One of the reasons that I love living in Buenos Aires is that it is quite literally like living in an economics textbook. You have a very decent example of a trilemma – a central bank attempting to hold a currency steady and maintain independent monetary policy while restricting capital flows. When asked to give an example of import substitution industrialization (ISI), most economists will throw out an example from the 1970s. I can tell you about the time I paid US $750 for a blackberry made in Tierra del Fuego to see the screen burn up in under eight months, the time I paid close to US $900 for a pretty average television that after a year just sometimes doesn’t turn on, and my personal favorite – the time I paid an ungodly amount for an air conditioner that broke and cannot be repaired because the parts needed can no longer be imported.
Argentina is the perfect example of trade barriers, exhibiting a tantalizing web of import and export tariffs, quota systems, subsidies, licensing schemes, and local content requirements, all along with a healthy dose of corruption. In one of my favorite anecdotes, I was meeting the Vice President of a large international oil company who received a telephone call and took off at a dead sprint (while wearing a fine Italian suit) with no explanation whatsoever. He later emailed me an apology, saying they attempted to turn away some parts at the port and he had to go in person to get them in.
Currently though, Argentina’s most ‘popular’ textbook economic blunder is capital restrictions. And the best part about that is watching the cat and mouse game that is playing out between the government and the people evading the traps set to suck their money back into Argentina.
Last week, a very important thing happened in the wonderful world of capital controls – a law that passed a few months ago came into effect in Uruguay. For a while, the OECD has been putting pressure on Argentina’s neighbor to share tax information, shed its status as a tax haven, and join in the global fight against money laundering! And as no one advocates international financial crime, this sounds like a good move… unless you happen to be an Argentine with a bit of cash.
According to a BCG report, Argentines with at least US $100,000.00 hold 74% of their wealth offshore. That is quite a bit of wealth – and you can be sure that even Argentines with less do what they can to move their hard earned pesos into dollars and out of the grasp of AFIP, the Argentine tax agency. And as Uruguay is a convenient couple hour jaunt across the Rio de la Plata and home to beautiful beaches and the trés stylish Punta del Este. The convenience coupled with the relative financial security makes Uruguay a hot spot destination for both vacationers and their savings and investment. But what implications does this law have?
I’ve discussed the law with quite a few Argentines, and their response is that it won’t affect anything really. Firstly, the law is only supposed to apply to transactions that take place after the law took effect, rather than retroactively. Secondly, AFIP shall only have access to specific cases where they have shown evidence of evasion. But this line of thinking ignores the importance of businesses and entities that incorporate in Uruguay and are able to take advantage of the proximity and business friendly environment to essentially execute operations between Argentina and the rest of the world. And while it clearly will not result in a S.W.A.T. team of AFIP agents swarming the homes of Argentina’s wealthy brandishing evidence of tax evasion in Uruguay, it is a creeping step towards more control.
Before the reelection of Cristina Kirchner back in October, I had the exact same conversation with an identical bunch of people regarding the issue of access to dollars. And from these conversations, two major concepts and lines of thinking emerge.
The first is a queer sort of “wait and see” attitude that to me seems preposterous in an environment where what has been seen in the past was really not worth waiting for. There exists this tendency to either stay put en masse or to pile into decisions simply because your uncle’s neighbor and your brother in law’s polo teammate is doing it. I have this suspicion that the due diligence process for quite a few Argentine investment companies probably resembles a list of how many godfathers, brothers-in-law, uncles’ friends, and university chums are also doing it, and the decision to move forward is taken when a critical number of these key indicators has been achieved.
The second is a “black swan” mentality – and not the aspiring psychotic ballerina kind. Nassim Nicholas Taleb’s book about rare and unpredictable events is so named because at one point in time, it was indisputable fact that all swans are white. The discovery of the existence of black swans immediately and instantaneously discredited that so called fact.
Argentines believe that because they have seen and experienced a handful of other crises, certain actions that proved beneficial will do so again. The example of real estate investing is an easy example, but my favorite one is the peculiar habit of Argentines to keep massive amounts of cash in safe deposit boxes (cajas de seguridad) in banks and companies dedicated to the provision of insured safe boxes. More on these in the future, but these mini- fortresses literally house piles of liquid wealth, and are insured by companies forced to hold Argentine assets. Yet simply because they’ve never been touched before, they are viewed as safe. Just like Uruguay.
Yet when little laws like giving AFIP investigatory scope in Uruguay creep closer and closer to the aspects of security that Argentines take for granted, at what point do you acknowledge that maybe not all swans are white?