The impact of economic measures

Published on March 20

In the course of the third week of March, the argentine government put in place a series of economic and social measures aimed at alleviating the crisis caused by the arrival of the pandemic. The scope  of the measures were wide and varied: on a social level and pertaining to a population of almost 10 million people, a special bonus for retirees and beneficiaries of certain social programs, an increase (one time, reviewable) of the Universal Allocation by Son; economically, reduced employer contributions for affected sectors, expansion of the Productive Recovery Program, expansion of budget capital expenditures, support for housing construction and repair, “soft” credit lines and accelerating payment export refunds, among the main measures.

These decisions followed a changing diagnosis of the health strategy. On this front, there was an initial delay in the government’s reaction outlined at the beginning of March, until measures were finally taken to prevent the exponential spread of cases.  As the country navigates this U-turn in its sanitary measures, Argentina has assumed the positions taken by many other countries in the region (while Brazil aims to downplay the epidemic for the time being).  This frontal-attack health policy is based on two elements that have most likely been taken into account by the authorities. First, because it is the main lesson of what has been happening in the Northern Hemisphere and the differences between Asian countries versus Europe and the US. It is key to put into practice what others have learned, while there is a certain climatic window before it is permanently installed in the fall. Second, the possibility of containing contagion is critical for a health system that adds to its structural weaknesses the challenge of such a crisis.

The implementation of larger scale prevention measures is a positive development in light of this pandemic. But there’s something else to consider. The policies will be contingent on the results that are being obtained. Regular information of the health plan as the crisis evolves will help the understanding of the general population. More information helps bring peace of mind to the population and clear uncertainties even within the complexity of the situation.

However, going back to the economic level, there are several factors to consider. As it is known, Argentina’s situation is particularly complex. The health crisis comes at a time when the economy is in recession with severe economic imbalances, a delicate social picture, and a horizon that was already uncertain given the negotiation of its external debt. Argentina has no fiscal margins and the possibility of monetary financing should be managed with caution. Therefore, the arsenal of tools available to the government is very limited. Moreover, the economic threat of COVID-19, here and in the world, has a very unique feature: the impact of the pandemic on economic activity is on both supply and demand.

If we focus on the Argentinian case and the supply side, disruption is likely to be relatively less than seen in the northern hemisphere countries given that Argentina’s economy is less interconnected in international supply chains. However, there will surely be cases that will need to be addressed. The objective is to avoid, as far as possible, suspensions of activity due to lack of inputs.

The situation on the demand side is considerably more complex. Precisely, one of the axes of health policy – isolation and social estrangement – will affect demand. There are activities that will receive great impacts: tourism, hospitality, gastronomy, transportation. In addition, and from the external demand side, another factor to be assessed is the impact of the crisis on major export products (prices and quantities). Soybean prices have fallen 10% since the beginning of the year. The abrupt decline of oil, although for reasons beyond the coronavirus, puts Vaca Muerta on hold.

At the time of economic policy design, the above analysis sets out a table within which measures can be applied. Fiscal and monetary tightness advises targeting, which is also compatible with the fact that the crisis will impact in a sector-by-sector differential way. It is also important to define the duration of these aid measures: once the health episode passes and some normality returns. The progressive decrease in support is necessary. As we know, this is a difficult requirement to meet. But the clearer the starting conditions, the easier the subsequent negotiation will be.

But will the measures taken by the government be effective? It is impossible to answer the question to the extent that it is unknown what the course of the epidemic will be. But their direction is understandable: there are measures specifically aimed at addressing affected activities, credit facilities and others aimed at providing relief to the most vulnerable population impacted by the retraction of informal employment. The additional bonus for retirees located in the minimum pension raises doubts in the context of the COVID-19 crisis: though it is reasonable to direct resources to low-income sectors while helping sustain consumption, the current health scenario also poses the question that the main effort must also come from health care, the responsibility of the PAMI.

Spending on public works and housing has more delayed effects, in a context where it is unclear how the pandemic will impact such markets. The special assignments that congressmen would distribute do not seem very justified. There is also no official assessment of the tax cost of the ads. Implementation will be key to setting the duration of measures, especially support for affected activities, and thus to help better allocation of funds. In sum, the government faces several simultaneous disjunctions: the volume of resources mobilized for aid (which in turn depends on fiscal capacity and the possibility of monetizing), sequence and duration of measures, and also the dilemma of concentrating support on activities (employment) affected versus that transfers that act as income and demand support.

However, despite all efforts to contain the most damaging economic and social effects caused by coronavirus, it will be impossible to avoid the negative consequences it will have on economic activity and employment. A key factor will be the health situation: if the evidence is favorable, there will be a partial reversal of expectations. Finally, the government will need to question how it reviews its external negotiating strategy, and debt in general, in this new context. We still don’t have any new updates about this matter.

Autor


Ricardo Carciofi

Principal Researcher of the Economic Development Program

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