A Class Act.

Yesterday, November 20, 2012, was the highly anticipated #20N nationwide strike organized by ­the labor unions.  #20N came hot on the heels of last week’s #8N, an anti-government cacerolazo organized to protest the Kirchner government’s dollar crackdowns, corruption, and rising insecurity.  More importantly, today Bianca Fernet comes off her self-imposed hiatus to continue providing cheeky commentary to Argentina’s economic happenings.

#8N protests at the obelisco on November 8th

I’m ashamed to admit that a version of this post has been in permanent edit mode since mid-September, and has been extremely difficult to write for two reasons.  It will evoke more emotion and generate more controversy than my typical subject matter, and quite honestly as an American white girl from the suburbs I lack the “street cred” that’s preferred when writers tackle touchy subjects like racial or class divides.

Marines finally disembarking the Argentine Warship Libertad held captive in Ghana after living conditions deteriorated

Since I last wrote, an Argentine naval vessel has been impounded in Ghana by a US investment fund seeking to recoup unpaid payments from 2001, provinces have made bond payments in pesos that should have been dollars, Argentine debt is getting battered in global markets following a US court ruling that Argentina must make payments to investors who refuse to accept restructured payments, Buenos Aires has had rolling power outages and trash strikes, Argentina has been warned by the World Bank that it will be kicked out, and everybody’s favorite rating agencies Moody’s, Fitch, and S&P have downgraded and put on review a variety of provincial and national debt.  Whew.

And how, in the face of such absurdity, is there still vehement support for this government?  To be blunt, there’s a pervasive issue of classism and racism with a dash of fear-mongering that underscores the Argentine political debate and serves to bolster an economic system that borders on ridiculous.

He’s all smiles now, but wait until he weighs in on politics

I like to play my own version of taxicab confessions to take the pulse of the mean streets of Buenos Aires by asking taxi drivers what they think of the government.  This game could also be called “how to get yelled at by strangers no matter the time of day” because regardless of the political affiliation, the delivery is always the same – intense yelling, vilifying the opposition, and wild hand gestures in lieu of holding the steering wheel.

A personal hero of mine who is a pioneer of cheeky journalism took a stab at pro/anti government dichotomy here that inspires this:

Cristina Kirchner: Eve Peron reincarnate, champion of the poor, defender of the weak

Supporters of the Kirchner administration see the government as a heroic force that saved the country from the evil clutches of globalization and capitalism following the economic crisis of 2001, and that works tirelessly to raise the poor up and support the interests of the country as a whole against the interests of a few wealthy elite who would keep the masses in abject poverty to go to Miami and buy lipsticks and TVs.  Oh and that also supported and would bring back the dictatorship that kidnapped babies and disappeared tens of thousands of left-leaning students and thinkers during the Dirty War of the 1970s.

Anti Government poster that circulated via social media! It was so on my MySpace…

Opposition to the government views Cristina Kirchner as the next Hugo Chavez, and Argentina as on the road to becoming Venezuela or Cuba in terms of travel restrictions, initially democratically elected leaders that entrench themselves, bury opposition and rule from a hospital bed with an iron fist, and a generally garbage can-esque economy.  Oh and they see the masses that vote for these leaders as genuine enemies to achieving true economic and social progress.

 

Heavy, right?  Said the white girl from the suburbs.  I know.

Now – if the government were lifting millions out of poverty, bolstering education, and creating a sustainable country to lead South America into the future, then isn’t that worth fewer Miami trips and imported tweezers?  Potentially, but let’s delve into a little bit of Latin American “keeping up with the Joneses” and see how Argentina stacks up to its neighbors in terms of poverty reduction and income distribution.

Let’s start with the Gini coefficient, which is a measure of income distribution, or how much richer are the rich than the poor.  A Gini value of 0 is perfect equality, whereas 1 is complete inequality where all the wealth is in the hands of one.

The lower the Gini, the more equal the income distribution (Data from The World Bank)

*boing* I dream of GINI

On this count, Argentina has more equal income distribution than its neighbors; however, check out the rate of change of the lines.  Argentina’s income distribution is improving at almost an identical pace to Uruguay’s, Peru’s, Brazil’s, and Columbia’s – countries that are not defaulting on debt, restricting travel, or experiencing 25% inflation per year.  So while Argentina does have more fair income distribution, the past seven years’ policies have not done anything to set it apart from the crowd.

What about growth?  If you take a gander at the chart below you will notice two things:  Firstly, Argentina’s growth looks quite a bit like its neighbors, except it’s a bit higher.  Secondly, you’ll see that the Venezuela comparison might not be so off the mark.  Following the recovery from 2008’s fun-filled global crisis, the rest of Latin America save Venezuela has posted slowing or steady growth rates because that’s what the world is doing.

It’s getting hot in here – is Argentina on its way to overheating?

Argentina is essentially burning out by manipulating the economy to grow too fast at the expense of stability and sustainability under the pretense of championing the interests of the poor.

And why is this working? Perspective matters, public opinion is easy to manipulate, and the opposition does not make it hard.

My inability to locate Argentina would explain my poor marks in European History

I have been told many times by Argentines that they are not Latinos, they are European.  Now maybe there’s an import ban on globes that nobody has told me about, but that’s a ridiculous statement.  Another fun one is that it is not unheard of to  refer to people of native descent as “negros” or “negros de mierda,” translated loosely as “shitty black people.”  I am then told that it’s ok because terms like that do not mean the same thing and are not offensive here as they are in the States.

Back in September there was a decently sized cacerolazo organized and attended primarily by wealthier and upper middle class people.  The protest was against the government’s damaging decisions and restrictions that are visibly hurting the economy and the people, yet the left-leaning newspaper Pagina 12 was able to use a gem of a headline taken from a chant sung by protestors – “El que no salta es negro y K”.

This is a take on a chant sung by soccer fans where everyone jumps around and sings “El que no salta es un ingles”, or “whomever doesn’t jump is English”.  And yes, that is prejudiced against the English but I’m not going into that here.

River Plate soccer fans singing “el que no salta…” Potentially European, jumping so not English, certainly confusing.

“El que no salta es negro y K” means that the person who doesn’t join in is black/dark-skinned/of native descent and a government supporter.  Not only does this attitude alienate a massive demographic element in Argentina, it allows the government to point to anti-government protests as racist, elitist, classist, and out of touch with the needs of the people.  No one feels bad for a racist who can’t vacation in Miami and is forced to wear a smaller selection of designer clothes.

The pro-government elements take full advantage of these attitudes, responding to protests by pointing out that these protesters are not like us, they are not part of the people.  While an extreme case, union leader Luis D’Elia repeatedly comments on the whiteness of the opposition and calls them part of a wealthy elite that offers no alternatives.

The end result is a disappointing, depressing disaster.  A government cheats and steals from its people and they continue to support it, largely because the opposition makes it so damn easy.  While I’m tempted to end this post with a pithy blue comment and a smirk and continue in my sassy apathy, I can’t on this one.

Stop accepting lies so I can go back to punning on Gini and working blue

Argentina, you need to figure out inclusivity or you will do some combination of crashing, burning, and sinking.  Opposition – get a globe and deal with the fact that you are not European and you share a country with your fellow Argentines.  Government supporters – stop living on a steady diet of bread, circuses, and fear.   Your government is buying your support by exploiting class divides and sacrificing your future.

And I prefer hatemail with a sandwich and a shot of tequila, please.

Bianca Fernet needs something stronger today.

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Credit where credit’s due

Sometimes I have to hand it to the Argentine government – their systematic clampdown on the movement of goods and capital across their borders is creeping along just enough to make international headlines about once a week without incurring any real domestic outcry to speak of.  Remember how Argentines were taking shopping vacations to hot spots like Miami to stock up on clothing, electronics, and other savvy purchases using their Argentine credit cards to get the official 4.5 ARS/USD rate?  Well as of early September, that loophole has been sewn shut using fines, reporting measures, and penalties.

Image Credit: Perfil.com

How did this TV get in my bag?

The new regulations include the following measures:

  • A 15 percent tax on dollar-denominated purchases outside Argentina made using credit or debit cards (think E-Bay, Amazon.com, etc)
  • New requirements that every single purchase be reported to AFIP – before only purchases of more than 3000 pesos (roughly $650 at the official rate) were subject to reporting requirements
  • Image Source: Louboutin website

    If Argentina refunds anyone the 15% fee I will eat my stilettos

    Banks must report every credit card purchase made by customers domestically and abroad to AFIP

  • Failure to report customs declarations will result in steep fines and criminal charges
  • Cardholders will be reimbursed the 15% each May if their taxes demonstrate they paid more than they owed the previous year.  If this actually comes to pass, I will eat my shoes.

The question is, where do these new restrictions fall on the spectrum of controls?

Clearly they are not purely a forex or capital control to combat capital flight and the pressure on the peso.  For a quick refresher see my post on multiple exchange rates.  At present, the official exchange rate is 4.66 ARS/USD while the black rate is about 6.4 ARS/USD, over 37% higher.  The new 15% tax doesn’t even split the difference, and taken alone Argentines would still be well-served to stock up on Mac chargers and MAC lipstick while abroad.  Furthermore, is it capital flight if the goods purchased abroad are promptly brought back into Argentina?  Pressure on the peso yes, capital flight not really.

AFIP, I declare that I look fantastic!

The real kicker is the double ended reporting requirement – individuals must fully declare every purchase to AFIP, who can then compare and contrast with the credit card statements reported by banks.  One reason people refrain from declaring purchases is that in protected industries including electronics, goods are subject to a substantial additional tax when crossing the border.  More importantly than evading this border tax, Argentines evade income tax by reporting they make below a $20,000 annual threshold and using cash off the books for income and purchases above this level.  The ability to peer into international and domestic credit card purchases and compare with tax filings is more significant than a 15% tax.

Image Source: Perfil.com

I brought these Euros to see the sights, not to exchange on the lucrative black market!

As an economist and an American, I value efficiency in all things.  These new regulations use the comparison of two reports (individual custom declarations and bank reported statements) to identify tax evaders, rather than step up the AFIP airport presence and search more bags.  But I think that’s what we’ll see within the next few months because it will clamp down harder and have a stronger psychological effect.

This new measure is inefficient, messy, and does little else well than inspire fear.  AFIP chief Ricardo Echegaray explained the new regulations as a measure that would only affect the very wealthy when traveling, force that taxes are paid by those “who are able to pay more”, and stated that the government would prefer that Argentines stay and spend their summer vacations in the country.  What is the policy goal there again, che?

Firstly, to prevent Argentines from one of the last legal means of accessing the official exchange rate is tantamount to admission that the rate is at least 15% overvalued.  They might as well have slapped the full 37% on there and be done with it.

Image Credit: Murtasma

Be afraid, tax evaders (Photo Credit: Murtasma)

Secondly and more importantly, the declaration’s requirements and ability to match customs declarations with credit card statements appears to be geared towards catching tax evaders rather than stopping tax evasion.  Yes, higher wealth individuals likely have more taxes to evade and have more opportunities to go abroad.  But the percentage of tax evasion that goes towards overseas purchases of Ipads pales in the face of government corruption in the nation.  In 2010 the Guardian ranked Argentina 105 of 178 countries, and that was before the capital controls and restrictions set in.

The bottom line?  This is not really an effective capital control, import control, or tax measure – it is a people control.  So far the government has targeted money leaving the country and goods coming in, but this crosses the line in specifically targeting and indeed vilifying Argentines who travel and spend money overseas that may not have flawless income tax records.

These new measures will soften the blow on the dollars spent abroad by lessening the volume of transactions and recovering 15% on each dollar spent abroad.  But the regulatory cost to the government of tracking all purchases and matching them with customs declarations is high.  This is a demonstration of power that will be followed by more obvious inspections and stricter movement restrictions.

I’d bet next time I enter Argentina I will have more than this old machine to worry about

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When life gives you lemons, cry to the WTO

Starting last week, the US, Japan, and Mexico followed the EU’s lead and filed complaints at the WTO against Argentina’s import restrictions.  Argentina promptly responded with its own complaint – against the US for blocking imports of beef and lemons.

Photo Credit: Longlex.com

= a very confused WTO complaint

That’s right – Argentina is accusing other countries of interfering in the free market import/export of their beef. Understand that the Argentine beef market is for sure top 10 most protected industries in the world – and not in favor of the beef producers.

I think my Argentine friends will stop talking to me after seeing the vegetable to meat ratio on this asado

Culturally, Argentina views its beef as a source of national pride, and it’s normal to receive “health” advice that it is necessary to eat meat at least once a day.  Important life events are marked by asados, or large outdoor barbeques for which butchers inform you that you must prepare at least ½ kilograms of meat per guest.  For those of you doing the math at home, well done! Math is cool!  But you should be concluding that this cultural pièce de résistance sounds extremely costly for the general public to participate in, especially in such an inflationary environment.

And you’re right!  So to keep beef an affordable part of the Argentine diet (and so imperialistic US/EU consumers don’t snap it all up), the government has in place an honestly impressive array of barriers to prevent the coveted cow flesh from leaving the country.

Thank you ,Uruguay, for demonstrating to us that in some cases size does NOT matter

Beginning in 2006, the Kirchner administration kicked off the protectionism with a 180 day ban on the export of beef, hiked the export tariff from 5% to 15%, and then put in place a quota system. Since then, the beef industry has fallen from a place of global renown to a case study in protectionism and corruption.  Argentina now exports less beef than neighboring Uruguay.  And while beef remains less expensive than on world markets, that is less and less comforting as its price rises at the same 30% annual rate as the rest of your grocery bill.

In equally important news, I lost my Blackberry last weekend.  After grappling with the stages of grief, I took a trip to the cell phone store to pay a protectionist price replace it.  But I arrived at the store and was informed that they did not have my model and that it could not be ordered for the foreseeable future.  My options consisted of “select a phone that is made in Argentina”.  And so dear readers, it is with a heavy heart that I inform you that the daily snapshots that I put in this blog will now be from a camera that is hecho in Argentina, lacks a flash, and has about one pixel.

Now I know that Argentina’s international trade complaint regarding lemons and beef may seem to have very little to do with my mobile phone woes, but I assure you that together they demonstrate something special about Argentina’s trade restrictions.

Image Credit: Contexto

I would be happier about my low quality Blackberry with a pair of these bitchin’ shades for viewing LCD screens that are ALSO made in Tierra del Fuego

Goods are not crossing Argentina’s borders for two reasons:  protecting domestic industry from competition and balance of payments problems.  The first reason is what shows up in the news and is debated over kitchen tables and asados worldwide – a government responsibility to safeguard national producers against less expensive imported competition.  And indeed, publicly Cristina Kirchner can be seen defending Argentina’s refusal to permit me access to a reasonable Blackberry on the grounds that by forcing me to buy an inferior machine that does not allow me the functionality that I desire and am willing to pay for, she is lifting the nation up into an age of independence from imperialist cell phone exporters providing cameras with flashes and decadent numbers of pixels.

But the reason for Argentina’s recent uptick in protectionism is not to help local producers, it is to deal with the fact that their balance of payments is out of wack.  Basically, balance of payments takes stock of what is coming into and out of a country in money terms – and each import into Argentina is necessarily accompanied by the purchase and outflow of foreign currency (dollars).

Indeed according to globaltradealert.org, over the past 12 months Argentina has topped the chart by implementing the most protectionist measures in the world.  While it must feel good for Argentina to be number one at something from time to time, these measures are creating a crackerjack economy where access to basic inputs and business necessities is limited.

A gold medal in protectionism and Tae Kwon Do

There are legitimate arguments to protect aspects of domestic industry from international competition.  But arbitrarily restricting the import of goods NOT PRODUCED domestically?  Parts needed to bottle wine, bicycle tubes, air conditioner parts, bottle caps, automobile inputs, internationally acceptable Blackberrys… This wave of protectionism has nothing to do with domestic producers and everything to do with a government that is landed itself in a leaky boat and is attempting to plug the holes with temporary fixes.

Argentina’s beef/lemon complaint is as waste of legal resources and newspaper paper.  Argentina’s beef industry faces more barriers domestically than internationally.  If you’re savvy with the WTO dispute settlement mechanism, you are well aware of what is “awarded” to the victor: the right to impose protectionist measures against the loser equal to the amount of trade loss calculated.

And as Argentina is neither seeking WTO approval for nor being sparing with protectionist measures presently, the outcome of any proceedings is about as relevant to Argentine policymaking as how many medialunas I can eat in one sitting.

If you are curious, the answer is many

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Emotional Baggage and Lingering Freudianism

Over the past few days about 6 people have emailed me this New York Times article: Do Argentine’s Need Therapy?  Pull Up a Couch.

While outside the typical “economics with a twist” scope of this blog, I wanted to address this because I believe it provides a window into the soul of this confusing nation.

My psychiatric solace would apparently not be welcome in Villa Freud

It is important to understand the value that Argentines place on feelings.  One day at work, a colleague of mine was staying home for a few days because he was feeling depressed.  Half joking, I openly commented why he didn’t just cry in the bathroom for a good ten minutes then pretend he’d gotten sick like everyone else did.  The looks that shot my way following my offhand comment were priceless – horrified, shocked, and utterly disapproving.

Indeed, Argentina values emotional self-exploration in monetary terms as well.  Seeing a psychologist regularly is included in the majority of private health plans, and viewed as necessary to healthy living as regular visits to the dentist and family doctor.

I had the distinct pleasure of living with a bright and highly talented young woman studying psychology here in Buenos Aires for one year.  One of my favorite evening activities was hearing about her classes on Freudian psychology that were required coursework and laughing with disbelief that this lunacy was actually providing a meaningful foundation for thought.  Don’t get me wrong, I’m a huge fan of male anatomy, but I’m pretty sure a penis would ruin some of my favorite outfits and frankly make me look more like a drag queen than a serious professional.

Although it would make me eligible for next year’s Miss Drag Queen Buenos Aires…

A friend of mine once suggested this difference stems from the culture of the protestant work ethic vs. the catholic culture of waiting for salvation.  While I do think this has some merit, I think the current runs deeper.

Argentines don’t merely indulge themselves in their own feelings; they like to pry into the feelings of others as well, even in a professional context.  In 99% of business meetings that I have here, I am asked how old I am, and how I feel about being in Argentina.  Not only would these questions be considered wildly inappropriate in any business context in the USA, I am then carefully observed and probed on how I respond to these inquiries.  If I display affront or emotion, I am branded “hysterica”.  If not?  Cold and American.  In essence – I am valued based on my feelings rather than my accomplishments.

Joey Tribbiani dazzles in Freud! the musical in the popular sitcom Friends

Now what does this (admittedly self-indulgent) little cultural opinion have to do with Argentina’s rickety economy?  Actually quite a lot.  As the author of this rather critical blog, I am frequently asked what I think Argentina should do to fix their economy and indeed their country, and this is a difficult question to answer without spurring an intense debate that drifts towards the social consequences of austerity, or even whether or not I agree with IMF policies or the Washington Consensus.  And these debates are not without merit – solving Argentina’s economic quandary is not as simple as loosening trade restrictions, implementing intelligent monetary policies, and mopping up the culture of corruption and graft.

In answer to the questions posed by the NY times, Do Argentines Need Therapy, I would reply no.  Argentines need to learn to cry in the bathroom for ten minutes, come out and say they were sick to their stomach and have allergies, and move on.  The answers for the future will not be found by wallowing in the past and indulging in circular debates on issues like the Malvinas/Falklands, or throwing around blame and denying responsibility for public needs like transportation.

Mayor Macri and President Kirchner would both benefit from some bathroom stall therapy

I have gotten so much both personally and professionally out of living and working here, but if Argentina picks anything up from me I sincerely hope that it is a healthy dose of sucking it up and moving forward.

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Creeping Control – AFIP’s Uruguayan Vacation

It’s like hanging out with Greg Mankiw, except with quite a few more catcalls

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.

Fighting financial crime one dirty bill at a time (Image Credit: Globalresearch.ca)

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?

AFIP takes a grab at Argentine savings in Uruguay

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.

Swans are always white – until one is black

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.

Buenos Aires Banking – A lot like Gringotts with fewer dragons

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?

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Ever wondered what a week without the subway looks like?

Today, Friday August 10, marks day seven of the longest subway strike in Argentina’s history.  The complete shutdown of the Subte, Buenos Aires’s underground transit system, began Friday night and as I write, the end is still not in sight.

My midday trip across the city – had to watch 3 packed buses pass me before wedging my way onto this one.

A seven day subways strike in Buenos Aires is paralyzing.

Buenos Aires Metropolitan Area is home to well over 12 million people, and an average 1.123 million trips are taken on the Subte every day.  Meaning that every day this week, over a million people crammed themselves onto the already crowded streets of the city into busses, taxis, and on foot.  Transportation has ground to a crawl, as the bus system is unprepared to handle such a sizeable influx, and traffic chokes the streets.   ­

The Subte workers union AGTSyP called the strike to demand a 28 percent wage increase.  The complication exists when asking who is responsible to meet or negotiate these demands with the union.

A poster plastering the streets – The people of Buenos Aires pay, the city is in debt, Macri denies blame

Metrovias is the privately owned company that manages the Subte; however, the system is highly subsidized.  In 2010, Argentina’s planning minister estimated these subsidies to be equal to 706 million pesos.  Although I constantly poke fun at the fact that the peso is bleeding value at a rapid rate, that’s quite a cost.  So substantial in fact that in November, the national government announced plans to hand the administration of the Subte system to the city government of Mauricio Macri.

Now I could wax poetic on this topic, but for the purposes of this post it serves to understand that President Cristina Kirchner and Mayor Mauricio Macri do NOT get along.  At all.  As in, seat them on different sides of the room and write about their run-ins in the tabloids.

They won’t be buying eachother a fernet any time soon (Photo Credit: LaNacion)

While Kirchner and the National Government insist that the city must be responsible for the Subte, which exists within the city, Macri has responded that his administration will not take control until significant necessary investment is made.  He has asked that the national authorities allow him to seek international financing, and quipped that in order to finance the project, he would have to close kindergartens.

The labor union blames first Metrovias for not using subsidy money appropriately, then the City, and finally the national government.   The result of this circle of blame is millions of people a day spending an extra 2+ hours getting to and from work, which I will tell you firsthand is a truly ugly picture.

A “counterstrike” has been organized via Twitter and Facebook by the users of the Subte, who claim they are the only ones paying for the power dispute between city and national government.  The community is calling for people to jump the turnstiles and take back their lost week from Monday to Friday.

Viral – this image calls for subte users to jump the turnstiles and refuse to pay for a week

But while the Subway cost and the wage increases are indeed a steep bill, who is really paying the bill?

Buenos Aires has a labor force of 4,656,000 – the majority of whom are affected by effective shutdown of transportation in the city.  If we take 3.5 million to be conservative and account for people in the provinces who do not commute into the city, it’s still a substantial number.  As a rough estimate, if the closed Subte and gridlocked streets add an average of two hours to each daily commute, this strike has cost the City of Buenos Aires 35 million hours in lost productivity just from Monday to Friday.

It doesn’t take a labor economist to tell you that 35 million lost hours is not good for the productivity of any city.  And you only have to have spent a few hours of your life stuck in traffic to understand how universally pissed off it can make people.

At this point, the strike has gone on for seven days – and everyone involved is losing.  The question remains how much longer will this go, and how big of losers will we be?

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Shrinkage?

The winter weather’s not the only thing chilling the bones of Argentina’s residents –  Since the last week of July, a new set of words have been showing up in the articles about the economy.  Shrinks.  Slows.  Stagflation.  These chilling terms are being used to describe the consequences of what some pretty nasty looking economic indicators might have in store.

On July 26, Citigroup reported that Argentina’s gross domestic product will post its first annual contraction in a decade.  Economists estimate that GDP will shrink approximately 1.7% this year.

The same week, the official government statistics bureau INDEC reported that May economic activity fell .5% year on year, while private economists estimated the fall to be closer to 1.2% and predicted the June drop to be close to 3.9%.  Check out this article to read more about these numbers.

image credit: ichigomarshmallow at http://ichigomarshmallow.deviantart.com/art/Fat-Deer-268283005

NOT Stagflation

Now, enter stagflation.  For those of you that weren’t alive or were busy eating crayons in the 1980s, stagflation describes a situation with:

  • Persistently high inflation:
  • Low and slowing economic growth
  • Steadily high unemployment

 

 

 

 

This specifically nasty combination of factors earns the name stagflation because it presents policy makers with a dilemma.  Steps that could hem in inflation would actually exacerbate low growth and unemployment, and vice versa.  Essentially, the government is presented with three problems, and fixing one would make the other two worse.

A Trilemma: Try to fix one problem and the other two get worse

While stagflation can be brought on by a large external shock, à la the oil shocks of the 1970s, Argentina’s situation is the result of over a decade of pursuing a growth strategy that combines import restrictions with capital controls to promote domestic growth and high employment.

In 2001 when Argentina opted to default on international obligations and rapidly devalue the peso, effectively losing the ability to borrow money abroad, they did so to pursue a course of action without the harsh effects of austerity currently being protested in Greece and Spain.  And indeed, the past decade has seen growth and relative stability, which led a number of commentators to suggest that Argentina provides an alternative path to countries under strain in the Eurozone.  (See here, here, and here.)

Image Credit: Europa.eu

This isn’t a shock yet

The emergence of stagflation in Argentina should serve as a warning to these thinkers.  While some will surely argue that stagflation has been brought on by external factors including the Eurozone crisis and the United States’ continuing faltering, these are factors not shocks.  Furthermore, if Argentina’s economy is stumbling now, what will happen if these drawn out first world crises do indeed develop into full blown shocks?

While the situation is certainly complex and could spawn countless studies and articles looking at the social benefits Argentina has accrued as a result of following this particular growth strategy, it looks to me like the point of unsustainability has pretty clearly been reached.

When Argentina devalued the peso in 2001, it became de facto more competitive on the export market.  Policies were put in place that did in fact support the growth of service and industrial sectors.

But what do growth and competitiveness at the expense of sustainability mean?  The price of a cup of coffee in Buenos Aires might be the only thing it has in common with Paris these days; meanwhile, the streets are rocked on a daily basis by protests and transportation stoppages that exacerbate a pervasive air of creeping downturn.

Photo Credit: La Nacion

The subway strike continues

In addition to donning winter gear, Argentines are battening down the hatches against what is to come.

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