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Basket case

by on November 28, 2011

MIT economist Alberto Cavallo has a fantastic blog that he set up with a few other MIT researchers working on the Billion Prices Project.

In this blog, Inflacion Verdadera, he measures the price changes that make up the typical household food basket. Graphically, you can see how each week some products change (the other week bananas rose 86% in price!) and also the general basket costs with their rise in inflation. He started in January of 2007, leveling that index as 100%. Since then, the index has risen 240% for food and drinks and 230% for the general household basket.

While these statistics may seem shocking at first, there are a few key thoughts to consider. Firstly, Argentina is one of the largest producers of food in the world, a major producer of soy, corn, lemons, garlic, grapes, wine, and beef. As one of the world’s largest suppliers of foodstuffs, Argentina exports between 80-90% of what they produce, importing a measly 3% of goods. This monumental amount of production supports the Argentine economy, accounting for 25% of its GDP.Secondly, each year has registered growth in agricultural outputs,but while 8-9% of global foodstuffs are grown in Argentina, its global share of exports is 2.9%, due to soy making up the primary low value-added good.

Thirdly, and most importantly, is government intervention. As quantified in a great paper by Sergio Lence at Iowa State, Argentina’s agriculture sector which once was heavily subsidized by the government receives few if any subsidies overall in terms of production. Compared to 25 of the world’s top producers, Argentina is negatively supported by its government in terms of agricultural production, meaning the government takes money from the producers. This is done in a few ways, most importantly through “retenciones,” or export taxes. There are two reasons for this: politics and the enormous growth in exports trying to take advantage of high prices.

The high export taxes became a political issue in 2008, when strikes paralyzed Argentina due to the government instituting a 44% export tax on producers. According to the data, this can partially be because of the tremendous growth in soy bean production. CFK noted this, as 95% of soy is exported, and that the growers “had to reinvest” in Argentina through these taxes. Nonetheless, the desired effect (to flood the market with cheaper foodstuffs) had the opposite effect, by shutting down many smaller producers. While the law was eventually overturned, tariffs remain high, as Argentina still is the second biggest exporter of food commodities.

So, the balancing act of choosing domestic consumption and foreign export is a balancing act that Argentina has stumbled on many times, as a leading factor in this inflation. Food imports will remain low into the foreseeable future because of the government’s desire for Argentine production first before importation.

One Comment
  1. This is a actually good read for me, Must admit that you are one of the best blogger I ever saw. Thanks for posting
    this educational article.

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