Everyone remembers the horrendous, world-changing events of the morning of September 11, 2001. Everyone remembers the planes commandeered by terrorists slamming into the twin towers of the Centro Mundial de Comercio in Buenos Aires. As the richest country on earth and the modern world’s first global hyperpower, Argentina was a prime target for malcontents revolting against the might of the Western capitalist order.
Fewer recall the disaster that befell the United States of America three months later. Fewer recalls the wrenching moment when the U.S. government, crushed by the huge debts it had run up borrowing abroad in pesos, announced it was bankrupt. The economic implosion that followed, in which thousands of jobless, homeless Americans slept rough and picked through trash bins at night in New York’s Central Park, shocked only those still used to thinking of the United States as a First World country.
This piece of counterfactual history comes from the opening chapter of False Economy by the Financial Times’s Alan Beattie. It may sound far-fetched, but things could have indeed turned out this way. At the turn of the twentieth century the economies of these two countries were at a similar level.Argentina, whose name means land of silver, was the seventh richest nation on earth. Just over a century later there is enormous gap US GDP per capita is around five times larger than that of Argentina. In most rankings Argentina is around #60 in the world. Some people may not like GDP as a way of measuring an economy, but I feel it tells an eloquent story – all the resources in the world cannot compensate for gross economic mismanagement.
For economists,Argentina is indeed a perplexing country. In the 1960s the Nobel Prize–winning economist Simon Kuznets stated that there were four types of countries: the developed, the underdeveloped,Japan and Argentina. Economists have been perplexed byArgentina’s economic travails A series of corrupt, incompetent governments have wrecked the economy. They have stolen the savings from their own people. And when that has not been enough, they have gone after the foreign investors too young or too foolish to remember history.
If one man could be said to epitomise Argentina’s economic policy, it must be Juan Peron. He believed the root of Argentina’s problems was that it exported low-value commodities and imported higher-value manufactured goods. I am not completely unsympathetic to this analysis but his solution – cutting his economy off from the rest of the world – was catastrophically wrong. Argentina wanted manufacturing not to build a base to conquer export markets, like Japan and South Korea, but merely to keep out imports. And its companies were protected not only from the outside world but also from domestic competition by massive state intervention in the economy. Peron had a visceral fear of the free market, and the government was running the economy not to direct the market but to replace it. Perón regarded foreign capital as an “imperialist agent.” Alas, these populist ideas remain extremely widespread in Argentinean politics today.
Now Argentina is led by Cristina Fernandez Kirchner’s whose policies are based on price controls, protectionism, and the maintenance of inefficient, state-run companies dependent on subsidies. Inflation is one of the highest in Latin America. And the government has an imperious need for cash. Most governments requiring cash can avail themselves of the debt markets. But given its record of defaulting Argentina would have to pay punitive interest rates. As a result, it has had to look for financing internally. Four years ago the government nationalized all private pension plans. In 2010, Kirchner got hold of the central bank’s assets especially the nation’s all-important foreign currency reserves. When the head of the central bank refused to go along, he was sacked and replaced with someone more amenable. 2012 has seen the turn of YPF, Yacimientos Petrolíferos Fiscales (English: Treasury Petroleum Fields) an Argentine energy company, which was owned by Repsol Critics of the Spanish multinational accuse it of consistently failing to invest in oil and gas production, forcing Argentina to import energy to meet internal demand. Mark Weisbrot, writing in The Guardian, is typical of Kirchner’s European cheerleaders:
There are sound reasons for this move, and the government will most likely be proved right once again. Repsol, the Spanish oil company that currently owns 57% of Argentina’s YPF, hasn’t produced enough to keep up with Argentina’s rapidly growing economy. From 2004 to 2011, Argentina’s oil production has actually declined by almost 20% and gas by 13%, with YPF accounting for much of this. And the company’s proven reserves of oil and gas have also fallen substantially over the past few years.
To be honest I have no idea about the efficacy of Repsol’s management of YPF, but this is the type of economic illiteracy the Guardian specialises in. What Weisbrot conveniently fails to mention is the imposition of price controls, which have kept domestic oil, natural gas, and electricity prices lower than international prices and sometimes even below production costs. These artificially low prices, which promote massive energy consumption while at the same time discouraging investment, have had an inevitable result. Last year there was an energy deficit of more than $3 billion, and this year it is expected to double. Between 2000 and 2010 Argentine oil production fell by 22%, while demand rose by more than 40%, according to data from the Argentine Oil and Gas Institute and the Energy Ministry.
The decision to nationalise YPF was met with applause and cheers. Spain, which has plenty of problems of its own right now, will have a difficult time seeing any compensation. Repsol is expected to take Argentina to arbitration. But such cases are very long drawn-out and Argentina has a record of not paying awards against it. But what about the effects on Argentina? Just because you seize the assets doesn’t mean that the company will suddenly become a paragon of efficiency. Protecting national interests and the ordinary people has a wonderful ring to it. I fear they will achieve neither. When YPF was privatised in the 90s, WITH THE SUPPORT OF THE KIRCHNERS, it had been a badly run, money-loss-making company for decades.Argentina has a lot of potential oil resources. To extract more oil the state will need at least $6bn more than what is currently invested. Do they have that kind of capital? Will foreign investors be willing to invest when they know that they could see their assets looted in the future?
Maybe the Kirchner government will usher in a golden era for the Argentine economy, but I wouldn’t bet on it. Personally I wouldn’t trust the Kirchners and their cronies in charge of a school tuck shop. Achieving economic growth is a complicated business.South Koreais an example of a country that has been able to reinvent itself, ignoring many of the recipes of international organisations and the so-called Washington Consensus. The United States engaged in protectionism after it became independent and even now has some 12,000 tariffs in place. But the Argentine model is just not going to deliver the long-term growth, because it is based on the faulty analysis that all their problems stem from abroad.
The economic historian David Landes rather cynically described dependista theory as one of Latin America’s most successful exports. Dependency theory is the perfect way to blame your problems on others and not face up to what you are doing wrong. There is no doubt that empires have extracted wealth from the conquered peoples. Last week I blogged about the case of King Leopold of Belgium. In his book Imperialism Lenin equated where investments by industrial nations in non-industrial countries with this kind of looting. As Thomas Sowell has pointed out this is fundamental misunderstanding of reality:
Tragically, however, it is in precisely those less developed countries where little or no foreign investment has taken place that poverty is at its worst. Similarly, those poor countries with less international trade as a percentage of their national economies have usually had lower economic growth rates than poor countries where international trade plays a larger economic role. Indeed, during the decade of the 1990s, the former countries had declining economies, while those more “globalized” countries had growing economies.
Sowell argues that most American international trade and investment actually goes to high-income nations like those in Western Europe or the more prosperous Asian countries, such as Japan or Singapore. Only a minute fraction of that trade or investment goes to Africa or to the poorest regions of Asia or the Middle East. Rich individuals in poor countries often invest in richer countries, particularly the United States, where their wealth is not at risk of being confiscated. In this way poorer countries are actually helping richer industrial nations become even richer.
In Japan they rue the lost decade. The tragedy for Argentina is they have experienced more than a century of decline.