Longtime watchers of Argentina have seen this movie before: in the aftermath of a mighty economic crash, an Argentine government embraces an unorthodox set of economic polices. For a time, they work—partly because the crash was so huge that some kind of recovery was inevitable and partly because Argentina’s rich natural resource endowment (fertile soil, oil and natural gas) keeps producing year after year.
As the recovery gains momentum, Argentines start to claim that they have beaten the odds; their new unconventional program will work for the long term. Foreign investors (and a new one moves in every minute) forget that for generations foreign investors have been losing money in the periodic meltdowns and serial repudiations that mark Argentine financial history. Argentine assets are undervalued; growth looks good. And there is all that wheat, beef, wine, fruit, oil and gas. They plunge back in, and the cycle gets another kick forward.
But the cycle always starts to turn. Smart, rich Argentines recognize the signs faster than anybody else; they have mastered the art of moving money out of the country for the crashes, buying again at the new bottom, riding the cycle up to the peak and bailing once again. The survivors are good at this; those who aren’t good, don’t survive.
As the cycle edges toward the next turn, for a while incoming foreign capital offsets the outflowing domestic money. But the cracks in the floor keep widening; the government has to resort to increasingly unscrupulous and bizarre methods of bridging various funding gaps. Pension funds get nationalized; funny things start happening at banks; strange regulations and court decisions pop up, almost all tending to the erosion of the rights of investors, especially foreign investors.
Argentina’s political cycles tend to move with its economic gyrations. Governments are wildly popular on the up side; hated and sometimes overthrown when things go down. As the cycle begins to turn, governments can feel their popularity start to wane. At this point, one often invokes the Malvinas—Argentina’s claim to the Falkland Islands is dusted off and made the subject of a huge national campaign.
There are many signs today pointing to a turn in the perennial Argentine cycle of boom, theft and bust. While the Falklands noise machines are being cranked up to full volume, foreign companies are discovering that their claims to oil fields they thought they had leased aren’t quite as secure as they—and their stockholders—thought.
Faced with poor government finances and a worsening outlook, Argentina is back to the only sport in the country more popular than soccer: the manly and time honored game of stripping the foreign fool. In the past, American bankers and European bondholders have learned what it’s like to play patsy with Argentina; this time the fool is Spanish, and this time the target is oil.
It begins, as usual, with market chicanery. Horrified by the specter of inflation, Argentina’s Pink House issued a decree: domestic energy prices will stay low regardless of what those lying foreign oil markets say prices should be. Amazingly, fuel shortages began to pop up. Oil and gas production fell, and the country began to have to import energy from abroad.
Obviously this is the fault of the evil, bloodsucking Spanish oil magnates who unpatriotically refuse to sell oil at submarket prices in order to spare a noble populist government the embarrassment of having to admit its policies are junk and that it is out of its depth.
Bad oil company! Bad oil company! YPF’s concessions in the province of Chubut have suddenly disappeared. They will soon be sold once again—if the Argentines can find somebody with a lot of money who doesn’t know much about Argentine history. Other provinces are expect to follow suit; the concessions must be taken from the wicked oil company which has already paid Argentina lots of money, and sold to another company for another fee.
The country’s energy secretary was perhaps more accurate than he knew when he said of the decision that “This is not a caprice, but the defense of the province’s economic activity.” He is right; playing fast and loose with the rights of foreign investors isn’t a caprice in Argentina. It’s a tradition.
In fairness, many countries have grown rich by fleecing silly foreigners: the United States is one of them. Ripping off British investors in our tumultuous 19th-century financial markets was a lot of fun for all concerned; even the British must have enjoyed it because they kept coming back for more. But in general the investors were ripped off by skilled stock market operators and clever business titans; the national government didn’t routinely and periodically jump in to take the foreigners’ money away.
YPF has vowed to take the fight to courts, and Via Meadia hopes the country’s judicial system will produce a ruling that “is not a caprice.” We hope, but we do not hold our breath. Argentina remains Exhibit A for the ability of a country endowed by Nature and Nature’s God with every possible blessing and bounty to fritter its potential away and frustrate the hopes of rising generations because of the deep hold that bad ideas have on so much of the public.
There is nothing to be done about any of this. Argentina has the right to ruin its own happiness as often and as long as it chooses, and at this point anyone who invests in the country really has no one to blame but him or herself. As Henry Kissinger once pointed out, its strategic significance is not particularly great; it is “a dagger aimed at the heart of Antarctica.”
But if you want to understand why some places with few or no natural resources have become very rich (think of Switzerland, Singapore, Hong Kong, Japan) while others, seemingly blessed with everything you could want, never quite realize their potential, study Argentina. It is one of the most interesting cases of culturally induced economic failure that we see on the world stage.