It is often said that Argentina is an expensive and uncompetitive country and that the solution to these problems is to devalue the currency. President Milei refuted this idea by pointing out that GDP measured in purchasing power parity is higher than GDP measured in current dollars, which would mean that the prices of goods and services that make up Argentina’s GDP are cheaper than those of the United States. For many readers This statement is incomprehensibleTherefore, I consider it necessary to clarify these concepts in order to understand how the Argentine economy works.
Is the president’s statement that Argentina is a cheaper country than the United States true? The answer is affirmative. And not only that: Argentina is cheaper than around 90 countries in the world. Then the question inevitably arises: How do you explain shopping and sightseeing trips to Bolivia, Brazil, Chile, the USA and other countries? The answer is simple: for some products – those that are actually purchased – Argentina is balanced four times more expensivewhile in others it is much cheaper. This shows that we are a relatively poor country, but with strong distortions of relative prices.
Measuring GDP in current dollars is done by dividing the prices of each good and service in domestic currency by the exchange rate. On the other hand, purchasing power parity measurement quantifies the added value of each product based on current prices in the United States. The comparison between both measurements allows us to visualize the price differences for all goods and services in the economy.
Figures published by the IMF in its World Economic Outlook report show that if the value of this basket in the United States is 1, in Argentina it is 0.459, less than half. The most expensive country in the world is Iceland (1.22) and the cheapest is Nigeria (0.126).. The world average is 0.561 and Latin America’s is 0.47. Price levels are quite homogeneous in the region: Uruguay is the most expensive country (0.656) and Nicaragua is the cheapest (0.325). Brazil has a level practically identical to that of Argentina (0.454).
Being an expensive country does not mean that it lacks competitiveness. On the contrary, more competitive countries tend to be more expensive because higher productivity increases wages and prices for services. Although Argentina is generally not expensive, it is expensive in certain goods and at the same time uncompetitive in many sectors.
Many analysts claim that this problem will be solved by raising the exchange rate. However, experience shows that this improves competitiveness They are not permanent, they contribute to increasing inflation and ultimately reduce the medium-term growth rate. Empirical evidence also shows that export volumes are not improving sustainably either.
A good friend, Enrique Blasco Garma, used to say that calling for devaluation in Argentina was tantamount to doing so Little people demand a devaluation of the subway: Your measured height would increase, but your relative height would not change. Some may benefit awkwardly from a “growth hormone.”
What Argentine producers should demand is a true “hormone of competitiveness and growth”, which is none other than the necessary structural reforms to reduce the so-called “Argentine costs”.
Improving competitiveness means that sectors compete with the outside world can do this under the same conditions. To do this, it is necessary to analyze all the components of the cost structure that make us uncompetitive. These improvements include reducing many of these costs: unit labor costs – which does not mean that the purchasing power of salaries decreases -, the tax and financial burden, the costs of regulations and the costs resulting from the lack of infrastructure. Almost all of our competitive problems stem from these factors and the historical inaction to correct them.
These reforms are intended to improve the competitiveness of companies and from then on everything will depend on their ability to continuously increase productivity. The Argentine production structure is the result of the incentives granted over time, to which companies responded and often promoted them. Any change in these incentives will inevitably change this structure, with winners and losers and with economic, social and political consequences. Destruction often occurs faster than creation and its impact should not be underestimated.
The decline in inflation is also changing the way businesses operate. In inflationary contexts, many focused their strategy on accumulating stocks financed with subsidized loans, taking advantage of the lack of competition to operate at high margins. The decline in inflation reverses this dynamic and forces us to compete in a much more demanding market.
Finally, it should not be ignored the growth of informal trade. Until recently, this activity was focused on small-batch products and street sales, but in recent years it has expanded to include a variety of goods and unduly affected many formal sectors. This situation distorts relative prices and needs to be corrected.
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