Describing why Argentina has one of the highest inflation rates in the world is an exercise in broad-mindedness. We cannot simply dismiss the South American country’s abnormally high inflation as a consequence of the COVID-19 pandemic. The problem goes back a long way and extends far beyond the pandemic.
What Do Economists Say?
Depending on the economist, some would call Argentina’s inflation a multi-causal phenomenon. Others see it as the direct consequence of uncontrolled monetary issuance. It is possible to think that all these statements are justifiable.
Thinking multi-causally, we can consider issues such as mistrust in government for why inflation rates are so high in Argentina. The national currency is losing its value, making consumers cough up more pesos to buy the same products.
Social Assistance in Argentina
When the economy shrinks, governments must choose a path. If they decide to give uncontrolled economic aid, as is the case in Argentina, aiming simply to put a little money in people’s pockets, then that money does not generate added value. People will spend it in the retail market, leading retailers simply to raise their prices, since there will be more money in circulation with nothing backing it.
This situation has been going on for several years, and despite the negative results in the Argentine economy, governments do not know how to solve it or are not willing to face the political consequences of a drastic solution.
The Reserves, Country Risk, and the Global Image
As a result of the measures taken during the last decades and a high percentage of corruption, the Central Bank’s reserves have been another target of the country’s detrimental consequences.
Reserves support the local currency and make up the proceeds from exports and the difference between credits and debits. Higher reserves back the currency, making it stronger. Add economic policy to this, since without a consistent policy, the global image deteriorates, and this makes it more expensive to borrow money in the markets. An index known as “Country Risk” reflects rising interest rates. This index indicates the increase in interest rates that the country will have to pay if it obtains credit. Argentina does not export because the industry is undergoing an inflationary process, and this makes costs more expensive, reduces profits and makes local manufacturing uncompetitive. The result is a lack of foreign currency from foreign sales. A cycle that never ends thanks to the lack of effective economic policies.
The Countryside and Taxes
Meanwhile, we also must consider rural areas. Crops and meat exports have become the the primary “manufacturers” of foreign currency for the state, meaning they also are the main drivers of international prices. In the wake of an economic crisis, increasing taxes and retentions to the agricultural-livestock sector becomes inevitable. In doing so, speculators hesitate to make investments, which reduces production capacity and infrastructure maintenance.
Inflation Is the Sustained Increase in Prices Over a Period of Time
When prices rise, it takes more money to buy the same things. In an inflationary economy, wages end up lagging behind inflation, so people lose purchasing power. Loss of purchasing power is tantamount to generating poverty, since in a society like Argentina’s, where more than half of the people rely on state subsidies and do not generate wealth with their work, inflation further impoverishes them. State assistance fails to cover even basic needs.
Conclusion
So, why is inflation so high in Argentina, and what can we do about it? Tackling this issue requires a multi-pronged strategy. Generating more jobs, taking advantage of opportunities, and supporting the sectors that can provide a benefit are some of the ways to move forward. Argentina’s wealth falls into the hands of people who mostly misuse it. Even so, it is still a country that has the resources to beat inflation. It will not magically happen over night, but with time and effort, it will be possible.
Photo by Marianela Caputi
About the Author
Paola Rinaldi is a freelance writer and translator with a background in cultural and ethnic studies. Her proofreading, translation and content creation services can be found at https://www.trebinalditranslations.com/.