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Slippery Subsidies

Jan 11, 2012 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic History, Financial Markets, Regulation • 117 Views    No Comments

By Mira Korber, guest blogger, Kent Place School alumna, Yale student, and recent traveler to Buenos Aires, Argentina. 

Venture down any avenue in Buenos Aires and you will certainly see tremendous lines coiling around the sidewalks as daily commuters await the infamous “colectivo,” or Argentine public transport city bus. Wait a while, then a while longer, and perhaps your bus will arrive quickly, perhaps not. But in the end, it’s worth the wait as your ride is so cheap, you can put up with a little unpredictibility. 

Climb aboard and spend only between 1.10 and 1.25 pesos for a ride anywhere in the city of Buenos Aires. But now, it’s going to cost you a few more “monedas” (coins). 

To ameliorate their massive national debt, the Argentine government has no choice but to cut back on national spending, some of which is dedicated to subsidizing the “colectivo” system.

Subway fares have already increased by 127% — to 2.50 pesos (.58 US cents) and colectivos could raise their 2012 rates by as much as 3 pesos. Additionally, the considerable water, gas, and electric subsidies are on their way out; 260,000 Buenos Aires residents living in affluent neighborhoods have lost all government assistance.

In 2011, the government doled out almost 69 billion pesos (approx. $16.4 billion USD) in subsidies, the largest recipients being energy (60.4%) and transportation (27.9%). A remaining 31.9 billion pesos went towards social welfare programs.  

Try out these interactive subsidy graphics at LaNación.com, one of Argentina’s most prominent newspapers; you can find month-to-month costs of subsidizing buses. And here, you can find an interactive map of public transport prices around the world as well as an animated representation of the elements fueling each bus, the “colectivo porteño.”  (NB. “recorrido” = route, “usuario” = user, “boleto” = ticket, “subsidio” = subsidy.)

Read here about why such extensive subsidies were implemented in the first place, and how the proposed 2012 subsidy cuts will only comprise 4.8 billion of privately estimated expenditure of 70 billion. 

The Economic Lesson

Government subsidies exist to (1) help boost industries, (2) encourage businesses to hire more employees, and (3) ease living costs for a country’s residents. By keeping prices artificially low, Argentina experienced tremendous growth in the years following economic crisis in 2001-2002. In 2011, the Argentine GDP measured up at 8.3% (see bottom of article).  But now, due to subsidy lifts that will turn up the heat on already-high inflation (privately estimated around 25%), the economy’s 2012 GDP is projected to be only 2-3%. 

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