Argentina - The Road to Tomorrow – Part 1
After a boom and bust period of 40 years, Argentina today faces a new challenging period under the leadership of former Boca Juniors President Mauricio Macri. Let me be VERY CLEAR on that. This is not an underdeveloped country that is growing now (case of Brazil or India), but a country that reached high levels of developments, and then stagnated taking a U-Turn.[44] There was never a 100 year period of decline, as previously “advertised” by the economist.[45] Be careful with what you read, some magazines just want to turn everyone right. As explained in the chapter “The Failure of New Liberalism – the Case of… Argentina!!!”, this was a rich country that has a fantastic period of growth and industrialization from the 1900s to the 1970s. This was a fantastic period for the country, and that is of course why the Europeans moved there (they had it much better than in Europe). A period of de-industrialization managed by puppet governments that responded to US interests from 1976 to 2001 led to the country’s worst crisis, including mankind’s largest sovereign debt default in 2001. A period of recovery followed from 2003 – 2011, were 6 million jobs were created (both public and private sectors).
Unemployment recovered from 25% to 7% (2011). However, inflation soured to average 25% from 2007 until today. Inflation has been a historical problem for the country at least since the 1960s. Every time there is a period of strong growth, inflation sours weakening the currency, which must be devaluated to keep the industry competitive. This has to do with the country’s production matrix. In order to have a strong currency, heavy industry that keeps on attracting genuine longterm capital must be developed (It was my understanding of this that lead me to be the only person on Planet Earth to predict the Norwegian oil crisis: with a low oil price the influx of permanent investment to offshore would diminish, weakening the NOK). Argentina, however, never completed industrialization. Light industry was developed (again, until the 1970s), but the country has never reached it’s full potential. This could be a good thing though, if the next government plays it’s cards well. A long term plan for industry development must be set in place, involving all the main political parties. This has been a historical mistake. A short term mentality has led to conflict between right and left, union and industry, which sometimes takes even violent proportions. Again, long term measures must be set in place to ensure the country’s sustained development, and locate itself amongst the world’s 10 most developed countries. Consider first a country segmented by region. Whereas the Buenos Aires province contains 40% of the population and produces more than 50% of the country’s GDP, the Patagonia is almost empty. In the West and Center regions quality of life is relatively high. The North West and North East region have historically been the least developed (or poorest). They are also regions that have not been so impacted by European migration, it’s population being mainly “criollos” (mix between Spanish and Indian). It is also where the most traditional and typical Argentinian traditions can be found, as well as colonial architecture.
Regional differences in GDP x capita appear astronomical.[46] Check the following chart. The City of Buenos Aires plus the Patagonian region all have a GDP x capita of over 15.000 USD. The center appears as middle income, with a GDP x capita from 5.000 to 15.000 USD. And the North is, as mentioned, the poorest, with a GDP of under 5.000 USD. The real efforts must be focused on industrializing the North then, to balance the countries’ economic structure. Even if there have always official promises about this, it never really happens.
I will now propose the 20 measures that would take the country to triple GDP in the next years, reaching the developing levels of countries like Australia and Canada (which could be most comparable):
1. Banking: - Today 50% of the economy is handled in “black”. More efforts must be made in order to move from a “cash economy” towards a banking economy, like in any other developed nation. People’s behavior must be changed as well, but generating conscience of the importance of moving towards a bank economy. Eventually and on the long term, cash should also be abolished.
2. Tax evasion: - Informal economy: 30% works in “black”. These are usually the people who are least privileged. Descendent from Bolivians or people that live in bad conditions. Everything is related, they take these jobs because they don’t have a choice. However, many efforts have been made in this direction under the Cristian Fernández de Kirchner Administration. There must also be a move towards electronic invoicing. It is very common to sell “in black”, not paying corresponding taxes. Inflated inventories and costs of goods are also very common in order to pay less earning taxes. More efforts from tax auditors must be made, and also maybe control the tax auditors themselves.
3. Attract genuine long-term investments (and not vulture funds) by developing strategic industries per region:
- A little known fact is that Argentina is actually the richest country in the world, measured in natural resource wealth per inhabitant. Some examples are:
Lithium: Argentina, Chile and Bolivia own 80% of the world’s reserves. Lithium is considered to be the future’s oil, since it is used to produce batteries.
Shale Oil and Gas: it is the 2nd largest reserve of shale gas, and 4th largest reserve shale oil in the world.
Offshore Oil: the Malvinas/Falklands region has twice the oil reserves as the Northern Sea. This has given rise to tensions between Argentina and the UK the last few years.
Wood: the Northeast has the potential to create thousands of jobs with the development of a wood industry. With a concrete long-term strategic plan, the production matrix could be diversified and the country reach the highest levels of development, the permanent influx of money strengthening the currency and ending the country’s historical inflation.
- To the previous mentioned industries (Offshore Oil, Shale Oil & Gas, Lithium, Wood), a series of concrete measure can be taken to boost industrial development region by region. For example, the North West could be a perfect place to develop an IT Tech Hub. There are more engineers than jobs available in the region and the cost of living is cheaper than in Buenos Aires. It is not all about natural resources, the country can get huge benefits from it’s well-prepared and highly qualified skilled labor.
4. Reduce government burden - This is already taking place. Thousands of people are being laid off from an inflated government sector. The government became the main employer in the last 4 years, the private sector stagnating. Also, too much paperwork and manual work makes the government extremely inefficient. To automate their administrative load would be the best way to save cost, but it would mean even more lay-offs. This is not an issue, as long as the private sector is reactivated. Then, as people are laid-off they will move towards the jobs created in the private sector. This must happen simultaneously and is very hard to accomplish. The worse scenario would be what happened in the 1990s: the public sector was reduced, but the private sector did not generate
enough jobs to balance. The result was unemployment and the ring effect this produced in the economy as a whole.
5. Reduce Welfare burden - Cristina Kirchner’s Administration reintroduced many of the disappeared welfare state measures. This was very good for the poor people, who regained many of their rights. The challenge now is to move that large amount of people that are living on welfare towards the job market. Social exclusion, discrimination and racism will be an issue the government will have to tackle diligently.
6. Reduce Tax burden - As explained before, due to cultural implicancies the people of Argentina do not tolerate a heavy tax burden. When this happens, they begin to cheat. Lowering the tax burden, but also making the tax system more simple will help drive the industry. The tax system is today extremely complex. Different regions receive different treatment, as well as different products and different services. This actually makes tax evasion easier, since it is more difficult control. Simplifying, as well as informatizing the system will actually increase government tax revenue instead of diminishing it. Tougher measures must also be taken against tax evaders to slowly change a tax evader culture.
7. Reactivate the private sector - Connected to developing strategic industries x region is the reactivation of the private sector. Only by presenting a comprehensive long-term strategic plan will the government be able to attract investment. Besides abundant natural resources, due to it’s fantastic education system the country is blessed with abundance of high skilled human resources. Software, Robotics and Telecommunications industries must be amongst the country’s top priorities. The example of the software industry shows there is brilliant people that are already on the go. Whereas the industry counted with a manpower of 20.000 people in 2003, today 120.000 people work in the industry with a growth pace of 20% a year.
8. Protect (and eventually nationalize) national resources - One of the biggest challenges the South American region has historically faced has been the privatization of it’s natural resources to foreign corporate interests. In order to attract investments to an otherwise not so attractive region, political leaders have comprised (most of the times getting a very large commission or chunk on their own.). Bolivia has grown exponentially
since the government took control of it’s massive gas resources. In the case of Argentina, the Shale revolution has been handled excellently, by taking control of the privatized state Oil company (YPF), and keeping a 51% interest. The rest is privatized, keeping private management (in a mixed model similar to Brazilian Petrobras or Norwegian Statoil). What will happen to lithium though? Will it be 100% privatized or will a state owned company take majority control? And what about future natural resources? Energy, and transport, should never be left to private players since they are key drivers to any economy.
9. Develop a national train and fluvial system - The train helped the country’s development in the beginning of the 1900s. However, this was dismantled under the last dictatorship (1976 – 1983). The result was the emergence of the “truck driver” union, which is in my opinion one of the main reasons for the country’s continuous inflation. It is today more expensive to send goods inland by truck than to bring them by skip from China. Truck drivers, of course, have it very well in Argentina: they have great salaries and benefits. The re-establishment of a country wide train and fluvial system would help to bring down costs and lower inflation, making the industry more competitive (to the detriment of the unfortunate truck drivers, but that’s life).
10. Discuss salary increases based on productivity - A big historical mistake is that salaries follow inflation. The reason for inflation is cultural: due to historical economic instability, companies don’t invest for the long term. When a generous business cycle boosts demands, the offer should be increased to match it. Since it is never clear if the upward cycle will be long, business people prefer to capture the surplus by raising prices. Companies charge more for products and in turn employees ask for more salaries. This pushes companies costs, which in turn transfer the cost to price. In the long term, everyone loses: as businesses lose competitiveness currency must be devalued, generating even more uncertainty. By discussing salaries based not on cost of living, but on productivity, employees could get salary raises without impacting the company’s earning structure. Meaning, the employee earns more (which has an impact on costs), but the company produces more than the cost increase, resulting on the earnings rising. It has been discussed to move to such a type of model, including earnings distribution amongst employees, but so far nothing is resolved.
http://www.economist.com/blogs/economist-explains/2016/03/economist-explains-1
http://www.economist.com/news/briefing/21596582-one-hundred-years-ago-argentina-wasfuture-what-went-wrong-century-decline
https://en.wikipedia.org/wiki/List_of_Argentine_provinces_by_gross_regional_product
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