I have a huge backlog of Argentina posts. Life and work kept me from posting most of them. I will start to try to rectify that.
I earlier mentioned my first contact with Argentina’s exchange controls, in May 2012, when I saw a Brazilian couple stopped by police and arrested on Calle Florida.
In May 2012, the breach between the blue market rate and the official rate was not serious. It was still reasonable for a tourist to avoid the hassle. The business pages had stories about companies that were having problems with a lack of dollars, but nothing particularly serious and nothing that would affect day-to-day life.
By June 2013, the gap had become more serious. No tourist in their right mind would buy pesos at the official rate. For the rest of the economy, the economic effects were relatively small but beginning to be felt. Imagine, for example, that you were an Argentine manufacturer. Some of your inputs are imported. If you wanted to import them at the official exchange rate, then you would have to apply to the central bank. The red tape was increasingly onerous. (The negative effect of the controls on trade is part of Argentina’s ever-worsening beef with Uruguay. They have also brought down a host of WTO suits.)
It was possible for firms to work around the controls, but that was costly. There were two varieties of workaround. The first was to buy or contract with an export business which would earn dollars outside Argentina. Those dollars could then be used to purchase imported inputs. Pirelli, for example, makes tires in Argentina. It partnered with a honey exporting business in order to meet its import bills. As you can imagine, the honey exporters did not provide this service for free.
The second workaround involved the blue-chip swap market, in which a company would buy foreign securities with pesos and then sell those securities for dollars. That market, however, was costly to access ... after all, you had to convince somebody who owned foreign securities to sell them to you for pesos. They would not do so at the official rate.
Still, as late as last summer, the controls were more of an annoyance than a disaster. Companies that needed to import could do so, even if they needed to pay extra for the dollars and their shipments took forever to get through customs. Moreover, many imported inputs could be swapped out for local substitutes. Inasmuch as the Argentine authorities wanted to promote self-sufficiency, the implicit trade restrictions were a feature, not a bug.
There were some weird effects, of course. For example, demand for high-end cars soared. The cars were imported at the official rate but sold at the blue market rate, providing an irresistible bargain for anyone who earned in dollars. (Luxury cars were also considered an inflation hedge, but that was just people being silly.) In addition, luxury goods began to vanish, since there was no easy way to (say) replace an Ermenigildo Zegna suit with an Argentine substitute. But that was also minor: I still have two $200 local suits that I bought in Buenos Aires back in 2005. They started to generate lintballs fairly quickly, but they have not frayed. An annoyance, not a disaster ... and for a left-wing government you could even call the disappearance of imported luxury items an additional bonus.
The problem is that the macroeconomic imbalances have continued to worsen. The costs of getting dollars (or clearing customs) have gone higher and higher.
And so, since it turns out that Argentine-sold ketchup is actually made in Chile ... McDonalds has just run out of the red stuff.
OK, that is minor, and an Argentine substitute will be found pretty easily. But these sorts of problems are starting to pile up. At the limit, you make imports impossible and wind up with Venezuelan-style shortages, only without a giant oil export machine to cushion things.
Argentina is not Venezuela. The policy is fast-approaching its breaking point. The government is terrified of an inflationary spike, but there are worse things. (Like fuel shortages.) The recent liberalization is going to continue. Soon enough Argentina will be a normal high-inflation country, rather than an odd throwback to the 1970s. The liberalization will not be easy (the government needs the dollars to pay debts!) but the alternative is politically worse.
Either that or they will have to figure out how to make do without imports.
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