Food Economics in One Argentine Lesson

How bad choices in Latin America are contributing to global shortages

By Mary Anastasia O’Grady. Excerpts:

"When it comes to economic malpractice, it’s hard to beat Argentina, the breadbasket of the region. It recorded monthly inflation of 6.7% in March. Some analysts now expect 2022 inflation to be near 60%, following 2021 inflation of over 50%.

As always this inflation is a monetary phenomenon—to paraphrase Milton Friedman. President Alberto Fernández’s government, in long-standing Argentine tradition, has been deepening the country’s indebtedness to finance its deficit spending. According to Pablo Guidotti, a professor of economics at Torcuato Di Tella University in Buenos Aires, since 2000 government expenditures, as a percentage of gross domestic product, have doubled to 40% from 20%. Government debt as percentage of GDP is now about 100%. To pay the bills, the central bank prints pesos with abandon, sending prices through the roof.

The recent change in relative prices for wheat and other agricultural products ought to be a blessing for Argentina. In a free market, higher prices would act as a motivating factor to grow, sell and export more. As the value of harvests, measured in hard currency, went up, the nation would also become richer because dollar inflows would strengthen its buying power. To put it another way, the improvement in terms of trade would boost GDP.

Yet rather than ride the wave of rising commodity prices with policies that encourage production and export, the government is trying to lower local prices by forcing producers to sell inside the country. The policy mix for this strategy is high export taxes and export quotas that limit the amount that can be shipped abroad. Both depress exports and make it better not to plant at all or to hold excess inventories in silos.

In March the government announced that it will try to “decouple prices to protect the domestic market in a global context of war and sustained high wheat prices” by subsidizing 800,000 metric tons of wheat to domestic millers. It may succeed, in the short run, in making bread and pasta cheaper for the public. But it’s an expensive “fix” and gives consumers less incentive to find substitutes for wheat, which is one way to bring down high prices."