Instead of being a quarter-century into this millennium, some aspects of economic policy might suggest that there is still a quarter-century to go. The economy is at something of a crossroads at the moment with Tuesday’s reduction of the PAIS tax and the 2025 budget due within a fortnight indicating a new phase in the month starting tomorrow, but crossroads do not always offer two alternative paths forward – they can also point back.
The cheaper imports implied by a lighter PAIS levy and the stubborn insistence on a crawling peg devaluation of a monthly two percent yet to converge with inflation both echo central pillars of the policies of José Martínez de Hoz (1976-1981) with the terms “tablita” and “Made in Taiwan” triggering memories for those experiencing those times. In almost the same years a drastic economic transformation was underway across the Andes with the appointment of Chilean economist José Luis Deza as virtual deputy Economy minister (Economic Policy Secretary) under Luis Caputo hinting that something of that model might potentially be “imported” into Argentina – a model carrying the “creative destruction” of Joseph Alois Schumpeter (yet another of the Austrian economists so appealing to President Javier Milei) to extremes by eliminating all deadwood from the economy via negative growth rates of minus 13 percent in 1975 and minus 11 percent in 1982.
That was then but this is now until further notice. The paradox of a libertarian government revering the free market while unable to exit bureaucratic Kirchnerite capital controls has already drawn comment but the reduction of the PAIS tax exposes another contradiction. This government is pledged to replacing the consumer-led growth of the Kirchnerite years with export-led growth (and the RIGI investment incentive scheme is very much geared to such sectors) and yet the peso appreciation of the crawling peg already subsidises imports which now receive a further boost as from next week with the reduction of the PAIS tax from 17.5 to 7.5 percent.
Neither President Milei nor his economic team would necessarily see this effect as either an accident or a mistake since it is entirely apposite to their top and almost monothematic priority of taming prices and lowering inflation – their main political and electoral asset. Yet lower consumer prices also carry a high price elsewhere. With the economy already gripped by a severe recession (even if not the minus 11 orminus 13 percent across the Andes half a century ago), Argentina’s hitherto highly protected and precariously competitive manufacturing industry (which Daza would probably see as the deadwood long purged in Chile) would suffer even further against facilitated imports with Milei due to address the UIA Argentine Industrial Union on the occasion of Industry Day next Monday. Yet how much can imports be facilitated given the parlous state of the Central Bank reserves to pay them?
These reserves are already severely strained by the interventions to hold down the gap between the official and parallel exchange rates (another departure from orthodoxy, needless to say) while the cashing of export dollars is being kept to a minimum due to expectations of a devaluation sooner or later and discouraging global soy prices – freed from the drought demolishing supply last year, farmers are now hit by a glut flooding demand. Country risk remains above 1,500 points for the very simple reason that creditors see the cupboard as being bare of reserves to pay them. The situation would be worse were it not for the fiscal surplus which will presumably be maintained in the 2025 Budget heading to Congress next month (despite this new tax cut) – with the public sector no longer crowding out the private, more credit becomes available for companies to meet import needs.
Yet having enumerated all these drawbacks, Caputo’s announcement of a PAIS tax cut deserves a positive press precisely because it will not do that much to boost imports while hopefully making Argentina a less expensive country – a fuller perspective demands that this move be placed in a broader context of a trade surplus heading for a record US$16 billion this year despite feeble global prices for soy exports, the crawling peg, this new import incentive and all the rest of it. Milei has in the bag the famous twin surpluses (fiscal and trade) of which the late Néstor Kirchner liked to boast so much but the latter surplus is the result of the import capacity of an impoverished country being rock-bottom.
But tomorrow is another day – and another month.
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