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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Got the blues? A glance at Argentina’s exchange rates

This morning I ran across this simple but informative article in The Economist:

The blue dollar: Another step towards a siege economy

It provides a good overview of the parallel market that I referenced in my first post.  I do take issue with the following:

“Calle Florida, a pedestrianised thoroughfare in the heart of Buenos Aires, is once again thronged with money-changers, as it was in the inflationary 1980s.”

While Calle Florida is thronged with money-changers, this is hardly a new phenomenon.  Since at least 2010 when I moved here, it has been impossible to pass through the street without at least a dozen men muttering, “cambio, cambio, cambio” to me as I pass by.  There were a few weeks back in February when AFIP agents patrolled the streets, keeping these money changers at bay, but they returned shortly after.  As for the sock-banking referenced in the article, I highly doubt this is common practice.  I walk Florida daily and it would look terribly odd and obvious if one were to be frequently bending over (picking their foot up?) and pulling money in and out of socks.  I’d be willing to try it out though, to see how long it takes me to be robbed/questioned/arrested.

Calle Florida in Februay 2012, following legislation to ban unlicensed sellers of products from the streets

Note that when reading about the exchange rate in Argentina, there are three relevant rates to keep an eye on:

  • The official rate: Also known as the white rate, this is the official exchange rate announced by the Central Bank of Argentina.  This is the rate at which authorized importers can buy dollars to import goods, or that individuals who receive approval from AFIP (the tax agency) can buy dollars to travel with, send abroad, or hold.  The current reality is that fewer people every day can access dollars at the official rate, and recent legislation further curtails the ability to buy official dollars.  If you are a foreigner traveling, living, or working in Argentina, this is the rate you will receive from your bank if you use your ATM card to withdraw pesos, or your credit card to purchase goods in Argentina.

  • The blue rate: Also known as the unofficial, black, or parallel rate.  This is the exchange rate given by casas de cambio and other unofficial buyers and sellers of currency.  This rate varies between cambios and rises and falls according to sentiment and government crackdowns.  The last week of May and the first week of June, the rate reached a high of about 6.15 pesos to the dollar on new restrictions on travelers to access dollars.  This week, the rate is back down to about 5.9 as the market calms slightly and the government puts pressure on cambios  to get the rates down.  This is the rate that majority of individuals and small to medium businesses face when needing to convert pesos into hard currency.  It is also what savvy tourists and travelers do when they bring cash down to Argentina to exchange outside of a bank.

  • The blue chip swap rate: This is the rate implied by a legal operation whereby Argentines can buy sovereign bonds or securities in pesos in Argentina and sell them abroad for dollars.  This bond swap is sometimes referred to using the name Boden, referring to bonds issued following 2001 that are paid in dollars. This rate is typically higher than the blue rate, and is only accessible by large businesses with access to the national and international securities market.  While this exchange is legal, it is frowned upon and closely monitored by the government and is inaccessible to the majority of individuals who lack sufficient capital and access

Since the Economist piece was published five days ago, the official (white) exchange rate has slid from 4.47 to 4.4915 pesos to the dollar.  For a look at the official rate’s decline, check out this exemplary piece in Bloomberg.

What analysis of Argentina’s exchange rate debacle largely omit is that for capital flight to occur, pesos don’t merely change into dollars, they also leave the country, which has a cost.  And while pictures of dogs sniffing dogs on ferries to Uruguay makes for good reading material, it is not the only way dollars leave this country.

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Everything but the Kitchen Sink – Pots and Pans Protests in Buenos Aires

Last Thursday morning, I received a message on my Blackberry that roughly translates to:

“For the Argentina that we all want, we say ENOUGH (STOP!). ENOUGH of the lack of medication, of shackled imports and exports, of trapping of the dollar, of verbal violence, of expropriation, of hooliganism, of impunity, of authoritarianism, of the lack of dialogue, of insecurity, of corruption.

CACEROLAZO Thursday May 31 at 8:30 PM – continue distributing this message if you want to do something to change.”

Cacerolazo protesters on Avenida Libertador in Buenos Aires, Argentina

In my first post, I referenced a protest that consists of banging pots and pans, or a CACEROLAZO. While this story has been picked up by the Associated Press, I wanted to provide some insight into the significance of these protests, and how they differ from the multiple protests that you can regularly witness when strolling around downtown Buenos Aires any given weekday.

 

Argentina is known for its myriad of protests against price increases, lack of wage increases, benefits for veterans, laws regulating the sale of goods on the street, lack of funding for schools, increases in subway prices… this list could literally go on for pages. What’s more, these protests are accompanied by much more disruptive behavior than simply some clanging pots and pans from balconies and street corners long after business hours. These protests regularly cut off major avenues, involve loud drums and explosions, and have police and even military presence, yet are treated as commonplace occurrences, as if a minor traffic collision were to occur in New York or Washington DC.

The reason these protests pique the attention of anyone keeping an eye on Argentina’s economy is because they are out of place. Cacerolazos were the primary means of demonstration by middle class Argentines in the 2001-2002 financial crisis, who lost their savings in the corralito that froze dollar accounts and effectively wiped out 75% of the value of their savings. These people took to the streets to loudly but nonviolently express their discontent with the forced conversion of their dollars into pesos at 4 to 1.

Riot police block Avenida 9 de Julio during protest by Veterans of the Falklands war in February 2012

The majority of protests in Argentina are organized by lower and lower-middle class labor unions and politically connected organizers intent on attracting attention to their cause by disrupting the normal flow of life. With the exception of protests by the veterans of the Falklands war, the participants are primarily younger to middle aged students and workers.

 

 

The nights of Thursday the 31st and Friday the 1st, the streets of the upper class neighborhoods of Buenos Aires echoed with the constant metallic ring of pots and pans being struck. Strolling through the streets I encountered families with young children, elderly couples who looked like they were from a different time, and students and workers alike. I spoke with a handful of Cacerolazo protestors and supporters of the demonstrations to respectfully ask them if they were protesting for more bacon.

June 1, 2012: Cacerolazo blocks Avenida Santa Fe in Buenos Aires, Argentina

The general sentiment was that the recent measures by the government to restrict the currency, further restrict imports, and reform to increase taxes on agrarian land were counter to what they wanted for their country. I saw many signs with messages along the lines of: “My government does not represent me.” Individuals that I spoke with informed me that the purpose of the Cacerolazo is to express discontent without disturbing day to day business, and in a nonviolent manner that is nonetheless impossible to ignore.

While the din of pots and pans no longer marks the streets of the city by night, I am inclined to agree that as silly as it sounds, there is an ominous note to hearing the constant clanging for hours at a time.

Though I doubt there are enough pots and pans have any effect on the restrictions and policies of the Kirchner government, especially because a good deal of kitchenware in Argentina is imported from Brazil.

Made in Brazil – Tramontina Pots and Pans (Image Source: Tramontina)

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Inflation all I ever wanted…

So after my post last week on Argentina and Dual Exchange Rates, I received quite a few questions.  I decided it will be worth writing a handful of posts to catch up those of you who are not lucky enough to live in this fine country where major roads are cut off by protestors banging pots and pans on a daily basis, and restaurant menus are heavy with price stickers piled on top of each other.

The most important economic fundamentals in Argentina that I will take one post each reviewing are as follows:

  • Inflation
  • Import and export restrictions
  • Currency controls
  • Government

These topics are quite obviously interconnected, but I think a quick explanation of each will make the rest of my posts more enjoyable.

Inflation

When I first moved to Argentina, I would joke endlessly about the little old ladies in line at the supermarket who would issue a constant stream of complaints regarding the price of meat.  To me, this seemed ludicrous.  The price of meat was low compared to what I was used to in the states.  Over time however, these abuelas have come to represent for me a transformation.

Inflation is nothing more than a rise in price levels, and it is a normal trend to observe over time in most developed economies following the end of the gold standard.  Find any grandparent and ask them about the price of a coke or a movie ticket back in the day.  You’ll quickly realize that inflation is not limited to under-developed nations ruled by despots.  At the other end of the spectrum, you might recall from history famous cases of hyperinflation; for example, post WWI Germany in 1923, where prices rose per 3,250,000 % per month (doubling every two days) and citizens brought wheelbarrows of Marks to make their purchases.

What most people fail to recognize is that between the slow increase in the price of a soda and the wheelbarrow full of cash exists the possibility of sustained, almost unbearably high inflation.

Independent reports clock Argentina’s annual real inflation at between 20 and 30 percent.  INDEC, the government statistics agency, regularly and vigorously reports figures around 9 percent.  Since 2007, the government has fired and closed down individuals and organizations that deign to report differently, chastising them as anti-Argentina and puppets of international governments hell-bent on undermining Argentine growth and progress.  For more on that, check out the image to the right this article, both from the economist.

 

Since 1950, Argentina has had five different currencies lasting from two years to 20 years.  In every case, inflation eroded the value of the currency until it was devalued and then replaced.  In 2001, Argentina suffered a massive financial crisis when the government froze bank accounts and devalued the pesos from 1:1 with the US Dollar to 4:1, effectively reducing the wealth held by Argentines by 75% overnight in what is known as the Corralito (small corral).  Fast forward to today and you find a people that are mistrustful of banks, mistrustful of their currency, and inclined to stash physical US Dollars in safe deposit boxes, under mattresses, and wherever else wealth can be stored out of reach of the government.  But holding dollars does not protect you from inflation.

This inflation exists in real (dollar) amounts, meaning the price increases are not offset by a devaluation of the peso.  Find someone who visited Buenos Aires in 2004 and they will regale you with tales of living like a king, feasting on steak and wine in five star restaurants, and bringing home finely crafted leather goods for a fraction of the price in the States.  Fast forward to 2012 and you’ll more likely hear tell of hotel and meal prices pushing those in New York City, and of shoddily constructed jackets and shoes that promptly fall to pieces, purchased for double what they would cost at Bloomingdale’s.

Now imagine that you are a middle-class Argentine. If you’re lucky, your wages increase annually according to the 9% figure, while your expenses, from rent to food to clothing, increase about 25 percent.  Apartment and home rental contracts are available for two years at a time, with a 20 percent increase the second year.  Put most simply, you get to enjoy a constant and steady erosion of your ability to provide for yourself and for your family and with that the constant stress of feeling insecure and powerless to maintain a standard of living.

The government has in place a complex and immense system of subsidies designed to allow citizens to maintain a certain level of well-being.  Transportation (buses, trains, and airlines), electricity, energy, fuel, and water industries are highly subsidized by the federal government, in addition to some food staples including sugar, sunflower oil, milk, wheat, corn, and soy.  Trade barriers, to be addressed next week, act as effective price controls in these and other industries.

Affordable food – nice, right? Except that inflation is caused and made worse by the government printing more and more money to cover expenses that it simply can’t afford.  Over the past few months, the government has been forced to cut subsidies in transportation, electricity, and fuel to stay afloat, a trend that I expect to continue.

I will touch on inflation in more detail in future posts. To read up on it for yourself, I highly recommend the previously mentioned article in The Economist, as well as this one, which provide a much more technical analysis than I have provided here.

Remember my abuelas and their meat price complaints?  Last week I was in the supermarket to purchase a sausage to cook for breakfast.  Two years ago it would have cost me 2 pesos (roughly 40 cents).  The butcher rung me up and informed be the price was 5 pesos.  I gave him a look of disbelief and turned to complain loudly to whoever was within earshot.  At that point a second butcher walked by and asked me in all seriousness, “Are you from here?”

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Threesome anyone? Argentina’s flirtation with dual exchange rates

Over the past week, unofficial reports from the Kirchner government have insinuated they are considering a dual exchange rate policy.

killicof and ministers

I’ve been playing with this idea for a few days – how much different than today’s parallel economy for dollars would two exchange rates actually be?

For example – currently there is the official rate (4.5 ARS/USD) and the black rate (5.8 ARS/USD as of May 21)

What would the breakdown of people who actually can buy dollars at the white rate look like? I assume its a very small set of well connected importers who have some kind of import license. Last year I met a few guys who for example do construction as contractors for the government, and at that time they made quite the profit off buying dollars at the white rate and selling them at the black rate.

If i’m correct and the majority of people with access to white rate dollars are licensed importers, would it really make that much of a difference on the street if this situation were formalized?

I think yes. I think that a large percentage of people hold on to their pesos NOT because they think the situation will improve and they will have access to the white rate at some point. They hold their pesos because they are afraid of the consequences if they are caught participating in a black market transaction.

There are rumors and fears of Argentina going the way of Venezuela – and this fear is not limited to potential countrywide economic consequences. I think there’s a real fear among many Argentines that goes beyond losing money or being reported to AFIP (Argentina’s tax agency – think the IRS with a touch of laziness and a few thuggish elements). Argentines are risk averse, and to some operating in the black market carries risks beyond potential monetary losses. It carries unacceptable potential dangers to reputation and safety and the ability to create a secure environment for your family.

Imagine if on Monday they announced that the rate for importers would be fixed at 4.5 and the rate for everyone else would float between 6 and 8 but could be traded freely. I’m quite sure that even with the peso trading at 8 to the dollar, there would still be considerable demand from Argentines loathe to hold the peso. That extra 2 pesos per dollar would be an acceptable price to pay to remove the risk of operating illegally.

AFIP agents close an informal exchange house

With that hypothetical situation in mind, and acknowledging that there is currently an informal dual exchange rate, I highly doubt the government would put in place an official dual exchange rate. Firstly, Venezuela’s flirtation with dual rates barely lasted one year and did nothing to curb the black market rate that still exceeded the official unfavorable rate. Secondly, dual exchange rates provide the textbook example for rent seeking, whereby those with the ability to trade that the favorable rate exploit the difference by selling at the unfavorable and buying at the favorable. That already occurs, and would become more easy to accomplish in the event of official dual rates.

Finally, the cost of attempting to implement and enforce this system would vastly outweigh any benefits the Kirchner administration would gain. Cristina Kirchner has put in place expensive policies that do not bring monetary benefits, but they serve to bolster and strengthen public support and political popularity. A system that gives IMPORTERS a benefit over workers would be politically unpopular, expensive to administer, and ultimately useless in stemming the flow of dollars from the country.

In short, I do not see this as a likely policy choice for Cristina any time in the near future. My guess is she would rather let the peso depreciate and pay some form of subsidy to importers of critical materials. This would have the same final effect without the negative consequences.

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