Why does Argentina Always have High inflation? Central Bank,
Central Bank In 1945, Argentina had the highest GDP per capita in this list of 12 countries, including Ireland, the Netherlands, France, Spain, and Italy among others. In other words, according to this indicator.
Argentina was richer than these countries, but if we look at the same list in a year like 2010 Argentina ranked ninth among the same 12 countries, GDP per capita is a much-criticized indicator, but in most cases, it reflects the level of development of the country.
so taking this into account, it could be said that Argentina had several lost decades of economic development and wasted the opportunity to be closer to the richest countries, and one of the reasons that explain Argentina’s economic performance in the last decades is the permanently high inflation rate. Central Bank
Argentina has experienced an average annual inflation rate of 105 in the last 100 years and although it has had periods of low inflation after the second half of the 20th century, inflationary episodes have always been present. Central Bank
It must be said that almost all Latin American countries have experienced periods of high inflation rates over one hundred percent or even hyperinflation exceeding one thousand percent but Argentina seems to be a case apart, for example, in 1990 inflation in Argentina, brazil, chile, Colombia, Mexico, and Uruguay were high, as you can see some much higher than others. Central Bank
The point is that it seemed that inflation was a chronic disease of Latin American economies. However, in the last three decades, all of these countries have managed to reduce inflation to single digits, except Argentina which has been dealing with inflation above 10 percent since 2002.
Now some may wonder whether high inflation matters or why it could be detrimental to an economy. On the one hand, high inflation hurts lower-income people because they tend not to have investments or properties that grow with the rate of inflation. Central Bank
This population group relies only on their salary and if prices are constantly rising, they can buy fewer goods with the same salary. This is because they have to wait until the end of the year for the readjustment of their salary. The same happens with the pension of retirees, but, on the other hand, high inflation increases uncertainty which discourages savings and therefore investment. Central Bank
If a person has his savings in a bank account inflation causes a loss of purchasing power, but it is not only savers, wage earners, and retirees who suffer but also buyers and sellers in general, for example, in a high inflation economy, a consumer may not know for sure how much and what he can buy with a salary next month or he may decide to buy more than he needs in anticipation of a price increase next month. Central Bank
Therefore, in the context of high inflation, it is difficult to make good decisions because there is not enough information about prices and the selling side. Let’s think, for example, about the difficulty of a restaurant changing prices in its menu every 10 or 20 days, but let’s suppose that its menu is digital and that prices are easily modified. Central Bank
Even so, the restaurant owner does not have it so easy to define the prices of his dishes, because he is not sure how much raw materials, rent salaries, and other costs that make up the operation of the business will rise in the coming days. Central Bank
That is why high inflation generates uncertainty because not even consumers of vendors know if they are making good decisions similarly, a businessman or entrepreneur may choose to postpone his investments until he sees a more stable outlook or even finally decides to invest abroad. Central Bank
Now, if the consequences of high inflation are obvious, why has Argentina not controlled it for so many years since 1945 Argentina has experienced one of the highest inflation rates in the world, except in the 1990s, several studies on inflationary periods in Argentina conclude that the problem is due to budget deficits that were largely financed by the central bank’s issuance of money. Central Bank
This graph shows the behavior of Argentinian inflation from 1900 to 2019, as can be seen at the beginning of the century. Inflation was controlled even during deflationary periods, but from 1946 when Juan Domingo Peron took power. A practically endless cycle of high inflation began even hyperinflation that exceeded three thousand percent in 1989. Central Bank
The graph shows up to 60 percent to better visualize all the years. Otherwise, it would look like this going back to when perron became president, he established policies that are still ingrained in the Argentinian economy. First, strong protectionism in the manufacturing sector, orienting production to the domestic market, and second, a strong relationship between the state and the unions.
In addition, the central bank of Argentina was nationalized, which means that the government completely controlled the issuance of money. It must be said that since that time, Peronist and non-Peronist presidents have governed. However, none of them could control inflation because, in short, they could not control public spending. Central Bank
That graph shows Argentina’s fiscal deficit between 1960 and 2017, I.e, government revenues, minus expenditures. If expenditures are greater than revenues, there is a fiscal deficit, as can be seen. The period of the highest fiscal deficit between 1973 and 1991 coincides with the period of the highest inflation in Argentina. Central Bank
The most obvious explanation for this close relationship between fiscal deficit and inflation is that when a government has imbalances in its accounts, it resorts to debt either domestic or international, to finance the deficit. Central Bank
But when the international market feels that there is a responsible government in the management of public finances or that it implements policies against private capital, investors perceive greater risk in lending money to such a government, because there is a possibility that they will never get their money back, for example. Central Bank
few investors would be willing to lend money to the Venezuelan government under current conditions, so when access to international credit is closed, there are two options: raising taxes which is not a very popular option, or the other option.
Printing money to finance the increased spending, Argentina resorted to that alternative for several decades until 1991, which would partly explain the addiction to printing money and its consequent high and permanent inflation. Central Bank
In short, as public spending does not decrease, there tends to be a deficit, but since it does not have access to international credit due to its credit, history, and the supply of domestic credit is limited, the most immediate alternative will always be to print money and if, in an economy, there is the same amount of goods. Central Bank
but the money in circulation increases a generalized increase in prices is generated. It can be said that the only period in which inflation was controlled was between 1990 and 2001. During that period, until 1998 Argentina enjoyed certain stability and an economic boom that made people think that the country had entered the path to catch up again with developed countries as in the beginning and middle of the 20th century. Central Bank
During Carlos Menem’s presidency, several policies were adopted, such as monetary discipline, privatizations, and openness to foreign investment. The 1991 convertibility plan was created which fixed the parity of the Argentinian currency against the dollar, meaning that the exchange rate was fixed at one to one. Central Bank
One peso was worth one dollar so the central bank could not print banknotes to finance the government’s deficit, as had happened in previous decades. However, after restructuring the debt amid high economic growth, increased confidence, and some stability, the government was again able to borrow from the international markets which led to an increase in debt, and government spending again became unsustainable as in the past.
With these imbalances, fiscal deficits returned: external debt problems worsened to the point that in 2001 Argentina defaulted on its 95 billion debt, one of the largest defaults in history today Argentina seems to be experiencing the same thing.
The growing fiscal deficit recently came close to defaulting again on its international debt commitments and, of course, again, the central bank is printing money at full speed to finance spending and pay the debt. Central Bank
The question that remains is whether any government will be able to restrict public spending to avoid resorting to the central bank.