Argentina strikes again

This time the Peronist government has decided to nationalize YPF, the country's leading oil producer.  Repsol, a Spanish company, had majority control; Spain has retaliated by cutting off imports of Argentine biodiesel.  Spain is also asking other European Union countries to remove preferential trade treatment for Argentina.

Why is Argentina doing this?  It depends on who you ask.  The move is very popular in Argentina, which claims Repsol had cut back investment and was recycling record profits to largely Spanish shareholders and executives.  In the short term the deal may make economic sense for the Argentines as well, especially if they can get away buying YPF at a price well below market value.  The other side of the coin: Repsol was probably wise to avoid new investments, given the state of property rights in Argentina.
 
Longer term we could very well see more nationalizations and will certainly see sharply diminished foreign investment in Argentina.  The Argentine government will use its ownership position to provide patronage jobs to its supporters. 

NYT op-ed: US should mimic Argentine economic policy

So says Ian Mount, a freelance journalist with two degrees in English who has a forthcoming book about making malbec and was able to convince the NYT editors that he was a serious person.  Mount argues that because the Argentine economy has been growing rapidly since 2002, other countries should take a serious look at its policies.  The two most recent Argentine presidents (the late Nestor Kirchner and his wife Christina) raised taxes (especially on agricultural exports) and then overspent the proceeds on a wide range of government programs.

Mount ignores three inconvenient truths.  First, the World Bank statistics do show a remarkable turnaround in recent years as Argentine GDP per capita rose from $2708 in 2002 to $7626 in 2009.  He perhaps is not aware of the fact that Argentina still has not caught up to its standard of living in 1998 when GDP per capita was $8279.  In other words, living standards in Argentina have improved over the last 10 years but they have fallen since 1996. 

Second, ever since the days of Juan and Eva Person, Argentina has had a cycle of booms driven by expanded government activity funded by debt followed by devastating busts.  The current boom is being driven by exports and government spending funded through printing money.  The chickens will come home to roost again; the only question is what will happen first -- a drop in commodity prices or inflation rates topping 50%.

Third, and most importantly, Argentine economic growth has been abysmal.  In 1900 Argentina had a standard of living close to that of the US, it has since fallen very very far behind.  The real Latin American success stories are Brazil and Chile, both of which lagged significantly behind Argentina until the mid 1970s.  Chile adopted free market economic policies at that time and caught up with Argentina by 1989 and surged ahead since 2000.  Brazil became more market-oriented as well in the 1990s (although not as much as Chile), caught up with Argentina in 2002 and was 8% ahead in GDP per capita in 2009. 

Hard to see how we can learn much about economics from a country that jails its own economists who dare tell the truth.

Cry for Argentina's economists

Argentina has an inflation problem.  Economists and business experts recognize that inflation, if measured using standard techniques, is well above 20%.  The Argentine government (which stands for election this year) is not comfortable with this fact.  The official agency in charge of inflation statistics has been politicized since 2007; the official statistics claim the inflation rate is "only" 10%. 

Last week WSJ reported that the situation has escalated.  The Argentine government brought charges against consulting firm MyS Consultores for "publishing false information about inflation data;" jail sentences could result.  At least nine other firms already have been fined $122k each for publishing their own (presumably more accurate) inflation data. What makes the situation even more bizarre is that some Argentine provinces publish their own inflation data and their numbers also cluster in the 20% plus range. 

The fines and prosecutions presumably are intended to discourage honest reporting of inflation in the months before the October election.  I never thought that the basic calculations of inflation that all students of economics master in their first course could result in a fine or jail term.

Why the euro's days may be numbered

My former professor Marty Feldstein has a great column in the Weekly Standard about the euro.  He does a good job of explaining why the euro was always bound to cause trouble.  One of the key reasons: all euro-adopting nations have to have the same monetary policy and the same exchange rate, even though all nations have their own unique economic situation.  Nations with budget deficits and high unemployment are locked into the same monetary and exchange rate policy as those with budget surpluses and low unemployment.  Of course the US has the same issue with the dollar -- all 50 states and D.C. must have the same monetary and exchange rate policy too.  But Feldstein points out that the US gets around this issue because of greater wage flexibility and higher labor mobility than Europe.  Also each US state, unlike Greece, must have a balanced budget each year. 

What does the future hold?  Severe economic retrenchment may or may not happen in Greece.  It remains to be seen whether that country will be able to balance its budget and grow economically.  This is not so much an economic problem as a political one.  The government that adopts the economic policies that Greece needs to return to good standing in the euro-zone runs the risk of being quickly voted out of office and replaced by a populist regime supported by unions and government employees.  Such a government might instead decide to default on its bond obligations and issue a new currency that effectively lowers Greek purchasing power by a substantial amount.  The Argentines did the same thing in 2002.

Argentina Chile study tour day four

Wednesday March 17 2010

Today we visited the Standard Bank Foundation and learned all about trade issues from the perspective of Felix Pena, a lawyer who had headed the Argentine delegation in various trade negotiations. We reviewed a lot of facts and charts about imports and exports (Argentina exports a lot of beef -- it would export more if it did not tax beef exports) and then had a great discussion about trade policy. We learned that Argentina's priorities for the coming years are to promote the Doha Round of tariff reductions (especially regarding agricultural issues), build stronger ties through Mercosur (Southern Cone trading bloc that also includes Brazil, Paraguay and Uruguay) and initiate discussions between Mercosur and the EU.

In the afternoon we had to say goodbye to our wonderful Argentine guide Shirly Kalush (pictured here) and headed off to Santiago Chile. Chile's economy is heavily dependent on agriculture. To keep pests and diseases away, all incoming passenger luggage is screened. A few of us had close calls with those apples from the breakfast buffet that we had stowed away for a late afternoon snack.

As one might expect, everyone is Irish today and most students sought out Irish pubs in Santiago. It was my birthday, made extra special because of a card from the students and their gift of a Maradona soccer shirt.

Argentina Chile study tour day three

Tuesday March 16 2010

This morning was the academic high point of our visit in Argentina when we visited the Metro-politan Design Center. The Center acts as an incubator for dozens of startups; it also houses the Buenos Aires Fashion Bureau and a research center on design and innovation (which makes it a natural partner for NC State given our university's focus in these areas, especially in the Colleges of Design, Management and Textiles). The Center is housed in what was a seafood distribution facility in a marginal neighborhood, a mere 10 blocks from the largest shantytown in BA. Buenos Aires is one of the first four urban areas labelled as a design center by UNESCO, so the strategy is to leverage this advantage into company and job creation. (Other cities now include Berlin, Montreal, Kobe Japan, Nagoya Japan, and Shenzhen China.)

The students learned first hand from one of the companies how hard it is to get a business started in Argentina and how much harder it is to gain access to export markets. Pictured here is the owner of a slipper design and manufacturing company who sells her product in the chic Palermo neighborhood in BA (and would like to sell abroad).

In the afternoon we learned about Neoris (a spinoff of Cemex from Mexico) which is essentially the Accenture of Latin America. Neoris differentiates itself by focusing on IT deployment (versus IT strategy) and by locating offices in medium size cities that are ignored by the IBMs and Deloittes. Neoris finds Argentina an attractive market place because of the availability of skilled labor at relatively low cost, but it has concerns about political and economic stability -- a recurring theme of our visit.

In the evening most of the group headed for Cabana Las Lilas in the Puerto Madero district for one last beef throwdown.

Argentina Chile study tour day two

Monday March 15 2010

The group walked to the American Club in BA and went to the top floor, overlooking the Teatro Colon, BA's jewel of an opera house modeled after La Scala in Milan. The day began with two talks. Fernando Furci, head of international trade for the American Chamber of Commerce (and GQ model?), gave an overview of economic conditions and summarized do's and don'ts for American firms thinking about entering the market. Juan Cruz Diaz, director of Cefeidas a consulting firm, talked about how Argentine politics affect the business climate. We learned that the current president Cristina Kirchner of the Peronist party ran on a unity ticket with the leader of the Radical party as VP, but the two had a falling out on export taxes on agricultural goods (Cristina wanted higher taxes but her veep cast the tie-breaking vote in the Senate against her). Kind of like an Obama/McCain ticket. The class asked questions about the debt repudiation in 2001 and the prospects for Argentina receiving international investment in the future. Diaz concluded his talk on an optimistic note, "We are convinced the next government in 2011 will be more conciliatory toward business." To quote the Who, "We won't be fooled again!!!" I hope so.

In the afternoon we visited Craveri Laboratories, a rapidly growing contract manufacturer of various pharmaceutical products and an Argentine pioneer in Tissue Engineering. We selected Craveri because of NC State's emphasis on technology and biosciences. CEO Juan Craveri generously spent an hour telling us about Craveri and answering student questions. Craveri is making great strides in developing new products to help victims of burns, skin ulcers, and other ailments.

Fun time in the evening: a visit to El Viejo Almacen for an hour-long tango lesson, a three course dinner and a great tango show.

Argentina Chile study tour day one

Sunday March 14 2010

Last week I led a class of 15 NC State MBAs on a weeklong study abroad visit to Buenos Aires Argentina and Santiago de Chile. Never had time to blog while on the road but will try to fill in the high points now. Delta got us to BA right on time. We had the privilege of waiting in two lines: one to pay the "Reciprocity Tax" (the US charges Argentines $130 for the privilege of entering, so the Argentines decided recently to return the favor -- deadweight loss triangles were dancing in my head) and another to clear immigration. My first impression as we boarded our van -- where did all of these Renaults, Peugeots, and Citroens come from? There were more French cars on the road in BA than there were in Paris.

Sunday was designed to get everyone exposed to Argentine culture and to recover from overnight flights. We took a bus tour of the highlights of BA, including stops at Recoleta Cemetery to give out respects to Eva Peron and La Boca to soak up an array of merchants and street vendors. Most of us then went to see River Plate host Huracan in football. River Plate is, along with Boca Juniors, one of the big name teams in Argentine soccer. Their stadium seats 70K and was mostly full. The fans of the visiting team are housed in their own section surrounded by a 10' tall fence topped with barbed wire. Fans of both teams spent most of the game chanting insults at each other. After the game the River Plate fans had to stay in their section for 20 minutes to give the visitors time to escape the area. River Plate won 2-0.

Enjoyed a pizza and some malbec for dinner at Las Cuartetas, one of BA's top pizzerias. Deep dish style with lots of cheese, yummy.

Cry for Argentina

I am taking 16 NC State MBAs to Argentina and Chile later this month to learn about the different environment facing businesses in those two countries. This week's Economist magazine has an outstanding piece about Nestor and Cristina Kirchner, the husband-and-wife team that has run Argentina since 2003. Out of control spending. Corruption. Inflation. Punitive taxes and price controls. Confiscation of private pensions. Alas, Argentina has seen this play before and we all know how it will end.