With radical change, Argentina can turn this crisis to its advantage
“Taking Advantage of the Crisis: Three Steps for the Revolution Argentina Needs”
By Federico Fernández, courtesy of Fundacion BASES
Let’s be clear, the Argentine economy was already tumbling before we even suspected that a delicious bat soup would quarantine a third of Humanity.
But there is also no doubt that the economic situation as a result of the obligatory social distancing will cause a significant additional drop in GDP.
Thus, the prestigious magazine The Economist predicts a drop in the Argentine economy of 6.7 percent for this year.
As if this were not enough, the government by decree has just suspended the payment of some 10 billion dollars, bringing, once again, the Argentine state to default ( technical for now).
Will there be a crisis? Yes. Will it be painful? Without a doubt. It is so. Point.
The important thing, however, is not to become obsessed with the suffering that we are going to suffer or to insist on predicting the most apocalyptic scenario. Instead, we should draw valuable lessons so that these recurring economic crises do not happen again and bet on new and courageous solutions. The worst thing we can do is keep repeating the mistakes that have condemned us to decline.
Yes, Argentina must change. Radically.
What kinds of reforms can then take us out of the vicious circle of social decline and lead us to prosperity and greatness?
The reforms that I am going to suggest along the lines that follow surely do not exhaust all the changes that the country needs, but they do constitute measures capable of fundamentally transforming our society. It is time to think big, “out of the box” and, above all, a frank break with everything that has been done so far and has led us to the difficult situation we are in.
Nowhere is it written that one out of every two Argentine children must be poor, that we have to live in permanent crisis or that our streets cannot be safe. But abandoning this deadly trap we have entered into implies that we have the courage to change.
Here I rudimentarily suggest what points a real change in Argentina must contain. What I have in mind is neither the “way out of the crisis” nor, much less, the administration of misery that governments have been doing for a long time. I want us to use this crisis to make our revolution.
Here they go:
The cost imposed by the state administration on the country’s productive sector is unbearable. Without taking into account the tax burden, only Kafka’s regulations, the opacity of public procedures and the corruption of public officials make the “Argentine cost” something priceless.
This situation must be nipped in the bud.
How? With an absolute simplification of the rules and regulations of economic and productive activity. And for this an essential tool is e-government.
The best global example in this regard is Estonia.
In that small great Baltic country, 99 percent of bureaucratic procedures and public services are carried out online . The only exceptions are getting married, divorced, and buying property.
What is understood by e-government or digital services? ” A digital service for the Estonian government is a fully digital end-to-end service with no phone calls, office visits or physical paperwork.”
What’s the score?
The Estonian economy, that is, entrepreneurs, small entrepreneurs, who are starting a new business, etc. they save more than 844 years of work time that the bureaucracy would consume annually. Yes, they read correctly: 844 years. To have a perspective, only thanks to the possibility of signing documents digitally, they save 2 percent of GDP .
To change address, a citizen only needs an authentication that uses digital identification. Thus, any individual can update their information in less than two minutes .
Thanks to these e-government reforms, a business can be opened in Estonia in 18 minutes (it holds the world record).
2. Sustainability and fiscal transparency
A sustainable and transparent tax system must be, at the same time, payable to taxpayers and easy to understand and comply with. When the aliquots are too onerous or the tax code requires a battalion of accountants and lawyers for their understanding, the system becomes unsustainable, opaque and the last term, unfair.
Argentina’s tortuous tax industry must be replaced by an agile, moderate and simple system.
Specifically for companies, the main characteristics it should have is that, both the profits that are kept in a company’s account or those that are reinvested, are not taxed . This means that all the money that enters the account of a company or is used for justifiable expenses does not pay taxes.
In this way, companies that are just starting out and struggling to generate income do not have to worry about paying anything beyond their expenses. The objective is clear: to promote entrepreneurship, entrepreneurship and the growth of business in the country.
Taxes should only be paid when dividends, wages, etc. are paid. And when those taxes are paid, the rate must be low and fixed (flat tax).
But is this possible? Isn’t something like this only possible in a “tax haven”?
“Your highest score is driven by four positive characteristics of your tax code. First, it has a 20 percent tax rate on corporate income that only applies to distributed earnings . Second, it has a 20 percent flat tax on individual income that does not apply to personal dividend income. Third, your property tax applies only to the value of the land, rather than the value of real estate or capital. Finally, it has a territorial tax system that exempts 100 percent of the foreign profits obtained by national corporations from national taxes, with few restrictions. ”
3. 90 percent innovation + 10 percent regulation
This third point implies perhaps the most profound change. But also the one that greater returns can bring us.
In fact, Argentines and Latin Americans want more innovation . Where we must promote a change of mentality is in the authorities so that they understand that innovation, new products, services and business models must, in principle, always be allowed . Unless there are certain and justifiable suspicions regarding the damage that a product or service may cause, innovation must be left alone.
Problem solving must be left to imaginative responses rather than regulations and prohibitions that hinder and stifle the entrepreneurial spirit.
As Adam Thierer explains , we cannot be regulating and planning with the assumption of the worst possible scenario as that will mean that many of the best scenarios will never happen. That is the true catastrophe that we suffer every day.
At the base of innovation without permits is rational optimism . Which recognizes that innovations are a good thing and act as the main driver of progress.
And the engine of this process is the ability to expose your ideas to the world and let them be tested. This can only happen from the bottom up, not from the top down. It cannot be planned or centralized from public offices or regulatory entities.
When this process stops, either with prohibitions or with suffocating regulations, what is truly put to the brake is disruptive innovation, human creativity and social well-being.
Is there any role for the state regarding innovation? Yes. Minimal control to safeguard the population. If we were preparing a cocktail, the recipe would be nine parts of innovation and one of regulation .
In conclusion, Estonia can be a model to help lift the country out of decline and constant crisis. For its part, embracing innovation can put us at the gates of a new industrial revolution. The adoption of these three points would put our Argentina in an unbeatable position to encourage the creation of new companies, revitalize existing ones and attract foreign capital and talent.
Federico N. Fernández is Executive Director of Somos Innovación (the Latin American alliance in favor of creativity and innovation), Senior Fellow of the Austrian Economics Center (Vienna, Austria) and President of the Fundación Internacional Bases (Rosario, Argentina). He also serves as President of the Organizing Committee of the International Congress “The Austrian School of Economics in the XXI Century” , which is held alternately in Argentina and Austria.