes — because they allow the government to freeze rates on electricity, gas, gasoline, and public transportation. Total government spending for subsidies in 2013 was AR$134 billion (US$10.3 billion using the official exchange rate), of which AR$81.4 billion went towards subsidizing the energy sector alone.

Ivan Cachanosky, an economic analyst of the Argentinean Liberty and Progress think tank, says subsidies are a key economic problem for Argentina: “Spending on subsidies represents about 5 percent of GDP. Subsidizing sectors such as energy and transportation to maintain artificially low prices is a key long-term problem.”

According to Cachanosky, the problem is the lack of investment in these sectors, which has led to the deterioration of the quality of service (the tragedy of the Once train station, systematic power blackouts, etc.).

“Nowhere else in the world are rates so cheap,” he says, “and now we need to raise them to levels that are closer to reality.”

Energy Sector

According to the report, energy subsidies have been mainly concentrated in CAMMESA (Wholesale Electricity Market Administration Company, S.A.) and ENARSA (Energía Argentina Energy Company, S.A.). These entities are responsible for administering the contributions received from the National Government for the metropolitan area, and the purchase of imported gas used as fuel for the domestic market.

According to Cachanosky, the political and economic crisis that Argentina went through in 2002 presented an opportunity to bring the rates of basic services to more realistic levels. Back then, wages exceeded inflation, so citizens could afford to pay more for these services.

“Today the country still needs to adjust the rates, but inflation beats wage increases. As always, the losers are consumers, who have to constantly adjust their spending due to the bad policies of the government,” says the Argentinean analyst.

For his part, Minister of Economy Axel Kicillof explains that the cost of gas or electricity consumed is “much higher” than what consumers pay, and that the difference is covered by the national government. He justifies the existence of energy subsidies by saying that “What we are implementing from the government is a policy of growth and income distribution, because there are wide inequalities across the country.”

Transport Subsidies

While the national carrier was one of the few entities that showed a reduction in the amount of funds received from the state, Aerolíneas Argentinas still received almost AR$3.4 billion to finance its operations.

According to the Ministry of Interior and Transportation, during January and February a daily average of AR$60 million was transferred to public bus operators, and AR$4 million more per day were given to companies to cushion the inevitable rate increases.

Despite the increase in the amount of subsidies, rates for consumers have increased as well. In December of 2012, the minimum rate for a bus ticket was AR$1.10, and today it costs AR$2.50. This amounts to a regressive redistribution of income that clashes with the government’s expectations; these policies that subsidize the supply of services actually translate into an wealth transfer from citizens to transport company owners and executives.

José Luis Patiño, leader of the Union for All Party, tells the PanAm Post that subsidies, in particular those for transport and energy, not only cannot continue forever, but that “not a penny should be given without an effective control procedure in place.”

He added that “the current situation exceeds the ideological debate over whether or not to subsidize these and other activities, because they are true cash machines for financing the political apparatus, in collusion with pseudo-entrepreneurs well connected with power.”

He concludes “this system is unfair [because it is concentrated in the metropolitan area]; it is corrupt; and it also undermines market freedom in those areas.”

colectivo 62
Source: @danieltunnard

Social Benefits

Based on the same report by ASAP, in 2013 the National Government spent about AR$73.4 billion on social benefits — various forms of welfare programs.

The report explains which plans these resources were allocated for: “The items that contributed the most to the annual increase in social benefits were: (1) the Universal Child Allowance and the Pregnancy Allowance for Social Protection, with an expenditure of AR$15.8 billion; (2) transfers to the provinces under the Federal Solidarity Fund for AR$9.6 billion; (3) Transfers from the National Institute for Social Insurance (ANSES) to the National Institute of Social Services for Retirees and Pensioners (PAMI), of an amount close to AR$8 billion; and (5) the “Dignity Roof” housing development program, carried out by the Ministry for Public Investment and Services (MPFIPYS), for an amount of AR$4.4 billion.”

The Problem with Subsidies

For Carlos Maslatón, a lawyer, financial analyst, and radio journalist, the Argentinean model “lacks sustainability,” and the model of transport and energy subsidies is “based on money that the state gives to companies in order to avoid rising prices that have been kept at artificially low levels for more than 12 years.”

Further, he says this mechanism prevents the formation of actual market prices that would guide future investment, which harms the supply-side expansion required by any economy.”

He told this publication that:

Subsidizing demand may be a viable policy, it is a fair political decision in some cases, but always through direct cash transfers to the final consumer that don’t have a direct impact on the final price people pay the seller of the product or service. The Argentinean subsidy structure results from the government’s desire to feel like they hold the key, that they control the situation; it is the typical attitude of officials who want to be in the role of granting permits for every economic act, and this mentality is accompanied by the desire to create a corruption niche where the subsidized company kicks back part of the subsidies received for the officials that grant them.

Therefore, we can infer that subsidies are a political tool to remain in power, and that perhaps we should add to the American Heritage Dictionary‘s definition the fact that they are a form of governmental monetary assistance. Unfortunately, subsidies also tend to perpetuate themselves on account of corrupt crony favoritism. But besides its formal definition, they definitely are a fundamental part of the bastardized Argentinean economy — as defining of our identity as beef, bread, and Maradona.

Translated by Alan Furth.

Belén Marty Belén Marty

Belén Marty is the Libertarian Latina, a journalist based in Buenos Aires, Argentina. She has lived in Guatemala, Jordan, the United Arab Emirates, and the United States and is a former candidate for local office with Argentina's Libertarian Party. Follow @BelenMarty.