Marketwatch article on the export tax
Argentina agricultural-export tax clears a hurdle.
By MarketWatch.
Last update: 4:13 a. M. EDT July 6, 2008
TEL AVIV (MarketWatch) - Argentina's legislative lower house on Saturday cleared the government's imposition of a new tax system for agricultural exports, media reports said.
The vote on the plan, which has prompted angry protests, roadblocks and riots by farmers, was 129-122, the reports say. The plan now moves to the Senate for review.
Farmers in the country say the tax has shrunk their profit margins. President Cristina Fernandez de Kirchner put the plan in place in March to keep food prices within the country from rising and to share the wealth with the poor and reduce poverty.
The plan creates a sliding scale of export taxes, with the scale tied to global commodity prices. The system replaced a fixed rate of 35%. The new system, for example, currently imposes a more than 40% levy on soybean exports as prices for the crop have soared, media reports say.
Fernandez two weeks ago sent the proposal to the Congress for ratification, but critics say that was just for show since her party controls a majority in both houses, the Associated Press reported. Nonetheless, during the debate on the plan, some in her party openly opposed the tax increase, AP reported. End of Story
[url]http://www.marketwatch.com/news/story/story.aspx?guid=%7B6C5BE4D3%2D3360%2D46E9%2DBB6F%2DCB649B09A130%7D&siteid=rss[/url]
Brazil Announces $49Us Billion In Agriculture Credits To Boost Production
[url]http://www.truthabouttrade.org/content/view/12021/54/[/url]
Brazil is doing things different then Argentina. They are helping their farmers.
Expect next soy harvest to be down 20% , with no increase in other crops.
It isn't that the soybean industry in Argentina will go away. The prices are too attractive and the infrastructure too developed for farmers to abandon soybean production en masse, farmers say.
But local experts expect soybean acreage to remain flat in the next harvest cycle, which begins in September. And a reluctance to invest in fertilizer and other costly inputs will dampen yields. So because of the tax, Argentina will grow less, they say.
[snip]
Meanwhile, costs have doubled for herbicide and tripled for fertilizer since last year. Soybeans can grow without chemical nutrients in Argentina's fruitful soil, but yields will fall at least 20 percent.
Argentine farmers fear that prospective buyers will flock to more reliable competitors such as Brazil. So Roberto Costatini is bracing for the worst—again.
[url]http://www.chicagotribune.com/business/chi-sun-crops-argentinajul13,0,2575831.story[/url]
Argentina 2008: Is the (already High) Inflation Rate Accelerating?
Sourced from [url]www.rgemonitor.com[/url]
[url]http://www.rgemonitor.com/latam-monitor/615/argentina_2008_is_the_already_high_inflation_rate_accelerating[/url]
Argentina 2008: Is the (already High) Inflation Rate Accelerating?
This is not a technical article. It just puts together some commonly known facts and asks some questions; it also includes some thoughts.
Facts (or, shall I say, Problems?:
Argentina's "un-edited" (I. E. True) 2007 annual inflation rate is in the 20-25% range.
Wage contract negotiations are presently taking place. It looks like unions are requesting wage increases starting at 30% and up.
Although claiming that the latter contract renewals might be biannual, unions are requesting to being able to renegotiate them every six months.
As the piece by Mark Turner (here) pointed out, the current account surplus results from (the still high) external demand; it is not due to the artificially undervalued currency.
Jose Antonio Ocampo (here) highlights how the mentioned surplus is mainly due to capital flows instead of a trade surplus.
Given all of the above, Argentina's authorities should be really worried (although the claim not to be. Why? Well, not only the inflation rate is high, but it looks likely to accelerate. This can be seen by facts (1) and (2) Together they imply that unions are probably observing a reduction in the purchasing power of wages (past and future. Since any wage negotiation in the context of an inflationary process should be both backward- and forward-looking, this means that: (I) not even "official" unions believe in the massaged official inflation rate—they understand that the true inflation rate experienced by workers have been higher that the government's figure; (ii) they anticipate a high inflation rate for this year (probably not lower than last years'; my "gut feeling" guess in the 35-40% range); and (iii) there are reasonable chances to expect the inflation rate to accelerate, which generates the need to have a sort of "escape of clause" to re-negotiate every six months.
You do not need to be an economist to realize that a higher frequency of contract renewal is based on an expected increase in the rate of change of prices. Unions sit at the negotiation table trying to recover the lost purchasing power due to past inflation (the backward-looking component) and taking into account their expected inflation (the forward-looking component. And like I said, the faster they expect inflation to increase, the sooner they would like to renegotiate.
Thus, and contrary to the administration's intentions, inflation expectations are not being anchored. The more so if (as analyzed in my January 29th) we also consider the potential (intertemporal) fiscal fragility of the government.
The academic literature has shown that inflation reduces long-term growth. Even though the global economy has been growing at high rates during the last years, things seem starting to change. We could expect the "tail wind" (I. E. External demand boom) that Argentina enjoyed to slowdown (in the best case scenario. The administration is currently trying to engineer lower borrowing rates for long-term investment projects (especially if they are export-oriented. This is not wrong, but it arrives late. This should have been the engine of growth instead of domestic consumption in the very recent past if the goal was long-term growth. They are also differing things in the expectation of a better second half of 2008 (shouldn't they be planning and applying contingency plans ex-ante instead of acting ex-post?
Lower, non-increasing, and credible inflation, as opposed to the current policy, will boost long-term growth since it stimulates longer horizon investment projects and increases the expected real rate of return on those projects. Current investment is mostly driven by short run expected sales rather than long run demand. It also improves income distribution (more here) As mentioned above, the piece by Mark Turner shows how we should have expected the same current account surplus regardless of the exchange rate. The difference being the non-trivial point that Brazil obtained it at the same time that its central bank was able to dominate the domestic inflation rate (and with no observable drawbacks in terms of growth; on the contrary, but based on higher productivity instead. Or, as the piece by J. A. Ocampo highlights, that the accumulation of reserves is mainly borrowed (and thus more unstable since as easy as they entered the country, they can leave it; and capital controls never work. The more so in the Argentine case in which close to half the international reserves are reduced by the central bank's domestic liabilities (NOVAC, LEBAC, etc. And praying for the commodities' high prices not to be the next bubble to explode.
So far what the government is doing is clearly not going to control inflation. It does not anchor inflation expectation neither with its monetary policy, nor with its exchange rate policy or its fiscal policy. On the contrary, it looks more likely to make it get worse—inflation seems to be accelerating. The median voter seems to be happy with this policy, though. But it's the policy maker's role to appropriately consider and internalize the future effects of the current policies and adjust its present behavior accordingly—something not seen yet with the current administration.
It could be much better if the government would focus on reducing government expenditures (not just reduce the rate of growth to be lower than the growth rate of tax revenues—which are just casually high do the unusually high commodities' prices) to achieve not only a higher and stronger primary fiscal surplus but also to enhance its sustainability. It should also let all relative prices be really free to adjust to equilibrate demand and supply (I. E. Eliminate all the price controls and any type of capital controls) and let the exchange rate float. If relative prices are let to adjust, as well as the exchange rate, they will stop the growth rate of prices (I. E. Inflation) and contribute, together with a non spurious fiscal surplus to contain inflation expectations—and thus wage negotiation adjustment (in quantity and frequency. Core inflation would then be tackled with an inflation targeting regime, letting an independent central bank focus on its only goal: to preserve the value of the (domestic) currency. As of now, it will probably be better to raise interest rates to control the inflation in the short run while the rest of the reforms are put in place (including property rights that we could believe in—I. E. Proper long-term institutions. The question is, will this government be interested in implementing these and thus pursuing long-term and sustainable growth? I truly hope it. Unfortunately, I still have my doubts.
Comments.
Nicolas,
Given that the government will have to release the correct inflation data sooner or latter, do you think Argentina is facing the risk of high inflation?
Wage indexation is a strong trigger to foster indexation. What do you think?
Thanks.
Vitoria.
Written by Vitoria Saddi on 2008-02-20 11:25:46
What sectors are benefiting from the undereported inflation? What sectors are worse off?
Written by Robert F. On 2008-02-20 11:28:11
Hi Vitoria and Robert F.
I do think that Argentina is already in a high inflation situation. I am actually concerned that if authorities do not act soon and strongly things might get even worse.
I agree with you about wage indexation. My understanding is that there is no wage indexation formally, but there is de facto, and I hope it does not get de jure as well. There are wage negotiations that want to claim lower wage increases (in 20% range) but with alternative compensations. The results are the same no matter what you claim "INDEK's" inflation is.
Regarding the sectors that are better off / worse off: by income level, as any inflationary episode wage-income earners are worse off than "owners" so to speak. We know that inflation always worsen the relatively lower income recipients. Industrial sector-wide, it depends on many other details.
Thanks,
Nicolas.
Written by Nicolas Magud on 2008-02-20 13:18:32
Nicolas & friends:
I think that our government has no interest and idea to lower the inflation. At the same time they are doing his own bussines (corruption) for the time they will not be more government.
Once again.
Remember, Argentina has a cyclic economy profile.
Carlos / Buenos Aires.
Written by Guest on 2008-02-26 19:00:01
The reason the government is officially sticking with the 8.5% inflation rate is because they repay their bonds based off of the inflation numbers. It is a childish way to control debt. The main problem with the INDEC (not INDEK) falsifying data is that it forces many Small and Medium companies to not invest in Argentina because they cannot do any adequate research. Also the INDEC used to be very reliable and independent until the government of Nestor Kirchner submitted an evaluation of the economy that was not the one submitted by the INDEC. At that point, the INDEC's top directors and managers walked out, around 30-40 people. Right now the INDEC is in disarray because the new people who replaced the independent directors and managers are political appointees. The employees remaining from the independent regime have been using their camera phones to take pictures of the political appointees changing the data and send it in mass emails on the network, thus forcing these new people to resign with increasing regularity. The infighting has caused an atmosphere similiar to the chaos of a soccer match between Boca Juniors and Riverplate.
I live in Argentina and have many connections in business and in government. The business sector is clearly planning for a crisis in the next 3-4 years. The people I know in government have already tranfered their bank accounts overseas. The situation is no more obvious than if you check out at a kiosco (an Argentine conveniance store) The government does not want to raise the price of cigarettes because it fears that it will cause inflation. Cigarettes are ridiculously cheap and the price is managed by the government giving the kioscos about 16% margin. Also in the food industry where I previously worked, we could not raise the prices because of the government so we ended up lowering the quality of our products and the size. The pattern repeats which is unfortunate because Argentina has the potential to be a competitor in the international market but they need to employ economic policies that use rational. Lusteau, the new minister of economy, is poised to take the brunt of the blame and Nestor Kirchner will take the reigns in the next election and try to save the economy. He will bring in Lavagna, the previous economy minister that saved the day after the crisis. Nestor and Lavagna had a public spat that ended with Lavagna walking out of his role as minister of the economy but it was just a smoke screen. Lavagna did not combine with Carrio in the last election to give the election to Christina Kirchner. While looking at the numbers you find alot of the reasons why inflation is increasing, you must remember how the politicians think and what it is like on the ground here in Argenina.
Written by Andy on 2008-03-11 16:22:53
Your "gut feeling" of 35-40% seems exactly right. Inflacionverdadera. Com has an independent review of daily prices, showing an inflation rate of nearly 40% for food and drinks.
Written by Anonymous on 2008-06-26 08:03:07
