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In an 18-hour, drama-filled debate session that lasted until the early morning hours of July 17, the Argentine Senate officially rejected a measure designed to raise taxes on agricultural exports by a tie-breaking vote cast by a supposed ally of Argentine President Cristina Fernandez de Kirchner.
The vote effectively ends a law that has threatened Argentina’s stability, and put its agricultural industry at risk of collapse. It also represents a major defeat for Fernandez, whose control over the South American country never has been weaker.
The purpose of the taxes was twofold. First, the government is in dire need of cash. Fernandez’s government, like that of her husband before her, relies on populist policies to ensure support from the poor. To win this support, the government must be able to pay for massive subsidies. This results in artificially low prices for basic necessities (food and electricity lead this category), which translates into artificially high demand (and thus an evermore massive subsidy bill for the government).
The second reason for the export tax is to keep food at home. To ensure cheap foodstuffs at home, the government long ago imposed domestic price caps on food. This reduced farmers’ ability to profit at home, so they began growing crops such as soybeans for the export market. The export taxes were designed to reverse that incentive by making planting soy for export not worth it. Combined with domestic price controls on wheat (among other essential foods), however, the export taxes effectively ended farmers’ ability to operate at all. Without the ability to make money abroad or at home, the distinct possibility that the farmers would opt out of the market altogether arose. The resulting food shortage would have been disastrous for Argentina.
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