Observatorio Argentino 34: What is the opposite of blue?

The “blue market” was the name for the Argentine black market for dollars under President Cristina Fernández. It was called that because the blue marketeers used a blue marker to test whether U.S. $100-bills were counterfeit. On December 15, 2016, President Macri abolished exchange controls, letting the official rate crash, and supposedly ending the blue market.

Only, to my surprise, it turns out that there is still a blue market! The “official” rate right now is 15.6 pesos, while the blue rate is 16.0. That is not a big gap, but why is there a blue market at all? Who is changing money in this blue market?

Nobody seems to know. But the best guess is tax avoidance: people paying extra to avoid having to declare their dollars. I can understand that, but why then isn’t there a blue market in Mexico or Chile? Any explanations?

Comments

[J.H.]

I can imagine 3 factors:

1. Tax evasion (as opposed to tax avoidance). Changing on the blue market removes any uncomfortable questions as to where all your money (be it US dollars or Argentinian pesos) comes from. This hold true even when the blue rate was actually less than the bank rate at one point in 2016 apparently (see here: http://www.thebubble.com/why-is-argentinas-blue-dollar-so-expensive/)

2. Latent distrust of officialdom - the original blue market originated in 2002 didn't it? After the end of the fixed exchange rate, pesification of deposits, etc? In that case I could see why some Argentines would pay a little more to have US dollars in hand instead of in a bank account and to have these US dollars not known to the authorities in any way.

3. Tourists. As a tourist, it makes more sense for me to get 16 pesos per US dollar than to get 15.6 pesos per US dollar. It increases my spending power in pesos while I'm in the country. (for example see here: https://thebluemarket.wordpress.com/)

In essence, the blue market developed because of the messy default and devaluation of the Argentine peso and after it developed it seemed it retained a usefulness (for tourists and tax evaders) outside of it's original purpose.

I suppose the same hasn't happened in Mexico or Chile because the official exchange rate is market determined already.

Mexico's crisis in 1994-1995 led to a floating exchange rate, but didn't involve the government converting US dollar accounts into Mexican peso accounts if I am not mistaken. So Mexico allowed a market determined exchange rate without making citizens distrustful of actually using the banks when it came to US dollars.

Chile on the other hand had a fixed rate or a fixed band system in place until 1999 (floating within a band from 1974-1979 and 1984-1999, fixed fully 1979-1982 devalued 1982-1984). When Chile floated it in 1999 they also didn't seize citizens US dollar assets in the banks (which is what Argentina essentially did) and so again, most persons have no reason to be distrustful of banks when it comes to US dollars.

So the blue market developed in Argentina out of distrust and then became a useful vehicle for those who needed to evade taxes or wanted more spending power temporarily (tourists). Hard to imagine a black market for US dollars developing in Mexico or Chile solely for tax evaders/criminals and tourists alone. They might be enough to sustain it, but probably not to establish it.

[Noel Maurer]

Path dependency! That explanation makes a lot of sense. Thank you!