Caves, Blue Dollars, and Little Trees: Navigating Argentine Macroeconomics
Disclaimer: all exchanges, persons, and gratuitous description are assumed fictional.
“There are four kinds of countries in the world: developed countries, developing countries, Japan, and Argentina”- Simon Kuznets
11 AM, Florida Street, Buenos Aires. You brush past throngs of tourists, foreigners, and Argentines as you hear that omnipresent shout, “¡CAMBIO!” These are the arbolitos (little trees), black-market workers who stand in the middle of one of Buenos Aires’s most popular streets to entice you to break the law. You carefully examine each one, hoping to avoid the threat of false bills. One points at you aggressively, so he’s out. One of the few female arbolitos catches your eye, but you keep walking. You recognize the thirty-something man in the pink shirt your friend mentioned and ask him his rate. 15.3 pesos per dollar is a bit better than usual, so you follow him into a run-down mall, towards the back, into a dubious at best “travel agency.” This false-fronted currency exchange is known as a cueva, or cave. You hand the man a $100 bill as he asks you whether you think the dollar will rise or fall. You shrug as you accept your almost wallet-breaking stack of cash. The watermarks are there, so you grab an empanada and continue on your way.
Argentina, once one of the ten most prosperous nations, finds its economic potential stymied by the combination of one of the world’s highest inflation rates and government disregard. Although the government has estimated inflation between 5-11% since 2007, outside estimates peg it at 40% per year. Unions, when negotiating with the Argentine government, have used figures significantly higher than the official rate when negotiating cost of living increases. More gallingly, Argentine economists have been threatened with prosecution if they publish their own inflation figures. Inflation reduces the amount of debt held by governments denominated in their own currency, a fiscal solution often more politically feasible than tax increases or spending cuts. Because not all workers can insure that their wages increase correspondingly, inflation is known as ‘the ugliest tax’. Argentina has faced a turbulent economic history since the Great Depression, so Argentines’ first instinct when inflation increases is to buy dollars. In response, the Argentine government has imposed capital controls, limiting the amount of dollars citizens can hold, as well as how many they can take out of the country. In addition, the government has fixed the value of the peso to above market value. There are, rather amazingly, eight (or more) exchange rates for the peso. For the sake of simplicity, we’ll focus on two. Whereas one US dollar is the equivalent of about nine Argentine pesos at the official rate, the market value is one dollar to a little more than fifteen pesos (at time of writing). This unofficial rate is known as the “dólar blue.” Argentines value the dollar above its official rate in part as a hedge against inflation. In fact, it is estimated that Argentina holds $50 billion or more, about 1 in every 15 dollars in circulation.
Although tourists enjoy the unofficial, or “blue” rate, inflation and currency controls make life difficult for Argentines who earn income in pesos. The government restricts imports in an attempt to tamp down demand for foreign currency. This had led to shortages of goods from tampons to sunblock, but the more concerning shortages involve inputs to goods manufactured in Argentina, such as automobiles. Furthermore, the government has imposed a 35% tax on debit or credit card purchases denominated in foreign currency. The government makes purchasing from abroad even more difficult by requiring that goods purchased from international websites such as Amazon must be picked up from a customs office and a declaration form must be signed for each item. After a $25 annual limit is reached, a 50% tax is levied. As salaries fail to rise in tandem with price increases, Argentinians’ purchasing power declines monthly. The government has allowed some workers to obtain dollars for “savings.” Under the arrangement, some workers can choose to convert up to 20% of their monthly earnings into dollars, with a rate of 10.5 pesos to the dollar. If they choose to convert them into physical dollars then and there, they must pay a 20% tax. Almost all do before promptly selling the dollars for the significantly higher market value. Although this may seem like a benevolent gesture by the government, it’s a calculated move. By increasing the amount of dollars in circulation, the price of the blue dollar falls, and the gap between the official and “parallel” rates decreases.
Inflation of this kind is quite rare in the modern world. Most governments understand what causes inflation, why high inflation is a problem, and how to remedy the issue. When the prices of goods and services rise faster than citizens’ income, purchasing power diminishes. Inflation may be caused by a supply shock, such as an increase in global oil prices, but typically occurs when a government prints too much money too quickly. A case of inflation that is sufficiently severe and long lasting decreases a nation’s standard of living. Argentina represents an intermediate case of inflation. The U.S. and most of the developed world experiences 1-2% inflation annually— which is far from a threat to macroeconomic stability. Countries such as Zimbabwe in 2008, Yugoslavia in 1994, and the Weimar Republic in 1923 have all suffered from hyperinflation, in which monthly inflation has reached 10,000% or even higher. Hyperinflation wipes out savings, causes political radicalization, and generally upends order. This is thankfully not the case in Argentina in 2015. The consequences of Argentine inflation include reduced purchasing power, reduced attractiveness to foreign investors, and intrusive measures to manage flows of foreign goods and currency.
Inflation continues in part because the current President, Cristina Fernández de Kirchner, has little time left in her tenure. With elections in October, she has no incentive to change policy. Her preferred successor, Daniel Scioli, is seen as more business-friendly for a populist-left candidate. Scioli’s main rival, Mauricio Macri, has sternly criticized the Kirchner administration and has pledged to make data transparency a priority. Macri’s other economic positions include: an abrupt devaluation of the peso to market level, gradual containment of inflation, repayment to “holdout” creditors, and reduced distortion of relative prices. Scioli, on the other hand, plans to largely continue the path set by the Kirchners.
Although Argentina’s peculiar macroeconomic situation makes the country an enticing destination for foreigners with dollars (or euros, reales, etc.), the government’s capital controls and inflation rate among the world’s five highest, make life difficult for the average Argentine. Argentina’s economy can be difficult to understand, and this is without touching on Argentina’s decline from one of the ten wealthiest countries at the beginning of the 20th century, the great Buenos Aires coin shortage, or the time a New York-based hedge fund seized a flagship of the Argentine Navy. The upcoming elections will determine whether significant change will come to the Argentine economy. With a more prudent and farsighted economic policy, perhaps Argentina can fulfill the promise of its grand operas, theaters, and civic centers, rather than its present reality of chalkboard menus and barely hidden cuevas.