OK VisualPolitik fans, I’m going to start by setting you a challenge,
pay attention to the following data. Imagine that there is a country with
inflation above 50% every year, where almost half of the population lives in poverty,
a country with very few quality jobs and a chronic shortage of foreign currency and investment.
A country that has been experiencing a situation of almost constant economic, political and social
crisis for decades and that has fallen far behind in terms of productive technology.
Come on, things cannot continue like this, they are facing an unsustainable scenario.
A situation in which it’s time to sit down and make decisions.
The question is, if you were in charge, what decisions would you make?
Well, I am sure that with so many internal problems, one of the solutions that many
of you would put forward would be: this country must clearly turn to foreign trade.
After all, this would allow it to earn a lot of foreign currency, create new jobs,
attract new investments, acquire new technologies, new markets and a long list of other benefits.
We are talking about a formula that has been used by many governments around the world,
from Spain to Japan, Poland, China and Singapore. However, VisualPolitik viewers, there is a country
with many, many, many more problems than those we have described in this video,
in which the term “international trade” is treated almost like heresy.
Of course, I am referring to Argentina. A country that seems to be allergic to the outside world.
But why is Argentina so hostile to foreign trade, what are the obstacles? How could the
land of tango and barbecues convert foreign trade into an enormous source of wealth?
In this video we are going to answer all these questions, but first,
first we have to see where it all started. Listen up.
(FROM GLOBALIZATION TO ISOLATION) Argentina was a sparsely populated
and impoverished country until the 19th century, when an enormous social and economic change took
place. The country opened up to the world and millions of immigrants and investments began
to arrive, allowing the great expansion of the Humid Pampas to be put to work.
And so, little by little, Argentina became the "granary of the world"
and also one of the most prosperous countries on earth. The railroads
transported to the ports of Rosario and Buenos Aires the produce of the
countryside obtained through the hard work of the European immigrants who had arrived
in the country in search of fortune. In this way cities grew, investments
accumulated and the country had its own version of the American dream.
However, everything began to change when the Great Crash broke out in 1929.
A crisis that originated in the United States but soon spread to the rest of the world.
Argentina was no exception. From that moment on, many pointed to international trade,
open borders and the gold standard as the key ingredients of the crisis.
This provoked a huge wave of nationalism, interventionism
and protectionism in world politics. And do you know what? Argentina was
an outstanding student in this field. The economic liberalism and agro-export
economy that had characterized the gaucho country up until then were considered an outdated model.
The majority opinion began to lean towards the country
focusing on carrying out a process of internal industrialization that would
allow it to succeed independently of the fluctuations of the international economy.
These ideas were consolidated with the outbreak of the Second World War and particularly with the
coming to power of Juan Domingo Perón in 1946. From that moment on, the country would gradually
cut itself off from the global economy following the so-called Import Substitution Policy. A type
of policy that reached its peak in the 1970s. In fact, one of the books that has most influenced
Argentine economists is the work entitled "vivir con lo nuestro" (living with what is ours),
published in the early 1980s by the so-called Argentine Paul Krugman, that is, Aldo Ferrer.
"Living with what's ours". I don't know, I don't think it needs much of an explanation.
The fact is that, apart from the brief interval of Menem's presidency,
which by the way, we’ve already covered here on VisualPolitik,
Argentine politicians have worked hard to isolate the country from the world.
Well, the exception is if we’re talking about the International Monetary Fund
dollars. In that case, you know that Argentine politicians always put their
hand out first and then when it is time to pay, come up with a million excuses.
Argentina, far from promoting exports, has raised all kinds of barriers to foreign trade.
This is a completely paradigmatic case in international politics.
And, take note, because we are talking about a task that politicians have taken
very, very seriously. Even when the results have been calamitous,
not only have they not changed course, but they have stepped on the accelerator.
And do you know what? That is precisely what the current president, Alberto Fernandez,
is doing. Listen up.
(IN SEARCH OF THE DOLLAR) The most surprising aspect of
the Argentine case is not that politicians have become obsessed with hindering imports
with the excuse of promoting domestic industry and avoiding the loss of foreign currency.
After all, that is something that many other governments around the world have done.
And that, by the way, always ends badly. Among other reasons because competition and the use
of cheaper or more technologically advanced inputs are harmed, while captive markets are generated.
No, the most striking thing about the Argentine case is that a country in desperate
need of dollars punishes its own exports. Yes, yes, that’s what I said. The Argentine
government just keeps hindering foreign transactions, both buying and selling.
Basically, if you are an Argentine businessperson and you want to trade with foreign countries,
you are treated suspiciously. Now, the question is, how exactly does the
State do it? What mechanisms does the Argentine government use to torpedo international trade?
Well, you see, currently the first factor is capital controls.
That is, in the rules that the government has set for Argentines who want to buy,
sell and move dollars, which, as you all know, is the reference currency for world trade.
These controls have led to two exchange rates in the Gaucho country:
On the one hand, there is the official exchange rate, which at the time of
making this video was about 104 pesos per dollar, and on the other hand we have the
free exchange rate in the informal market, better known as the Blue Dollar exchange rate,
where, to give you an idea, the dollar costs twice as much: about 220 pesos per dollar.
Of course, all banking operations are carried out taking into account the official dollar,
which, as we are about to see, is not so easy to obtain.
But, let's start by looking at what happens with purchases, that is imports.
Any company, large, medium or small, that needs to import products from abroad must
face a long labyrinth of paperwork and forms that will make it very difficult to
obtain the foreign currency it needs. You see, in order to import products,
companies have to obtain an LNA; a non-automatic Import license.
These are licenses granted by the Argentine State in a totally discretionary manner.
In other words, getting one will depend on whether the official on
duty considers that your request to buy abroad makes sense or not.
And so, the interested parties are obliged to explain why and for what
purpose they want the foreign currency, request it well in advance and pray that
the official in charge of the case will listen to their prayers and grant them the license.
If not... tough luck. You’re basically screwed.
In this way the Argentine government controls the volume of imports entering the country. And if
suddenly the foreign exchange of the central bank is reduced very fast... the faucet is closed and
many more licenses than usual are rejected. Although this, of course, means a very harsh
punishment for local companies that, overnight, may face the inability to
obtain raw materials or products from abroad that are necessary for their activity.
Bad luck. This explains why in Argentina it is common for companies to face recurring shortages
of materials which, for example, may prevent them from improving production or repairing a machine.
So you see, the official dollar in Argentina is cheap but it comes with a catch.
But wait a minute, if you get along well with the government... Voilà, you can have an inexhaustible
source of wealth. Why?
Well, because by setting an official rate that has nothing to do with the market rate,
what the government is doing is basically subsidizing your purchases
abroad. But I repeat, only as long as you have their blessing.
Yes, I know, it's an awful system. OK so, this is true for imports,
but what about exports and foreign sales? Well, VisualPolitik fans, if you export a
product and you get dollars, the government is going to forcefully convert them into pesos...
At the official exchange rate, of course. That is, at 104 pesos per dollar and not
at 220, which was the price of the blue dollar at the time of making this video.
The problem is that Argentina's economy, in the face of the peso disaster,
is largely dollarized. And so, the costs of companies are determined in many cases by
the exchange rate of the blue dollar. To put it another way, when a company
decides to export its production, what it will receive are pesos at an exchange rate that is
half of what the dollars that the government takes away from it are worth in the market.
Remember that when an Argentine company wants to import something, it benefits
from the cheap dollar, the problem is that in addition to having to pay a lot of tariffs,
it is not guaranteed to have access to dollars.
And when you want to export, well, you end up only getting half.
Crazy. This – in addition to taxes,
labor regulations and, well, all kinds of obstacles in the country – explains why,
despite Argentina's low wage costs, there are practically no multinationals willing
to invest in the country to produce there and then sell to the rest of the world.
Because, of course, given such an environment, who would do it?
But, take note, because this is not the end of the story.
Since these types of policies have destroyed its industrial sector,
Argentina is mainly characterized by the export of agri-food products, such as meat,
cereals and flour. These products are also consumed by Argentines themselves.
In order to prevent foreign buyers from competing with local consumers, Argentine
companies face maximum export quotas. In other words, the government forces companies to sell a
considerable part of their production on the local market, at prices set by the government itself.
This may all seem very nice, very considerate. The problem, VisualPolitik fans, is that it
reduces foreign exchange inflows, wages and investment in increasing productive
capacity. The end result is bad for everyone. But there’s even more. For the last 20 years,
Argentina's star export has been soybeans. A product that is devoured in China but
barely consumed locally. So here the export quota is meaningless.
Now, did you think this was going to stop the gaucho politicians? Well...
If so, you are very much mistaken. Soybean producers can export as much soybeans
as they want... But in return they pay an additional tax, an extraordinary tax.
While the blue dollar, which is the free dollar, trades at around 220 pesos,
soybean exporters barely receive 70 pesos for each dollar they export. This is because
the government first converts the dollars into pesos at the official exchange rate,
and then imposes an additional tax of 33%. From 220 to 70 pesos per dollar exported.
And take a deep breath, we're not done yet. As if all this were not enough, the government
keeps approving new barriers to make it increasingly difficult to sell abroad.
For example, agro-exporters must be registered in the so-called
"Registry of Operators in the Agri-food chain".
Something that forces them to deal with a lot of paperwork.
For example, they have to make statements about the sales they plan to make in the coming year,
submit financial information to prove they are solvent, report in detail on
their employees and the salaries they pay, verify that the companies they interact with
also comply with the Argentine government's requirements, and so on and so forth.
In short: A complete nightmare.
And there’s even more. Once it has dealt with the government,
any company that wants to export has to deal with the control of two powerful unions:
that of the truck drivers, led by the Moyano clan, and that of the port employees.
Suffice it to say that the intervention of these
unions makes transportation in Argentina particularly expensive, competition limited,
and schedules and service a disaster. And if, on top of that, you don't get
along with the unions or don't pay them the dues they demand, forget about it,
because they will probably stop the shipment and you won't be able to do anything with it.
And these are just a few examples of what day-to-day life is like. Because yes,
being an exporter in Argentina is
almost an impossible mission. And the data corroborates this:
Argentina's economy is one of the most closed to international trade in the world. It’s a country
that has decided to do exactly the opposite of what the most prosperous countries have done.
Exactly the opposite strategy to the one that once made this country one of the richest in the world.
But having reached this point, it's your turn: With all these obstacles,
would you consider investing in Argentina? What do you think explains
the great obsession against foreign trade? Leave us your comments below.
And now if you found this video interesting don't forget to like and subscribe to VisualPolitik.
All the best and see you next time.