The Power and the Money

Observatorio argentino 50: Déjense de jod ...

Watching the Argentine mess is fun! These posters have recently gone up all over the capital city:

It shows Perón himself saying, “Stop fucking around. First the country, then the movement, and only then individuals.”

Right now, the issue seems to be that CFK seems willing to blow up the entire Peronist movement in order to control it. My analysis wasn’t quite right. It isn’t that she thinks she is Plutarco Calles. It’s that she thinks this is her opportunity to become Plutarco Calles. She is mounting what the British might call a parliamentary coup.

Here is what to watch for. President Fernández already seems to have agreed to let Santiago Cafiero go as chief of staff. Cafiero is the President’s right-hand-man, so that is no small olive branch to CFK. But there is also talk of letting go of some of CFK’s people, like Eduardo “Wado” de Pedro, the interior minister and a CFK loyalist. 

Watch to see what happens to Sergio Massa, the speaker of the lower house. If moves into the cabinet, then CFK has won. 

And that matters, even if the Frente loses Congress in November, simply because the Argentine president is just so damned powerful. 

Observatorio argentino 49: Post-election roundup

The left-wing ruling party in Argentina appears to be in the middle of a complete collapse.

Background

The party, called the Frente de Todos (or “Everyone Front” or “Front for All” both of which sound as clunky in English as it does in Spanish so don’t ask me to explain the name choice) is a coalition of all the old Peronist parties. Peronism is a big tent without much coherence, but it would not be inaccurate to say it is currently divided between moderates and a more radical faction led by Vice-President Cristina Fernández de Kirchner, aka “CFK.”

CFK and her followers are genuinely radical — a long time ago I met the current Governor of Buenos Aires province, Axel Kicillof. He seemed to be the real deal and I have to admit that I have some respect for the way he dealt with the country’s foreign creditors.

But CFK herself is also spectacularly corrupt. She’s under a legal cloud, protected by her position as Vice-President.

The current president, Alberto Fernández (no relation) is a moderate. Rather than fight it out with him for the nomination in the 2019 primary — and thereby risk losing, and thereby risk jail time — she joined him on the ticket as Veep.

The Election

So, as you know, the Frente got hammered in Sunday’s primary elections. The opposition held some actual primaries; the Frente for the most part did not. What the election was for the Frente was a preview of what the real election in November will look like, and it was bad.

For a good overview of the election (well, besides mine, ahem) see Maia here. I like her take on Javier Milei, a seriously batshit insane libertarian candidate for Congress. Seriously, watching the stunned look on an Argentine reporter’s face as he discovers that a woman in one of the capital’s poorest neighborhoods voted for Milei is priceless.

Votante de Javier Milei en la Villa 31 pide que se terminen los planes sociales, "le sacan al que está en blanco para darle a gente que no quiere laburar". Estamos frente a un evento histórico.pic.twitter.com/33OxJIqbth

— Pregonero 🗽 (@PregoneroL) September 15, 2021

But Milei is an aside, at least for now. The key question here is why the Frente did so badly.

For the answer to that question, you can really begin and end with Covid. Massive lockdowns failed to prevent its spread — Argentina did not become Australia. The economy failed. Then the government botched the vaccination rollout, getting into a food fight with Pfizer over legal immunity. Finally, President Fernández got into some Gavin-Newsom-level bad optics for flouting his own rules. Leticia Abad and I are going to try to write a more rigorous paper about the election, but Maia has a great overview.

The Normal Reaction

As I expected, the Frente immediately rolled out a slew of populist economic policies intended to provoke an electoral recovery by November. Minimum wage up 10%. Zero-percent government loans to wage laborers. A US$32 bonus to senior citizens. One that really annoys me: natural gas subsidies between 30% and 50%. One that doesn’t: lots of construction. (See right for a picture of a commuter rail line they rolled out in 2019 at a speed that would impress China and makes the U.S. look very very sad.)

Argentina also has a small universal basic income (IFE) put in place during the Covid recession. The government will now means-test it but also make it bigger for poor families.

And from where will come the cash? First, they intend to go tell the IMF to screw off and forget about getting principal payments for a while. (Interest will be paid, so no default, and honestly the IMF has rolled over for greater demands in the past.) Second, they’ll keep on printing more money and transferring it to the Treasury:

Hey, it could staunch the bleeding by November, and to be honest the economic cost probably won’t be that high.

The Crazy Reaction

Only, well.

CFK seems to think she’s actually running the administration from behind the scenes. She demanded that the actual President fire a whole bunch of his cabinet and put a bunch of her people in place.

And then CFK’s achichincles started yelling that the President is actually a “squatter” in the Casa Rosada. One congresswomen put it this way. “He’s renting the office, he doesn’t understand that he’s renting. The owner of the votes, the legitimate owner, the owner of popular support, the owner of the base that sustains this government and one that put him there is Cristina! Alberto Fernández couldn’t dream of even being an alderman.”

You’re not supposed to make the subtext into text when you’re trying to run things from behind the scenes!

If CFK was really pulling strings the way that, say, Plutarco Calles did back in the day in Mexico, well, then she wouldn’t need to send messages telling the nominal President to fire people. She would just wave a finger somehow and the people would get fired.

But although she is many things but she is not a Plutarco Calles. President Fernández isn’t going to quietly back down, because CFK isn’t really in control and she has given him no graceful way to give her what she wants. All she is managing to do is make the Peronists look really really bad to swing voters.

It is possible seeing try to CFK bludgeon her way back into the driver’s seat will inspire Peronists who stayed home this Sunday to make their way to polls to support the Frente in November.

But how likely is that? First, as I mentioned, you can’t replace candidates now: unless enough the Frente candidates on enough slates proclaim their loyalty to Cristina, any votes for the Frente will be votes for Alberto’s people. “Vote for Alberto’s useless incompetents because you need to do that in order to vote for Cristina” is not an inspiring message.

And are there really all these uninspired Peronists sitting out there? It is true that turnout collapsed during the primary. But … Covid, maybe? And maybe people are realizing that PASO isn’t a real election?

In short, I’m not seeing much here that makes it look like November will be any better for the Frente and I am seeing a lot of things that could make it look much much worse for them. Shiny new infrastructure notwithstanding.

Observatorio argentino 48: the circular firing squad forms up!

This post was going to be about all the populist measures the Fernández administration has rolled out in the last few days, but instead it’s going to be about the circular firing squads forming up in the cabinet.

Short version: The Argentine administration is divided between moderate supporters of the President and more radical (and sometimes more corrupt) supporters of the Vice-President, Cristina Fernández de Kirchner (CFK), who also happens to be a former President.

After the election, CFK demanded that President Fernández (no relation) fire his moderate cabinet ministers — including the Economy Minister. And since everything in Argentine politics ultimately revolves around the economy, that would be a BFD.

The thinking is that the government needs to go more radical to win in November. The President said no. So CFK got her ministers to offer their resignations to the President. We’ll see if he accepts them ... but rumors are floating that the Speaker of the House, Sergio Massa, will resign if the President refuses.

The Frente can’t win without CFK’s support. But if he gives in then he will be seen as a puppet. Only if she goes to the mattresses then he loses an election … but she risks going to jail.

It’s a game of chicken.

And there’s an international component.  

The new regional manager of the IMF is very orthodox. Ilan Goldfajn was the former boss of the Banco de Brasil when Brazilian inflation was running well below target. He is not going to be an easy man for a heterodox Argentine government to talk to. So even if CFK wins, the administration could be dashed on the rocks of the people at 700 Nineteenth Street Northwest.

Anyway, this ongoing. Go find your favorite source of Argentine news and follow it. I recommend here. CFK supporters are heading into the Casa Rosada right now. Watch Moyano, the union leader, says Leticia Arroyo Abad. 

Observatorio argentino 46: All this will PASO

Argentina has a weird two-stage electoral system. The first stage is called the PASO, for Primaria Abierta Simultánea y Obligatoria. Everyone has to vote in the primary, therefore “Obligatoria.” (Although the fine is currently running only around 50¢, U.S.) All parties are on the ballot, thus “Simultánea.” Any voter can vote for any party, thus “Abierta.”

Yesterday was the PASO! All votes have been hand-counted and the results are in, which should make all Americans slightly ashamed. 

In the senatorial PASO, each party puts up two candidates in each province. If a party has internal competition, then it puts up more than one slate. (Most parties put up only one slate.) If you get more than 1.5% of the vote in the PASO and beat the competing slates within your party (if any), then your slate gets on the ballot for the general election. When the general election comes along, the party with a plurality of votes will win two Senate seats for the province and the runner-up will get one. If that seems like a stupid system to you, that is because it is, although stupidity is a general characteristic of most senates around the world.

The PASO for the lower house runs similarly. Each party puts up a list of candidates, ranked in order. The lower house of Congress is based on proportional representation, so if a province has (say) 35 seats, then the party needs to put up a list of 35 candidates in the order in which they will take their seats. In the PASO, a slate has to clear 1.5% of the vote and beat any competing slates in order to get on the general election ballot. When the general election rolls around, seats will then be distributed to the winning party based on their vote share. So if you win, for example, 15% of the vote share in Buenos Aires in the general election, then the first 5 names on your party list get to go to Congress.

What is voting like? Well. You go into a polling station. There you wait in line, match your name to a voter registration list, and get a ballot. Which looks like this for the lower house in Buenos Aires province:

I told you that there were a lot of parties here. The photo (if there is one) is of the headliner(s): that is, the first person on each party list. You can see that Juntos por el Cambio (Together for Change) and the Frente Unión por el Futuro (United Future Front) conducted a genuine primary. For the former, you had to pick between the slate led by Diego Santilli and the slate led by Facundo Manes. 

The rest of the parties fielded only one slate, so the only thing that they had to do was clear 1.5%. 

You might ask upon seeing this ballot, “WTF?” I certainly did back in 2019, when I visited a polling place in San Isidro, B.A. Well, here is the F. Polling officials give you a pair of scissors. You go into a little private booth. You then cut out your preferred party list, stuff into an envelope, properly seal the envelope, and then put the envelope into the ballot box. 

In general, the PASO is nothing more than a government-sanctioned obligatory poll. The parties do not have to allow for competing slates if they do not want to. Juntos wound up fielding two slates because it is not really a party. Rather, it is a coalition between two parties who usually hate each other: the Radical Civic Union (UCR), which has long historic roots, and the Republican Proposal, which dates back only to 2010 and started as a personal vehicle for Mauricio Macri.

(As for the Frente Unión por el Futuro, well, I have no idea why they fielded two slates. Neither one cleared 1.5%.)

Anyway, as a government-sanctioned obligatory poll, which is highly correlated with the general election results, the PASO has the ability to move markets and break careers. So what happened yesterday? Well, you will have to either go to any other news source of the hundreds available to you ... or wait until tomorrow. 

Observatorio argentino 47: Esto PASO de castaño oscuro

And the results are in! Or were in, since the voting took place on Sunday.

On one hand, the result is a massacre for the government. Juntos won 42% of the votes for the lower house, against 32% for the government. Considering as Frente took 45% of the congressional vote in 2019, this is pretty bad. Frente lost badly in Buenos Aires province, its stronghold. It also got slammed in Cristina’s home province of Santa Cruz, along with Chaco, La Pampa, and Chubut. This was not expected either.

Markets were happy … ish. The blue market rate for the dollar dropped a bit right before the election, because reasons, but recovered once the results came in.

The stock market jumped 17% the day after the PASO, but that also doesn’t look so great in context. If you look at the Merval index in dollars, you get a little bump coming at the end of a months-long rally.

If the Frente de Todos is so bad, why were the markets so meh? Well, one possibility is that Frente de Todos isn’t really that bad for the economy. Which is not to say that Covid hasn’t hammered the Argentine economy. President Fernández managed to get into the worst of all possible worlds: an economy wrecked by lockdowns and a virus running unchecked. It is to say that maybe the markets don’t think giving the keys to the conservatives will make all that much difference.

A better possibility is that the markets realize that the voters haven’t really handed over the keys! First, this was just a dry run for the real election, unless you’re particularly vested in the Santilli-Manes pissing contest in B.A. You think the Frente isn’t going to respond by going all out to win votes? They’re first reaction was to roll out massive street paving programs with crazy speed. Watch this space for what is going to follow.

Second, even if these results hold in November, the change will be muted. Argentine elections are staggered, so only half of the lower house and a third of the Senate was up for grabs. In addition, while the lower house is elected by proportional representation, each province is a district, which in practice further mutes national vote swings.

If the PASO results hold in November, a big if, Frente de Todos will lose its Senate majority, going from 41-29 (out of 72 seats) to 35-34, with smaller parties holding the balance. In the Chamber, the Frente de Todos will go from 120 seats (out of 257) to 111. Its allies, with 8 seats, will be unchanged, more or less. Juntos and allies will go from 115 to 120. Basically, it will go from no governing majority (but tilting towards the Frente) to no governing majority (but tilting towards Juntos).

Since smaller parties can be bought, the Frente could cobble together a governing majority. In addition, the Argentine president is incredibly powerful.

Plus, well, the Frente can do a lot in the next few months. Watch this space.

The Barber of Buenos Aires cuts again

Argentina is going to get a large haircut on its debt. That was a foregone conclusion. Now, though, Covid-19 has worsened the situation. Yet for some reason Argentina has made a very generous opening offer, about what I would have expected in a world without a pandemic. I don’t know why.

The country could not have paid before Covid-19 hit; it certainly can’t pay now. So President Fernández’s finance minister, Martín Guzmán, proposed a debt restructuring that was far more generous than most economists expected.

Of course, restructuring the debt is ultimately a political decision, and economists still aren’t too good at predicting political decisions. That said, economists do think the offer is pretty generous towards creditors.

First, how generous? I came up with a back-of-the-envelope calculation for at least a chunk of the outstanding private debt. We know the following:

• The face value of that debt is going to cut from $67 billion to $63 billion, or 5.4%;
• The total interest that will be paid on that debt before its retired (or rolled over) is going to be cut from $61 billion to $23 billion;
• Coupon payments will be suspended for three years, after which they will rise slowly from 0.5% in 2023 to a maximum of 4.5%.

If you assume that the coupon rate will rise by 0.5 percentage points per year, then it is possible to estimate a flow of payments and discount that back to year zero. You can do that for the original flow of payments and the restructured flow in order to estimate the “haircut” on the debt. Of course, in order to do that you need a discount rate. What to use? You could use the current yield on Argentine debt, which is in the vicinity of 40%, but that number reflects the fact that everyone knows that the country can’t possibly repay its current debt load. You could use the rate at which most of the debt was issued at, around 7%, but that reflects the optimism of the Macri years and does not reflect the country’s likely post-restructuring situation.  

At 40%, the haircut comes to 90%! That can’t be right. At 6.7%, the haircut comes to 49%, but that waves away the fact that Argentina is riskier now. There is a lot of chatter for a 12% rate, which sounds right. Using that, you get a haircut of 60%. Which is still less than Argentina got back in 2005.

Why be so generous?

Who voted for Macri and why? We know the wrong answer, at least

Joint with Leticia Abad.

First things first: Macri won 90% of the Antarctican vote! Sure, that’s only 102 people, but hey, climate change. Just wait until the 2059 election. He also won everything in the Malvinas, getting zero of zero votes. Or did he lose big there? It’s not clear, but the newspapers are reporting it, so I am passing it on.

Second, last night’s result was only mildly surprising. Boz called it that Macri would outperform the polls but not go the distance, and that is what happened. Macristas are furious at Lavagna and Espert, but it’s unlikely that all of the votes for Lavagna would have gone to Macri. This was a clean win for Fernández, and a win is a win. In other words, “Lavagna cost it for Macri” is a wrong answer.

Larreta cleaned up the mayoral election in Buenos Aires City: who could have imagined that “Seven new subway stations in four years!” would have been a winning slogan?* Meanwhile, in Buenos Aires province, Axel Kiciloff won a massive victory. I have met Kiciloff in person. (As has my friend and colleague, Gónzalo Monroy.) Kiciloff is a smart fellow, but his understanding of markets is so weak that I have to wonder how he manages to go shopping.

I spent election day in San Isidro, a small bastion of anti-Peronism, so the traditional method of “Ask random people why they like Kiciloff” didn’t work. Election night was with Macristas in the city, so the method worked even less well.

A conventional wisdom is emerging here that Macri won where the farm sector is important. The only problem with answering “Farmers!” to “Who voted for Macri and why?” to that it is wrong. 

Map 1 shows per capita agricultural exports (including agro-industry). Map 2 shows Macri’s vote share. There is basically no correlation.

I don’t know why a band of provinces across the center of the country went for Macri, but it wasn’t because they voted out of fear of export taxes. An enterprising scholar should investigate this. Has Argentina seen an American-style “big sort”? Is there a cultural component to the anti-Peronista belt?

The same belt went overwhelmingly for Macri in 2015. In 2011, the Peronists won everywhere but San Luis, only with reduced margins. In 2007, the Peronists lost in Córdoba and San Luis. In 2003, there isn’t much of a pattern, but when you go back before that Córdoba and San Luis seem to be perennial bastions of anti-Peronista sentiment, something that has spread to a belt across the center of the country running from Mendoza in the west to Entre Rios in the east. 

Something interesting is happening; I just do not know what. 

* Other than, well, anyone.

Observatorio argentino 45: Maybe Argentines did not care as much about the election as they claimed

The excitement around the recent Argentine election felt unprecedented. Everyone was talking about how fired up people were. Both sides thought this was a critical election. Random people on the subway called it, “The end of the world.” News reports intimated record turnout; that night people feared violence.

Except, well, turnout was bog normal. Completely normal. As in, nothing-to-see-here normal. Turnout was about the same as in 2015 and lower than most postwar elections. See below.

Of course, most postwar elections came in an atmosphere where everyone knew that the military could and would overturn a result that they didn’t like, and where Juan Perón was an active living political force. So maybe the whole postwar period isn’t a fair comparison. But turnout is barely up on 2015 and only a little above 2011. It really only looks good against the astonishingly apathetic election of 2007, where Cristina Fernández first won election in her own right.

I should point out that voting is compulsory in Argentina, although the penalty is risible. Right now, the fine is 100 pesos (about a buck-fifty, more or less). In theory, you’re also banned from carrying out any sort of bureaucratic procedure for a year, which could be a PITA if you, say, plan to buy a house or sell a car or something like that. (Here is the registry of people who didn’t vote.) In practice, it is not clear to me that the disincentive is all that large.

The compulsory rule dates back to 1912. Weirdly, the evidence points to conservative parties favoring the reform as a away to insure that their supporters would get to the polls in the face of fired-up and enthusiastic socialists. (Article 84 of the Saenz-Peña Act of 1912 exempted illiterates and people who lived more than 20 kilometers from the polls from the fines; this was strategic.)

To sum up, the election certainly seemed historic! But the average Argentine voter didn’t really act like it was.

Argentina tries to stem the panic

Leticia Abad and Noel Maurer here again, reporting on some news that while not unexpected, has arrived unexpectedly prematurely. 

Imagine you are a banker in the mid-19^th century. All of a sudden, you observe more and more people demanding that your banknotes be converted to hard currency. After a couple of days, this is getting serious and you see your reserves plummeting: this is a bank run!

If the bank were in a weak position to start with, then this bank run could have been warranted. The banker will stop paying when she runs out of reserves. But sometimes bank runs are just panic for panic’s sake. Then, as a banker you could refuse to convert these notes to restore sanity, to calm people down.

Now, replace “ban”k with Argentina. The bank run is a peso run. Welcome to President’s Macri’s life.

Since the last post, our dear country has not managed to hold a steady course. The Central Bank keeps on hemorrhaging dollars and technically the country has defaulted, well, selectively, according to rating agencies.

Right now, the federal government is facing substantial payments on its dollar-denominated debt over the next few months. (See the below chart.) That means that the federal government will need to dive into the market to get dollars make the payments. (The Argentine federal government, not surprisingly, collects tax money in pesos.) That will lead to one of two things: (1) A further fall in the value of the peso against the dollar, which would be very bad; or (2) A big drain on the Central Bank reserves as the bank provides the government with the dollars it needs, which would also be very bad, since those reserves are falling fast. 

So what to do? 

Well, ask creditors to let you postpone the payments.

On August 28th, to hold on to its foreign currency reserves, the government tried short-term debt management. It unilaterally extended the payment of short-term bonds on August 28th. That lasted a day. Then the government came up with a plan for further extending repayment — or as they call it a“reprofiling.”  (Check #reperfilar for the corresponding memes).

My favorite: Reprofiling is the new “we need to talk.”

The renegotiation applies only to firms; individual creditors will receive payments as expected. This move should free up around $13.4 billions of reserves.

In other words, let’s kick the can down the road!

This strategy to ease the peso run failed quickly. The dollars kept on leaving the Central Bank’s vault.

To quell the panic, the Macri administration’s second move was the national equivalent of having the banks close their doors to depositors during a run. Capital controls ensued, first for foreign banks to repatriate profits. Then yesterday (on Sunday!) the government issued an emergency decree establishing good ol’ capital controls. All firms now require authorization to operate in foreign currency. Individuals have a cap of $10,000 per month on how much money they can change. Today will be the opposite of a banking holiday, withthe Central Bank extended banking hours until 5 pm (normally banks close at 3 pm).

President Macri decided that it’s better to adjust now when he has lots of reserves than adjust later. Will that stop the panic and make Argentine and foreign investors calm down?

It is clear that this is a last resort, as President Macri denounced capital controls during his presidential campaign. Since the primaries, he is facing an uphill battle to, at best, make it to a second election round. Hence, he is trapped between being a president and a candidate. From the quasi-populist policies announced two days after the elections to the imposition of capital controls binding for firms, he is trying to stabilize the country in hopes of attracting more votes. At the very least, he is trying to avoid to leave De-la-Rua-style — i.e., in a helicopter — before the end of his term.

All this, of course, has implications for the election and what the next president will do. Wait for the next post!

Guest post: Gone with the PASO

Leticia Arroyo Abad here, our woman in the Southern Cone.

Argentines have been battling a recession, several mini-crises, and high inflation for a while now. The result was a resounding defeat for the incumbent administration in the recent primary elections.

The primary is called the PASO, for “Primarias Abiertas Simultáneas y Obligatorias.” In English, that’s the obligatory and open simultaneous primaries. Which means exactly what is says. All parties hold presidential primaries on the same day (simultaneous), in which any voter can pick any candidate for the nomination of any party (open), and in which all Argentine citizens are required to vote (obligatory).

Admittedly, the fine is only 50 pesos, which was about US$1.25 before the election, but we Argentines are public-spirited. Or possibly just angry at our politicians. Either way, turnout hit 75%. 

To the shock of precisely no one who was paying attention, unless you include all the people who are paid big money to pay attention, the defeat for the ruling party triggered a massive response in the markets. The following day, “Black Monday”, the peso plummeted to from 45 to 63 pesos per dollar before recovering to around 54. The MerVal index and government bonds suffered massive losses. And things would have been worse had the central bank not intervened promiscuously to prop up the peso. Here are central bank reserves over the past two months:

(Extra credit if you can spot the IMF loan poor President Macri accepted as the markets battered Argentina in mid-July.)

The panic also hit the banking sector. With the plunge of government bonds, a group of foreign banks demanded a buyback from Treasury (as part of an earlier repurchase agreement to boost reserves) that further depleted our national reserves. But hey, what was lost in reserves was more than won in public debt reduction. That is good news, right?

President Macri was not, shall we say, gracious in defeat. With evident anger (or bronca as we say it here), he blamed the electoral results on all Argentines. In a strange technical sense that is true, as in voters do indeed determine election outcomes, but it seemed like he was blaming the crash on the voters ... and that is not generally a good way to win votes. He did apologize for his unfortunate reaction later on.

Trying to get a the solid win over the opposition will be hard, maybe impossible at this point. Nevertheless, Macri is giving it a try. On Tuesday, the President announced a new economic plan. It includes slashing the value added tax on the consumer basket, increasing university grants for students, cutting taxes for small firms, and freezing gas prices, among other things.

The problem is that this administration doesn’t want to be populist. (Or maybe it doesn’t know how?) So the whole package just falls short. And the Argentine people know populism very well; a collection of short-term half-measures is unlikely to fool anyone. Moreover, the government is trying to please God and the devil at the same time. A spending spree, however temporary, will not meet IMF targets. 

Now, as of this past weekend, we have a brand new minister of finance, as the previous one was not happy with the new “populist” detour. Hernán Lacunza believes that the number one priority is to stabilize the peso using the Central Bank’s reserves as “that is what they are for.” 

One week after the shock, Argentina has a new minister of finance, a somewhat stabilized peso, looming IMF targets to meet, and half-baked populist policies to implement. This should keep the President busy but it is highly uncertain that it may buy him another term.

So what will the opposition bring? Well, we can talk about that in another post.

Observatorio argentino 43: Así pasó

In a technical sense, today’s primary elections in Argentina mean nothing. They are, as indicated by the name, primaries in an election where both major candidates are running unopposed for their party’s nomination.

But ... voting is obligatory in Argentina and the voters can vote for any candidate. That means that the primaries are not going to be driven by dedicated partisans. Rather, they are a dry run for the main event on October 27. And the Fernández-Fernández ticket just won an astonishing 47% of the vote. That is a shocker, because the polls indicated a much closer election. 

In Buenos Aires province, Axel Kiciloff, the economic guru behind Cristina Fernández’s policies, won 50% in his race for governor. Admission: I like Kiciloff on a personal level. But investors do not like his record.

What does it mean? A few things. First, there is a real chance that the peso is going to sink. In general, the Fernández ticket has avoided making radical or irresponsible policy statements. But ... they have a track record from their last administration, and it is not a good one. It includes confiscating private pension accounts, generating shortages of imported goods, and lying about basic statistics. Plus, in this campaign there is the recent imbroglio over paying interest on bonds issued by the central bank. The suggestion is not a default. But the Argentine central bank sets interest rates by borrowing from the banks. Take away that tool and the central bank will have to change how it operates, to great disruption. 

Predictions that Fernández-Fernández will be bad for the economy will be self-fulfilling. On Friday the markets were predicting that Macri would do well. This did not happen. That opens the door to a painful reaction today. Such a reaction will deepen the recession. Moreover, as we all know, panics can take on momentum: maybe I do not think that a Fernández administration will be all that bad, but if I think that you think that it will be, then I want to sell my Argentine assets before you do. 

Is there any hope for Macri? Not really. The moderate third-party candidate got only 8% and he lost Buenos Aires province. In other words, CFK is back. 

Observatorio argentino 42: nobody is suggesting another default

I am in Argentina, my favorite country among all countries. Some of you may know that Argentina is in the middle of a presidential election campaign.

Background: The two main tickets are Macri-Pichetto and Fernández-Fernández. Mauricio Macri is the current president. He dumped his previous running mate in favor of a moderate Peronist, in order to (he hopes) siphon off some Peronista votes. Alberto Fernández was the chief of staff under the Peronist presidencies of Néstor Kirchner and Cristina Fernández de Kirchner (CFK). Everyone expected CFK to run for president, but she pulled a fast one and decided to run as Vice-President with Alberto (no relation) fronting the ticket. 

The controversy: Alberto Fernández declared that he was going to finance higher pensions by halting interest payments on “Leliq” bonds issued by the central bank. A firestorm ensued ... although not in the financial markets. They did not care. But the big agribusiness head convened at the La Rural exhibition to denounce default. Pichetto announced that it would cause a currency crisis. Everybody went running for cover.

Except ... well. Here is the thing. Leliqs are seven-day bonds issued by the central bank. Fernández proposed to stop paying interest on new ones. After all, they turn over every week. He did not propose defaulting on outstanding debt.

Now, all is not well with Fernández policy. After all, it is not clear how having the central bank stop interest payments on short-term notes is going to free up money for the federal government. In addition, the central bank conducts much of its monetary policy via the issuance of Leliqs, which it uses to mop up excess liquidity. That will not really work if they pay no interest. So the idea is kinda silly.

But nobody is proposing another default.

Yet.

Observatorio argentino 41b: Veníamos bien, pero pasaron cosas

I think I should use that quote from Macri for all my Argentine posts. 

So what explains the high electricity prices from the new generation tendered in 2017 and 2018? Short version: these were peaker plants intended to provide capacity when demand spiked. (Why demand spiked in the dead of winter, August is winter in Argentina, is another story. Pasaron cosas, I suppose.)

Consider. In the U.S., the capex per  MWh for a natural gas combustion plant is around $882,000. In August 2018, natural gas prices in Argentina spiked up to 5,931 pesos per thousand cubic meters. That is the equivalent of $7.25 per mmbtu, in American terms. If you assume that peaker plants run about 8% of the time, that gives you a cost per kilowatt-hour of 21.7¢!

Now, reading under Resolution 21/2016 makes it look like these guys intended to provide power for more than just peak demand. In fact, these plants provided 6% of Argentina’s power demand, which is twice what you’d expect peakers to provide. So let’s assume that they run 30% of time, which does happen. Costs would come to around 11.5¢. The chart to the right shows the calculations for coal and natural gas, using Argentine fuel prices in August 2018. (For nerds: I have not included cycling costs for a coal plant operating at 30% of capacity, so the real figures for an equivalent coal plant would be much worse. The $35/ton carbon tax does not exist, which is why it is transparent.) 

In short, the high prices are not a scandal; they are just the cost of peakload electricity in Argentina. 

Macri could have been more up front about this and he could have protected poorer Argentine consumers more. But he made a bet that the economy would do well and preferred to rip off the band aid. It is hard to blame him, but as he said, things do happen. 

It is going to be a tough election this year. 

Observatorio argentino 41a: Veníamos bien, pero pasaron cosas

Given that the name of this blog is “The Power and the Money,” I have to write the following post. 

I am sympathetic to President Macri, I really am. He got hit with a crisis not of his making. But in all seriousness, the fellow went into the crisis with far less goodwill than he should have. Here I am going to lay out one of the missteps Macri made; in the next post I will explain why the poor guy probably did not have another choice. In his own words: “Veníamos bien, pero pasaron cosas.”

Which is probably a good a way as any to sum up Argentine history, but I digress.  

One of the big problems Macri faced when he came into office were subsidized electricity prices combined with a growing power shortage. This needed to be fixed. So he raised prices. That angered people, but the only other choice would have been to let the Argentine grid go the way of Venezuela only without the big dams. One of the reforms consisted of Resolution 21/2016, which allowed the country’s independent system operator, CAMMESA , to contract for new capacity. (An alternative link to the resolution is here.) Basically, new generators were given long-term fixed-price contracts and a promise to buy a minimum amount of power. 

Still, you would think that the folks at CAMMESA would want to keep the price of electricity down as much as possible. Sure, it was an emergency, but if prices gotta rise it behooves you to make them rise as little as possible. So obviously one would expect the wholesale price of power from those sources to be in line with fossil fuel generators in other countries. It certainly should have been in line with the unsubsidized cost of fossil fuel electricity inside Argentina. Call it 4¢ per kilowatt-hour, maybe 9¢. (See Table 53.) 

Well, when power prices under Macri rose and kept on rising, the good people at Risk Event-Driven and Distressed Intelligence (REDD) got curious about how much CAMMESA was paying for these new sources of power. And what did they find? Costs of 18.6¢ in August 2018 and 9.3¢ in February 2019. That compares to 5.5¢ and 4.1¢ respectively for other thermal generators in Argentina in the same period. 

You got it. These new plants, with new technology, coming on-line in 2017 and 2018, cost two to three times what other plants cost. To be fair, they only provided about 6% of Argentina’s electricity demand. But, come on, President Macri! This kind of thing is not helping your case. It looks terrible!!

But wait. Might there be an innocent (or at least sensible) explanation? 

CFK is lucky she lost the 2015 election

Back when she was president, Cristina Fernández (CFK), her chief of staff, Aníbal Fernández, claimed that Argentina had less poverty than Germany. A popular Argentine joke is that he forgot to say “east.”

In 2015, it was obvious that Argentina was going to take a while to recover from the mess CFK  left behind. I predicted it back in 2015: “Another commodity-price boom does not look probable. Inflation will have to be contained or run up to Venezuelan levels. In short, the new president is likely to be less-than-popular when the 2019 election rolls around.”

And I suggested that the best thing for CFK was for her allies to lose the 2015 election and come back in 2019 by running against the inevitably painful adjustment. Which is what she is trying to do! 

I still suspect she will fail, but she has a decent shot. The good news is that Axel Kiciloff has been telling people that a new CFK administration will cooperate with the IMF, so there is a chance that she will govern more responsibly than in the past. But that is not how I would bet. 

Observatorio argentino 40: Election update, and a call that panic is not in order

Another Argentine election is upon us. Which means old friends from New Jersey asking me what I think! And so, after telling them, I go to a conference where other people reinforce my preconceived notions. And what better thing to do with your preconceived notions than write a blog post?

Okay, yes, I should tweet. But a blog post is more satisfying.

Currency markets reacted badly to the news that Governor Juan Schiaretti of Córdoba cruised to re-election with 54% of the vote. And it is true that the result bodes ill for President Macri’s re-election: Córdoba gave Macri his vote margin in the first round of the 2015 election (he won 53% in the province) and he went on to nail down 72% of the province’s vote in the second round. 

The currency markets are worrying too much. The results bode ill for President Macri; they do not bode well for Cristina Fernández de Kirchner, aka CFK. 

Governor Schiaretti is a card-carrying moderate. Yes, he is a Peronist, but Peronism is a broad church that cuts across various parties: he ran on the platform of the moderate Alternativa Federal and the Alternativa’s leaders called to congratulate him after his win. 

Moderate incumbents have won most recent provincial elections in Argentina:

• In Neuquén, home of the Vaca Muerta oil field, Governor Omar Gutiérrez easily won re-election. Gutiérrez stomped Macri’s candidate (who got only 17%), but he also stomped CFK’s proxy (25%). (Gutiérrez’s party, the People’s Movement, has ruled the province for 36 years; it ain’t radical.)
• Same result in Río Negro, where Arabela Carreras got 53%, crushing both the Macri-ally and the CFK-supporter. (Re-election provisions in the state constitution kicked the incumbent off the ballot.) 
• In the San Juan open primary, Governor Sergio Uñac net 56% of the vote. Uñac is a Peronist, but a CFK-foe, who has mooted the possibility of running for President or Vice-President as a moderate. 
• Governor Mariano Arcioni crushed the open primary in Chubut.
• In Entre Ríos, the Peronist incumbent steamrollered everyone. While not exactly a CFK enemy, however, Gustavo Bordet is not considered her ally either. 

In other words, there are a lot of moderates in the country. A moderate coalition for President would pull in Peronists, disillusioned Macri voters, the Socialist party (powerful in Santa Fe province) and political refugees from the  Radical Civic Union.

Keep your eye on June 22nd. That is the deadline to file for electoral coalitions. If a credible alternative emerges (maybe one behind Roberto Lavagna), then that will be good for the country. If multiple alternatives emerge, then that will be good for Macri, but will open the door to a CFK return.

Macri needs to gamble on a fragmented opposition and the scariest possible opponent. In that latter, his dilemma is a bit like Hillary Clinton’s. He can only win against a terrifying opponent ... but that terrifying opponent could win and that would be terrible for the country. 

That said, I would be optimistic (as much as anyone can be, it is Argentina after all) that a moderate alternative will emerge. Again, keep your eye on June 22nd. Other key dates are the open primary on August 11th, followed by the main election on October 27th and (if necessary) the run-off on November 24th. Buckle up, but don’t despair. 

Observatorio argentino 39 and How to swear in Argentine 3: What I learned in the last 24 hours

First, everybody hates Carlos Menem. The Cronista ran a weird poll asking which Argentine administration since 1983 has been the most democratic. The answers make no sense, as befitting a question which makes no sense. But Carlos Memem managed to get only 5% of votes, followed by Fernando de la Rúa at 3%. And to be fair, De la Rúa was really stuck cleaning up Menem’s mess. 

Second, down in Neuquén City, native Mapuche demonstrators have occupied a national park and blocked roads. The reason is that the the national oil company, YPF, wants to drill on their land. The Mapuche asked for 3.8 million pesos per well ... about US$136,000, for wells that cost seven to fifteen million dollars.

The city government countered with ... zero. Actually, they outdid Michael Corleone: they offered the expropriation of Mapuche lands without any restitution. Now, these are not lands governed by vague traditional laws ... we are talking a 125 acre plot (about thirty New York City blocks) given to the Mapuche by the previous mayoral administration in the far off year of 2011. This did not stop Mayor Horacio “Pechi” Quiroga from saying, with great exasperation, “If the lands were theirs, they would have private titles!”

Third, Argentine Spanish has diverged from the rest of the world to the point of having their own conjugations. Consider the following from the Buenos Aires subway: “Registrá tu tarjeta.” Go ahead. Explain that conjugation to me. I dare you.

Finally, if an Argentine tells you that somebody is “saliendo con los tapones de punta,” it literally means that they are “leaving with their cleats in the ground.” Which makes no sense, even for a soccer player. But imagine that you are putting your cleats in the ground preparing to launch yourself at an opponent. Somebody who has “los tapones de punta” is ready to beat the shit out of you ... and if they are “saliendo con los tapones de punta” then they are “coming out swinging,” whether literally or figuratively. If literally, get your dukes up or run away you idiot, run away!!!! And if figuratively, gird yourself for battle however is appropriate.

Good night from Buenos Aires.

How to swear in Argentine 2: “Hacer boleta” o “ser boleta”

Literally, “hacer boleta” is just an odd way of saying “design a ballot” or “print out a ticket.” The other expression in the title, “ser boleta” makes no sense at all, unless you happen to be a ticket.

In Argentina, however, both expressions mean  “to be killed,” in the same colorful way that a New Yorker of a certain age might say “get your ticket punched.” 

I have no idea what is the origin of the American expression, but in Argentina nobody appears to have used it before 1969. That year, probably not coincidentally, saw the first violent reactions to the repression of Juan Carlos Onganía’s dictatorship. People started to receive threats “te van a hacer boleta” which morphed into “si no cumplís, sos boleta.” 

For what it is worth, “sos boleta” is now official. The Real Academia Española (pictured above) has recognized it as a legitimate Spanish expression! So use it in good conscience ... although you cannot really have a good conscience if you need to use it. 

How to swear in Argentine 1: Irse a las piñas

I should and will write more about the Mexican elections and the future of Pemex. Especially given the food for thought Andrei Gomberg presented here! 

Instead, though, I want to write about swearing in Argentina. In my travels to and around that country I have often found myself utterly dumbfounded by what people are trying to tell me. I understand the words, but the sentences just don’t make any sense. So therefore we begin a new series: “How to swear in Argentine.”

We begin with “irse a las piñas,” which does not mean,  terrible Guardian translation notwithstanding, “go to the pineapples.” I don’t  mean that the translation is terrible because the expression is figurative; I mean simply that “piña” does not mean “pineapple” in Argentine. For some reason, the word for pineapple in Argentine is “ananá”; “piña” is “pinecone.”

Which makes more sense when you consider that “irse a las piñas” means “come to blows” or “have it out” or “step” or “throw down.” And since pinecones are not something that Argentines talk about particularly much (save Christmastime) other than in the context of “going to,” there is never going to be any confusion.

So if two people in a Pilar bar start whaling on each other, now you know how to describe it. 

Why not just let the Argentine peso fall?

I wrote this almost a week ago, but forgot to hit “post.” With today’s further fall in the peso to 25 per dollar, it sadly remains relevant. So ...

Why is Argentina going to the IMF at all? Why not just let the peso fall?

Answer: currency mismatch. Argentina seems to be shot through with foreign borrowings. Some of these borrowings are hard to understand.

Other foreign borrowings are not as hard to understand. Consider the gross data on Argentine financing through international capital markets. When President Macri took office, the country regained access to foreign lending. It then proceeded to take full advantage of that new access to raise needed capital. Together the federal government, provinces, and the state-owned oil company (YPF) have borrowed about $48 billion (gross) under the Macri administration through the end of 2017. (There are credible reports that these figures may be understated by a factor of two.)

Now, I’m not saying that borrowing caused the run on the peso. Nor am I saying that it’s a huge amount for a ~$545 billion economy. But it would be rough if the capital suddenly stopped flowing, which is what would happen if the authorities just threw up their hands and let the peso plummet. Budget deficits would still need to be plugged and expiring debts would still need to be rolled over, only at much greater cost in peso terms. 

But wait it gets worse! Argentina’s financial system is heavily dollarized. That means people and businesses denominate their debts in dollars, not pesos. Why they do this is not clear: there are plenty of other countries with as checkered a monetary history, yet debts and contracts are made in the local currency. Nonetheless, many Argentine businesses write their debt contracts in dollars, even though most of them make sales in pesos. 

How serious is this problem? Well, I once again turn to the Argentine central bank. In 2016, 39% of manufacturing industry debts were in dollars, along with 37% of farm debts and 32% of service businesses. Only commerce (17%) and construction (12%) had less dollar debt … but even those numbers are pretty high. Twelve percent of construction business liabilities, the nontradable par excellence, are in foreign currencies?

Should the peso crash, those debts would become overwhelming. In fact, according to the Institute for International Finance, the situation has become a lot worse in the last two years: they report that a whopping 64% of Argentina’s combined government and corporate debt is denominated in dollars. Imagine if the value of 64% of your debts doubled over the course of a few days.

It follows that Argentine banks are exposed to depreciation. As of September 2017, 9% of bank loans were denominated in dollars, against 15% of their liabilities. The weight of those liabilities could soar if the peso crashed. Moreover, considering as most of those loans are probably to Argentine entities who earn in pesos, those dollars loans would start looking shakier as well.

In short, jacking up interest rates and going to the IMF is bad. But letting the peso just fall as far and as fast as the market will take it is also bad. It might even be worse. In other words, cry for Macri, Argentina: it is a terrible and unavoidable choice. 

The incredible power of the Argentine president

Back in February, I noted that the Argentine president has too much power, which might be a cause of Argentina’s bad governance.

It turns out that I noted the same thing back in 2008. Cristina had just lost a Congressional vote on raising the soybean export tax from 35% to 44%. (Page 16.) I noted that this was a double-sign of political weakness, since her intention had been to bypass Congress altogether and impose the tax using the necessity and urgency clause in Article 99. Street protests forced her to go back to the legislature, where she lost 37-36 in the Senate. 

I interpreted the loss as a sign of her political weakness. I was wrong about that. Despite the export tax mess, and the pension nationalization mess, she managed to win re-election in 2011. Her administration would not collapse under its own weight until the 2015 election. But she would careen from self-inflicted disaster to self-inflicted disaster without the guardrails that keep American presidents from doing likewise, no matter how incompetent or mercurial they may be. (Mostly. In domestic policy, at least.)

But I was right about the danger of Argentine presidential power. I still fear for Argentina, especially in the current economic headwinds. 

Observatorio argentino 38: Who needs checks and balances?

It is astounding to realize just how much power the President of the Argentine Republic possesses. 

This came home to me while I was checking over how President Macri recently tightened the immigration laws. Context: Argentina has a rather liberal immigration regime. (I am surprised even more Venezuelans have not shown up. I guess the limiting factor is that they need a job offer to get a work visa, although there are no limits on such offers.)

Last year, the Macri administration wanted to tighten the law. (See Observatorio Argentino 32.)  The changes were small, but they involved specific clauses in the legislation itself. You can find the original 2004 text here. So they could not be made via simple executive order.

In other presidential republics, the only option would be to go through Congress. Get the law changed. How hard that is depends on the country. 

An American president needs to be a hella politician. They need to convince a legislator to introduce the legislation; they then need to cajole the Speaker and Majority Leader to bring it to a vote. Even then, under the new 21st Century norms, they need at least 60 senators to vote yes. 

A Mexican president is a little more powerful, but only a little. Under the original wording of Article 71 of the constitution, they could introduce bills straight to the relevant committee. But by itself that gave them only a little more power than an American president. In 2012, however, a constitutional amendment changed Article 71 to give the president the ability to introduce two bills every session that go straight to the floor. Each house then gets 30 days to vote on them; if they don’t hold a vote, then the bill becomes the first item on the agenda in the next session. So congressional leaders can still delay things; and note that if they delay both initiatives the President cannot introduce any in the next session. So even with the additional post-2012 powers, they need to be good legislative politicians if they want to get anything done. 

A Colombian president is more powerful still. She or he can introduce bills and demand that Congress vote on them within 30 days, with no limits. But Colombian presidents are not legislators. They have no direct control over the amendment process. And, of course, Congress can just say no. 

But Argentina? Sweet Mary. Under a 1994 amendment to Article 99 of the constitution, the President can decree pretty much anything. The article is nuts. Read section 3 for yourself:

The Executive Power shall in no event issue provisions of legislative nature, in which case they shall be absolutely and irreparably null and void. Only when due to exceptional circumstances the ordinary procedures foreseen by this Constitution for the enactment of laws are impossible to be followed, and when rules do not refer to criminal issues, taxation, electoral matters, or the system of political parties, he shall issue decrees on grounds of necessity and urgency, which shall be decided by a general agreement of ministers who shall countersign them together with the Chief of Cabinet.

Within the term of ten days, the Chief of Cabinet shall personally submit the decision to the consideration of the Joint Standing Committee of Congress, which shall be composed according to the proportion of the political representation of the parties in each House. Within the term of ten days, this committee shall submit its report to the plenary meeting of each House for its specific consideration and it shall be immediately discussed by both Houses. A special law enacted with the absolute majority of all the members of each House shall regulate the procedure and scope of Congress’s participation.

Yes, that is as crazy as it sounds. Exceptional circumstances are not defined, and every president since 1994 has interpreted the clause to mean that they can make legislative changes to anything they want whenever they want. In theory, the joint standing committee has ten days to vote and then Congress can reject the decree. In practice, the committee often stonewalls or deadlocks and then the decree just goes ahead and becomes law, poof, just like that. 

How the hell did that happen? The 1853 drafters of the constitution did not set out to create an elected dictatorship. But they got an unelected dictatorship in 1930, when the military seized control. The Supreme Court remained in session, though, and it validated the decrees handed down by the junta. In 1947, the Court tried to block a presidential decree ... at which point President Juan Perón impeached all but one of the justices. You won’t be shocked to find that the restaffed Court ruled in Ziella v. Smiriglio:

The decree-laws issued by the de facto government are valued by reason of their origin and since they have the force of law they continue in force even though they have not been ratified by Congress as long as they are not repealed in the only manner in which they may be so, that it is to say, by other laws.

Still, only 15 decrees were issued between 1930 and 1982. When democracy returned for good in 1982, the new civilian presidents were loth to give up the power. Raúl Alfonsín used the power ten more times, mostly for small-bore stuff; his big decree replaced the peso with the austral. 

But Alfonsín was succeeded by Carlos Menem, a Trump before Trump, a Berlusconi before Berlusconi. Menem liked executive power. He started by increasing the size of the Supreme Court from five to nine. He then issued a decree that seized most bank accounts and replaced them with government bonds. People sued. 

But the packed court ruled that President Menem was entirely within his rights as long as Congress did not explicitly repeal the decree with another law. American legal scholars will be amused to know that the Argentine justices cited Home Bldg. & Loan Association v. Blaisdell (1934) as justification for a decision ratifying exactly the sort of thing that Hughes, Cardozo and Brandeis were trying to prevent.

The 1994 constitutional amendment creating the new Article 99 was an attempt to limit the decree power. As such it failed. Menem would go on to issue over 300 decrees. (Note again that before Menem there had been only 25 presidential decrees in the history of the Republic.) Congress would not even bother to create the joint standing committee until 2006. And it remains toothless. 

Consider the immigration reform that started this discussion. What happened after President Macri issued it? Well, the joint standing committee has only 16 members but it could not get everyone to attend. It voted 6-5 to support the decree on February 22, 2017 ... but because there was no majority its recommendation was never reported out. The decree continued as law. In October, a federal judge ruled that it was in fact law even though the whole Congress had never voted. (In this he had ample precedent, although Argentine judges are not formally bound by precedent the way they are in the Anglosphere.) He also ruled that the deportation of criminals was somehow not a criminal matter and thus the reform was kosher under Article 99. 

No matter how you slice it, it is unbelievable that a democratic president has the power to make law unless Congress actively says no. Giving Donald Trump the power of a Mexican or Colombian president would change little; GOP initiatives are hard to pass because they are unpopular. Allowing the President to force votes on them would not help. But giving Donald Trump the power of an Argentine president? Well, that is scary.

And that may be one of the prosaic reasons why Argentina is not particularly well governed. They really ought to do something about that Article 99, I think. 

The roots of Argentine street violence

The pension reform passed the lower house yesterday on a vote of 127-117. The legislative process has been fine, notwithstanding the near-fistfight on the floor and a lot of disingenuous rhetoric from the government. In those terms, and those terms alone, Argentine representative democracy looks to be in better shape than American representative democracy.

But the street response has been nothing less than shocking.

Why? Well, there are two hypotheses.

The first hypothesis is that the mobs were organized by the Peronist opposition to discredit the Macri’s Cambiemos coalition. In this view, the pension reform is only a convenient excuse for an opposition facing an existential struggle against its ideological opponents.

The second hypothesis is that the Macri administration miscalculated the meaning of its recent electoral victory. It failed to realize was how little trust it enjoyed. In this view, the violence is an inevitable product of the government’s attempt to offload adjustment onto the middle class in a society even more polarized than the United States.

Which view is correct? Likely both.

There is certainly a history of Argentine political actors orchestrating street violence for political ends. Consider Javier Auyero’s (U.T.-Austin) magisterial study of the 2001 riots. In his words: “Three mechanisms [operated] during the episodes: 1. the creation of opportunities by party brokers and police agents, 2. the validation of looting by state elites, and 3. the signalling spiral carried out by party brokers.” Similarly, soccer fan clubs have employed violence to help politicians. Politicized soccer violence emerged during General Jorge Videla’s dictatorship (1976-83). Videla organized fans to pressure potential opponents; the “barras bravas” also became a convenient venue to channel payoffs to regime supporters. After democracy returned in 1983, the barrabravas began to sell their “services” to various politicians. In short, there is a history of party politicians inciting and using violence; it would be more surprising if nobody abetted the recent riots. The President certainly thinks that somebody did.

But the Macri administration has ] given working or middle class Argentines little reason to trust it. He has made no moves to apply scratchy hairshirts to the richest: the (unavoidable) austerity is going to fall squarely on the middle class. The pension reform came in the wake of a  punishing series of electricity rate hikes with no commensurate increase in service.* It also comes in the wake of Macri’s post-election declaration that he wants to cut taxes on business and investors; no sign of a progressive tax reform here, a la Chile or Uruguay. (More on Uruguay here.) Pain always goes down better when it’s shared.

It is true that some sort of pension reform will be necessary and it is true that the opposition has both the means and the desire to foment street violence. But it’s the reluctance to spread the pain of austerity up the income ladder that lies, I think, at the heart of the problem.

* Electricity reliability is measured via two indices. SAIDI measures the average annual outage time per customer. In the United States, the median utility has a SAIDI around 1.5 hours (NYC is 0.3); in Argentina, it’s 4.5. SAIFI measures the average annual number of outages per customer. In the U.S., it’s about 1.1 (with NYC having 0.1). In Argentina, it’s 16.2. Mexico, for further comparison, is 0.8 and 1.0 in Mexico City and 0.5 and 0.6 in Monterrey. (The World Bank tracks these numbers.) To be fair, one wouldn’t expect electricity provision to improve in a day after a decade of Peronist mismanagement, but that is a reason for Macri to tread lightly.

Observatorio argentino 37: A long hot summer of pension reform

It is summer in Buenos Aires. And it is proving to be a hot one. 

Political violence right before Christmas is a recent Argentine regularity. In December 1999, a protest by workers owed back salaries in Corrientes province grew out of hand and resulted in two deaths. In December 2001, the forced conversion of people’s dollar bank deposits into pesos worth a third as much provoked riots that killed 39 people. In November 2005, I was in Mar de Plata for the riots around a visit by President Bush. In December 2010, thousands of Paraguayan and Bolivian immigrants occupied a park in the southwestern reaches of the city. As you can imagine, the locals did not react well: Mayor Mauricio Macri called in the police and four people died before the federal Gendarmerie and naval special forces broke it up and cleared the area. In December 2013 the police themselves went on strike; in Córdoba, the result was looting, the arrival of the Gendarmerie, and at least one death. 

And now there is December 2017. Nobody has died, so far, but at last count 81 people were in the hospital ... 48 of whom are cops. A general strike is on, shutting the airports and the subway. That is today; on Thursday there was an earlier wave of rioting resulting in busted windows and burning cars. 

What is it all about? Short answer: pension reform. On November 29, the Senate voted 43-23 to advance an administration proposal to rejigger the formula for state pensions.  Rejigger how, exactly? Well, that has been giving me a headache but I think I have got it. 

The current pension formula adjust pensions as follows. Every six months, the pension fund averages the wage index (the higher of the Ripte or Indec indexes) and the nominal growth in total social security tax receipts. The resulting number (plus a top-off that I still do not understand) gives the percentage hike in pensions. The law has a floor: nominal pensions cannot fall even if nominal salaries and nominal tax collections decrease. (To be frank, in an inflationary economy like Argentina, a nominal fall in anything is unlikely in the extreme.) 

On paper, this does not seem like a bad system. It links changes in outflows to changes in inflows. Pension spending might be too high given the level of tax collection, but they should not grow out of control, at least not because of the formula.

But ... the formula does make pensions volatile. For example, in 2015 pensions grew by 4% in real terms, but they fell 6% in 2016, only to recover 3% this year. In other words, there is a case for pension reform beyond the vague “pensions are too expensive” that you usually hear. 

Of course, that case would be more persuasive if, well, pensioners were the ones pushing the reform.

The real issue is that the pension system has been underfunded ever since President Kirchner granted state pensions to slightly more than 2 million elderly who had never worked in the formal sector. It does not matter if the current indexing formula is a fine one if the system is paying out more than it takes in. Something needs to be done and this is something. 

The proposed change (text here) switches the index to the following: 70% inflation and 30% wage increases, plus a top-up for GDP growth that I do not understand. The adjustments will be switched from every six months to every three months. The reform implies that the pension administrator will miss a top-up during the changeover to the new system, so it proposes an extra one-time adjustment, aka “the splice.” Weirdly, however, the adjustments will still be delayed six months: the end-of-March increase, for example, will reflect inflation in October-December, not January-March.

Does your head hurt yet? Mine certainly did. I found a nice chart at Infobae that runs down the difference between the old and new systems. Short version: most pensioners will come out behind under the new scheme compared to the old one. It might save around $4 billion in the short term, perhaps. In the long term, who knows? But it is likely to reduce expenditures relative to the old formula.

The vote sailed through the Senate based on a deal President Macri struck with the state governors. As part of that deal, he got the governors to agree to let him transfer quite a lot of money to Governor María Eugenia Vidal of Buenos Aires province. Vidal is a member of Macri’s political party, the Republican Proposal (PRO); he needs her to succeed. So it is hard to get past the idea that President Macri is using pension reform to finance Governor Vidal. 

The lower house had to cut off debate when it looked like it was about to devolve into a fistfight.

So there you have it. The reform is basically a cut in pensions. Most of the short-term savings will go to the provincial governments in return for their agreement to drop a lawsuit claiming funds from the federal government. The big winner if it passes will be B.A. province, where a PRO governor recently took it back from the Peronists for the first time in 30 years. But the formula change is tinkering around the edges of a massively underfunded pension system; very little economic gain for a lot of political pain.

That said, by current American standards the whole debate seems refreshingly honest, wholesome, fair and open. And no, that is not something I thought I would have written a year ago.

The roots of making America in Argentina

Last post presented evidence that upward mobility was quite widespread in late 19th-century Argentina. The question is why? What made it so easy for immigrants to make America? Leticia Abad (Middlebury) and Blanca Sánchez-Alonso (UCEU) give one plausible answer.

But first, Prof. Abad shoeing me her childhood home in Buenos Aires. When she was growing up, the neighborhood was downright slummy. Now it is merely somewhat run down. I give it another ten years before the first yoga studios open up and she learns the exquisite pain I feel visiting Prospect Heights or Windsor Terrace.

And now, the reasons why immigrants to Argentina made America so successfully. In 1895, native-born Argentines still earned more on average than Spanish and Italian immigrants. Italians, though, managed to outperform Spaniards despite being rather less literate (78% versus 88%) and mostly farmers (69% versus 41%) when they got off the boat. Not to mention the language barrier; it is easy for an Italian speaker to learn Spanish, and you can hold simple conversations across the line, but the two languages are not identical. I have held conversations with people across the Spanish-Italian barrier, the first time on a crowded train from Glasgow to London in 1990. I could nonetheless not possibly hold a professional conversation in Italian. 

Yet despite these disadvantages  somehow Italians sorted into higher-paying occupations. How?

The authors’ explanation is that the Italians established deeper and better networks. Basically, once Italians got a foothold in high paying occupations, it became more likely that later arrivals would follow in their footsteps and sort into those occupations. These networks raised both groups’ wages, but the Italians were better at it. (The below map shows the concentration of Italians in Buenos Aires neighborhoods in 1895.) 

So there you have it! The immigrants were able to make America so successfully because they stuck together and helped their countrymen, even after multiple generations in the New World. We don’t know if these ethnic networks were stronger or lasted longer in the Argentine Republic than they did in the United States, but it is certainly possible. Half a cheer for assimilation, then! Sometimes it’s a good thing if the melting pot doesn’t quite melt completely.

But there is another, slightly more depressing, explanation for the why the immigrants made America in the Río de la Plata. One that might also possibly explain some of Argentina’s (and indeed, the whole Cono Sur’s) relative failure. 

Hacerse la América en Argentina

Argentina, it is probably unnecessary to say on this blog, is a country of immigrants. Moreover, it is a country of immigrants from almost the same places as Brooklyn got immigrants back in the day, as this photograph shows. 

Argentines had an awesome expression to mean that you were doing well in the New World: “Hacerse la América.” It translates to “making América.” Not “making it in América” but “making América,” as in “making partner” or “making tenure.” How awesome is that?

But how many people really did make América? Sure, unskilled laborers could earn higher wages in Argentina just by getting off the boat from Italy or Spain or Syria or Russia ... but that’s not making América. Making América is doing better the longer you’re in the New World and seeing your children do better still. How common was that?

Well, two new papers can now tell us. The first is by Santiago Pérez (U.C. Davis); the second by Leticia Arroyo Abad (Middlebury) and Blanca Sánchez-Alonso (UCEU). Today I will talk about the first.

Pérez matched individual immigrants and their children across the 1869 and 1895 censuses. He also matched immigrants from arrival data collected in 1882-84 to the 1895 census. And what did he find?

Immigrants moved up the occupational ladder faster and farther than native-born Argentines. That is, if you were an unskilled laborer in 1869 and you were an immigrant, you had a 23% chance of making it to a white-collar profession by 1895. For the native born, that same chance was only 8%. Immigrants also showed significantly higher wage growth than natives. Except, for some reason, the Swiss. That country appears to have sent a bunch of slackers to the Southern Cone.

As for the people who arrived in 1882-84, fully 75% of them upgraded their occupations by 1895, a rate considerably faster than in the United States. And unlike the United States, there was remarkably little immigrant downgrading, the 19th-Century equivalent of having the former Russian brain surgeon driving a cab in Houston.

What about the children? If you were the native-born son of an unskilled worker, you had only a 10% chance of making into the ranks of the white-collar class. But if you were the son of an immigrant unskilled worker, well, then you had a 36% chance of moving on up, to the top, to a deluxe apartment in the sky. And that result holds controlling for parental literacy, earnings, and access to property.

Better opportunity than in the United States! There are two potential explanations, though, which I may get to in another post. One of which is based on the immigrants ... the other on how Argentina differed from the U.S. and Canada at a deep structural level, and not in a good way.

Observatorio Argentino 36: What happened to the Afro-Argentines?

Today Argentina is not known for having a large black population.  

Being a country of Europeans is a deep part of Argentina’s national identity. The census stopped recording race in 1869. A bit more than 80 years later, when Josephine Baker visited, she was surprised at the absence of black people. So she asked Ramón Carilio, the dark-skinned minister of public health, where the black population lived. Carilio felt free to joke, “There are only two — you and I.”

When Era Bell Thompson visited Argentina in 1973 to report on the black population there, she recorded one Argentine’s ironic complaint about the United States: “Argentines are lumped in with all the rest of the Spanish-speaking peoples, even though we are white.” She had no problem finding black people, but she described them as “Not a viable, but a vanishing black people: relatively few in numbers, relatively free of racial discrimination and relatively content.”

Even now, some Argentines still joke — admittedly with some accuracy — that an Argentine is an Italian who speaks Spanish and wants to be British. This view of Argentines is not only in Argentina: in 2001, when María Lamadrid visited Panama in 2001, immigration officials refused to believe that a black woman could actually be Argentine.

But  we know that colonial Argentina was heavily African! A census of Buenos Aires held in 1778 revealed a black population of 35%. (See Luis Wainer, La Ciudad de Buenos Aires en los Censos de 1778 y 1810.) As late as 1855, local B.A. surveys recorded race. George Andrews (page 41) estimated the total African population of Argentina in 1800 to be 69,000, roughly 22% of a total population around 310,000. 

So what happened to all the black Argentines? In comments, Luciano suggests that Argentine governments may have engaged in genocide, conscripting blacks to disproportionately fight in the War of the Triple Alliance and live in disease-ridden neighborhoods. 

The genetic ancestry data cited in the last post, however, shows only about a 4% presence of African genetic markers. That is a lot less than 22%! Does that provide evidence of some great genocide or expulsion in 19th-century Argentina?

Possibly not.

The Argentine-born population of Argentina grew by about 2.0% per year between 1800 and the first national census in 1869. (The link goes to the census; the data on the Argentine population is on page 686.) That is only slightly lower than the 2.2% rate of natural increase in the United States between 1800 and 1870, as estimated by Michael Haines. (See Table 1.) We know that the rate of natural increase in Argentina was 1.3% per year in 1869-95 and 1.6% per year in 1895-1947, so 2.0% for 1800-69 is likely on the high end. (We have no direct observations of the 1800 population; the 310,000 is an educated guess.)

If you assume that the Afro-Argentine population should have grown at the same rate of natural increase as the overall population, then you would have expected about 1.1 million Afro-Argentines by 1947, roughly 7% of the total population of 15.9 million. Intermarriage would not change the expected prevalence of African genetic markers: it does not matter if 7% of the population is of purely African descent or if the entire population has 7% of their ancestors from Africa. In other words, the mass immigration from Europe and the Levant can explain 15 percentage points of our estimated 18 point drop in the proportion of African ancestry. 

That still leaves a mystery, because 4% is lower than 7%. But it is a much smaller mystery. One possibility, of course, is that Afro-Argentines suffered differentially high mortality due to actions by the Argentine state.

But there are other possibilities that should first be eliminated before we conclude that President Domingo Sarmiento presided over a great crime. It may be that the 4% estimate of the proportion of African ancestry in the Argentine population is too low. More likely, our estimate of the 1800 population may be too low: if there were actually 450,000 people in the country in 1800, then the expected proportion of African ancestry would be 4% today. 

There is a lot of room for more scholarship. But the mystery is smaller than the headline figures would indicate ... and there may well be no mystery at all. 

How is Argentina like Puerto Rico?

Mostly, it isn’t.

But there is a sign of a disturbing history deep in the genetic heritage of most Puerto Ricans. And contrary to the popular belief, there may be some trace of the same history in Argentina. 

Some background. Over on Twitter, the great Pseudoerasmus and the great Gabriel Mathy began a debate over why North America saw relatively little intermarriage between Europeans and Native Americans compared to elsewhere. Pseudoerasmus argued that it was all about initial conditions. The Iberians migrated in smaller numbers to areas with bigger indigenous populations and in a heavily male-heavy environment. Gabe, conversely, argued that it was all about cultural norms. The English did not intermarry in significant numbers even in places with high numbers of indigenous and skewed sex ratios. 

It was an interesting discussion which I hope is put into a blog post. I participated for a bit but dropped out; Pseudoerasmus and I get along brilliantly, but in the heat of tweeting innocent responses can come across as more than slightly hostile. Moreover, the long threads are impossible to follow, quite unlike comment threads on a blog or the old newsgroups. (or ... gulp ... Reddit.) These are two of the reasons why I think Twitter is useless (at least for me) and am leaning towards quitting the platform, but I digress. If you must, try here and here. 

What does any of this have to do with Puerto Rico? Well, early DNA studies, from back when such things were new and neat, showed something a bit creepy. Mitochondrial DNA (mtDNA), which is passed down through the female line, skewed Native American. But Y-chromosomes were entirely European and African. The implication is that something awful happened to the entire male Taino population; they were either killed or denied the possibility of procreation. Likely both.

Later studies upheld the results. Here is one from 2014, which sampled 326 people and found mtDNA that was 60% indigenous, 25% African, and 15% European, whereas the male Y-chromosomes were 85% European and 15% African.

Argentina is typically thought of as a European settler offshoot, and with good reason. In 1895, 25% of the population was foreign-born, overwhelmingly from Europe and the Levant. By 1914, that figure was up to 30%. Gross immigration between 1857 and 1914 came to 4.6 million people; net immigration ran about 3.0 million. (Pages 201-02 of the 1914 census.) All this with a population of only 7.9 million in 1914! Add in the Argentine-born children of those 3.0 million post-1857 immigrants, and you have a veritable transformation of the population. You might reasonably expect Argentines to have a similar genetic makeup to, say, white people in the northeastern United States or Ontario.

But there is some evidence that you would be wrong. 

A 2010 study found that 54% of Argentine mtDNA came from indigenous sources while 94% of Y-chromosomes traved to Europe. These results are strikingly close to Puerto Rico (minus the large African admixture on the island) ... shockingly so for a country which received mass immigration from Europe in relatively recent times.

So what explains the result?

Well, first, maybe it is wrong. It is one study of 246 individuals and sampling issues are not small. I suspect that the prevalence of indigenous mtDNA it is more-or-less correct; the result has been corroborated in multiple studies. The Y-chromosome part is dicier.

Second, another study added a wrinkle: half of the indigenous South American DNA appears to have originated outside the modern borders of Argentina. That opens up the possibility that at least half of the result may be driven by migration from Paraguay, Bolivia, and Peru. As the authors write, “We did not collect bio-geographic information for most of the donors of our samples, and this is information was not available for most of the data collected from the literature; therefore, some donors could be in reality Native American immigrants (or descents form parents) from neighboring countries.”

Finally, European immigration to Argentina skewed male. (See page 271; it goes to CICRED 1974.) In 1869-1914, 1.7 males arrived for every female. That could explain some of the disproportionate prevalence of European Y-chromosomes compared to mtDNA without the specter of a Puerto Rican style past holocaust.

Nonetheless, the prevalence of native American ancestry in Argentina — and its apparent concentration in maternal ancestral lines — is a bit of surprise! There is a lot we do not know about the Argentine past ...

Argentina is not as bad for investment as it seems

The Fraser Institute publishes an annual list of the most and least risky jurisdictions for mining investments. The index combines political and geologic attributes: New Jersey is a great place to invest, but there are not a whole lot of mineral resources. 

Number one is Saskatchewan, followed by Manitoba, Western Australia, Nevada, Finland, Quebec, Arizona, Sweden, Ireland, and Queensland. Not a whole lot of surprises there.

But the bottom? The worst ... uhhh ... counting up from the bottom, the worst are Jujuy, Neuquén, Venezuela, Chubut, Afghanistan, La Rioja, Mendoza, India, Zimbabwe, and Mozambique. Fully half of the jurisdictions on the list are Argentine provinces.

Whoa.

But it turns out that the issue really isn’t national. Salta, for example, performs ok, a little better than Colorado and Alberta. Ditto San Juan, and Santa Cruz is respectable. So what is with the underperformers?

Well, the issue seems to be environmental regulation. Consider Chubut. It banned the use of cyanide in open-pit mining in 2013. Then a petition put a bill to prohibit uranium and thorium mining on the legislative agenda. What came out was a bill that putting mining in the hands of local governments. Mining companies were less than thrilled. 

Mendoza has a similar ban on the books since 2007. Neuquén is considering one: a Chinese proposal for a copper mine was voted down by Loncopué county in a vote of 2,125 to 318. La Rioja repealed its anti-mining laws in 2008, but mass demonstrations in 2012 forced the governor to suspend the operations of a Canadian gold mine. (That sounds terrible ... but note that the Canadians could have taken Argentina to arbitration under this 1993 treaty but chose not to do so.) 

It makes complete sense why mining authorities would hate this, but it is the not the same thing as the expropriation risk faced in Venezuela. It is just good old-fashioned democratic politics in action.

The Macri administration is trying to convince the provinces to loosen their restrictions. The Argentine constitution is a bit vague on mining laws. Article 7, Section 12, gives Congress the power to write a mining code, “without such codes altering local jurisdictions.” Article 124 gives the provinces control over natural resources; but Article 126 prohibits them from enacting mining laws once Congress has enacted a federal law. In practice, this means the new laws will be negotiated with the provinces, which can of course use environmental or health laws to close unpopular operations. Foreign miners expect a bill this week; we will see if it happens. 

Observatorio Argentino 35: be careful with prices, very careful

In our last installment we reported that, to our surprise, the blue market was still functioning in Argentina! Reader J.H. provided the likely explanation: once created, the market stuck around as a convenient way to avoid taxes. 

The Fernández administration started another program in 2014: “Precios Cuidados,” which literally means “careful prices” but better translates (as much as Argentine Spanish can be translated) as “monitored prices” or “price watch.” Think of it as a weak sort of price control. The government would negotiate of list of products with retailers. The government then posted reference prices for those products on a website. All retailers in the program would have to charge the same price for said product. Retailers that did not go along would face fines, albeit not terribly large ones. (These fines were, in theory, voluntarily agreed to by the supermarket chains.) 

The idea was similar to the stronger controls imposed in Panama around the same time. The assumption was that rising prices were a product of an uncompetitive wholesale sector. Under their model, when input prices rose (for whatever reason) wholesalers took the chance to raise prices by rather more than inflation. With little competition, they could get away with it. Consumers would go along, chalking the hikes up to the general rise in the price level. The precios cuidados, then, would break the cycle by proving consumers with a reference point to hold down price hikes. 

The precios cuidados were carefully marked in the supermarkets. Competing products were usually available right alongside.

Sometimes the prices were negotiated too low, and goods would occasionally run out. It that happened, consumers could demand compensation from the stores: the newspapers would helpfully explain how. 

It wasn’t quite a price control. No Venezuelan-style general shortages emerged. Every so often something would disappear completely (like ketchup for a brief moment in 2014) but that was generally due to exchange controls, not the precios cuidados. 

But unlike in Panama, the price controls failed to slow inflation. The reason is pretty simple: unlike in Panama, which uses the U.S. dollar, Argentina really was ramping up the printing presses. Price hikes had little do with an uncompetitive wholesale sector. Just another bit of Kirchnerista control-freakery.

So you might have thought that the precios cuidados would have been one of the first things President Macri got rid of upon taking office. 

And you would be wrong! When Leticia Arroyo told me the program was still around in 2017, I was stunned. The program now covers 545 products. Products sold at the watched prices make up about 7% of sales. Now, the breadth of products on offer for the monitored prices is pretty low: Argentine supermarkets offer some 25,000 different items, on average, and some supermarket chains, like Mondelez, offer only 8 brands covered by the program.*

But here’s the thing: some small companies lobby to have their products included! Why? Well, weirdly enough, the Precios Cuidados brand has become sought after. You buy at the precio cuidado, and you can be sure you’re getting the best possible bargain! Consumers love it. And some producers know that consumers love it. So they lobby to get their brands into the program, even if they have to give up pricing control. The supermarkets are less happy, but with upstream producers and downstreams consumers in love with the program, it continues onwards, and may never die.

As the former commerce minister, Augusto Costa, said, “The program has a net approval rating between 50% and 70%. The government doesn’t have that level of approval!”

And so, as with the blue market, Cristina Fernández may have permanently changed how business is done in Argentina in an odd and completely unexpected way. 

————

* In case of link rot, google El Cronista: “Precios cuidados: pasado, presente y futuro,” from Feb. 24, 2017.

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?

NAFTA and agriculture

There was some interest in this topic but not a whole lot. So I will put up a short post, which will be pretty straightforward. I will discuss U.S. exports today.

The key thing to keep in mind is that agriculture is a global market. So if third-countries displace American agricultural products in the Mexican market, then American producers will be able to export their products to the places the third-country used to sell to. But if Mexico just reduces its consumption of all agricultural imports, then U.S. producers will lose unambiguously.

Mexico takes 8% ($1.8 bn) of American soybean exports. It takes 21% ($2.4 bn) of U.S. corn exports. It takes 11% ($0.9 bn) of our wheat exports.  It turns out that 36% of U.S. corn travelled to Mexico by sea in 2007-10. See page 10. The share is even higher for other products: 55% for wheat and 38% for soybeans; see pages 20 and 23. I used USDA data to calculate costs per ton-mile for soybeans: subtracting out $230,000 per ship Panama Canal tolls for cargoes from the U.S. costs gives you an average cost per ton-mile of 49₵ from the U.S., 43₵ from Argentina, and 39₵ from Brazil; fixed costs come to $5.70 from the U.S., $7.20 from Argentina, and, inexplicably, only $2.70 from Brazil.

With that data in hand, let’s look at those three markets and imagine that Mexico slaps MFN tariffs on the U.S. while opening to the South Americans. 

Soybeans: Mexico could easily supply itself from Argentina and Brazil. Landed costs to Mexico are already cheaper for the Latin American nations, even with higher transport costs; only South American export taxes keep us competitive.

Slap a 4% tariff on American exports (while removing them on the South Americans) and Argentina and Brazil would drive us out of the market. But remember that soybeans are sold in a world market. So more South American exports to Mexico means less South American exports to somewhere else. American production will fill up the gap. When it all shakes out, you would have a small loss for the Americans, a small gain for the Argentines and Brazilians, and about a wash for the Mexicans. 

Corn: The U.S. and Argentina have more or less the same corn production costs. But transport costs from Argentina are quite a bit higher. If Mexico imposed MFN tariffs on corn and suspended them on South American exports, the landed cost of U.S. maize would still be about 13% less than Argentine corn. Americans would lose sales via a general cutback in Mexican purchases, not a switch to South America. 

Lose-lose, although more for Mexican consumers, since U.S. producers would presumably find alternative markets. That said, Mexican corn farmers would gain, and rural voters are a major constituency, about 30% of the electorate. (See page 10. Rural voters punch slightly above their weight in turnout terms: see page 9.)

Wheat: See soybeans. 

Upshot: ending NAFTA would not be catastrophic for American soy and wheat exporters, but both would have to discover new markets right quick or suffer some unpleasant transition costs. It would be a clear boon for Argentine and Brazilian farmers, who could capture a whole new market. Mexican corn farmers will gain; Mexican consumers will lose.

Still, NAFTA probably won’t end.

Mercosur and the Malvinas: An Argentine question alone

In the previous post, some readers questioned how the Argentine government could unilaterally offer the Falkland Islands access to Mercosur. The answer is easy: Mercosur recognizes Argentine sovereignty over the islands. The Mercosur parliament ratified the previous declaration in stronger terms in August 2016.

The upshot is that Mercosur-Falklands relations are in the hands of Buenos Aires. If the Argentine government chooses to give the Falklands access to its market, then those goods will be Argentine to all extents and purposes. They can therefore not only be re-exported to the rest of Mercosur, they can be exported directly to other Mercosur ports. There is no need for anyone to recognize U.K. sovereignty ... or even the local government of the Falklands. All that is needed is for Argentina to declare that it will treat exports from the Malvinas as local production and ask Mercosur to do the same.

Now, in fact Mercosur is not so legalistic: the European Union this is not. But no other Mercosur nation has ever given any sign of opposing Argentine claims over the island. They all recognize that to do so would cross an Argentine red line and sound the death knell for the troubled organization.  Given that, and the relative unimportance of squid to those countries, they will follow the Argentine lead.

Argentina, of course, will not give the Falklands access to their market without extracting a pound of political flesh from the U.K. I am not sure what form that pound will take: it could be as little as having London agree to discuss the question.  So do not expect revolutionary change. Do, however, expect incremental Argentine gains in what will be a very long game. 

Observatorio Argentino 33: Muros, Malvinas y ... ¿tetazos?

In our last installment, we commented on the Argentine Republic’s recent immigration reforms. That rather anodyne change prompted the Argentine security minister to have to deny that a wall with Bolivia was in the cards. Now it seems that the American press has ingenuously picked up on the hysteria of its Argentine counterparts, with the New York Times reporting, “Argentina’s Trump-Like Immigration Order Rattles South America.” 

The story is fine; the headline is misleading. First, the rest of South America does not care. President Macri is not President Trump, picking needless fights with the neighbors.

Second, the actual content of the decree (which we discussed here) is lukewarm by any standard.

Third, unlike our presidential decrees, this decree is neither of doubtful legality, poorly-drafted, nor partisan.

What is true, though, is that Macri’s ties to Trump are bringing him under greater scrutiny than he would face otherwise. Trump damages every Latin American leader who tries to make nice: in Macri’s case, the damage came from rumors that the U.S. president-elect asked him to expedite a building permit. (Go google it.) The irony is that the tumult is pushing the Argentine Republic farther from the United States. The country now wants closer ties with Mexico. Macri haswanted to reduce Chinese influence; now he is accelerating contracts with them for nuclear power plants.

Of course, the U.K. has also managed to score an own-goal as far as Argentina is concerned. The Falkland Islands are single-minded in wanting to preserve their access to the European market, for obvious reasons. But should they fail, then Argentina now stands ready to offer them access to Mercosur. That will not lead to an Argentine takeover if the Falklanders accept, but it would be one hell of a British own-goal.

Finally, Buenos Aires has been consumed by the debate over the tetazo: a march by Argentine women to protest unequal treatment under the law. It was not really about the right of women to go topless, although that law is and should be a focal point for unequal treatment. Differential laws like that are stupid and unjust. For example, a serious law would ban people from going shirtless in public spaces, with an exception for those who need to breast-feed children. But neither Argentina nor the United States, sadly, is a serious country in this respect ... and over subjects far more grave than what you can or cannot wear in public. Sometimes that needs to be pointed out by something that appears to be non-serious which is most certainly not. 

Observatorio Argentino 32: We are not building a wall with Bolivia!

 Many of you may know that the Argentine Republic has a remarkably liberal immigration policy. But it does have an immigration policy; Argentine borders are not open. And now the Macri administration wants to tighten them a little bit.

What will the new decree do? First, it will shorten the time it takes to deport an undocumented migrant convicted of a crime to two months. Second, it will prohibit deportees from returning for at least eight years. Third, it will create joint databases with other Latin American countries to keep track of people with criminal records. Finally, the Ministry of Security will take over border control from the Interior Ministry.

So of course Security Minister Patricia Bullrich would be asked if this meant that Argentina would be building a wall. 

Sometimes you just gotta laugh.

Uruguay and New Zealand: no copying allowed?

 I am currently starting a project that will (well, may) end with a comparison of Argentina and Canada. Along with Argentina and Australia, that is a comparison that many scholars have noted, even if the literature so far has shed less light on the mystery of Argentine failure than one might have expected. 

A recent paper by Jorge Álvarez Scanniello, however, notes an even better comparison: Uruguay and New Zealand. (Apologies to all for also putting this post under the “Argentina” tag. I did it for future reference, at least until Typepad develops a widget for nested topic searches. In my defense, many Argentines are still unclear on the fact that Uruguay is a country.) Moreover, the paper focusses in on livestock. So it is a one-industry comparison between two like countries. 

How similar were they? Well, here is chart of livestock exports as a % of all exports:

OK, so far, so similar. But maybe they exported to different markets or had different trade preferences, and therefore maybe experienced different economic shocks? Well, here are their terms of trade:

Pretty correlated until the 1990s, by which point Uruguay had already fallen from 80% of New Zealand’s income per capita circa 1925 to only 50%.

Well, maybe New Zealand was just a better place for cows and sheep?

 

Line 1 is the ratio of New Zealand’s “meat equivalent” per hectare to Uruguay’s. It is about the same until 1930, which is when (not coincidentally) N.Z. starts to pull away in the income tables. The other three measures do not go back as far (for details, page 6) but show the same post-1930 trend. Basically, the two places look about as good for cows until 1930, when New Zealand becomes a lot better.

So what happened?

Well, the paper has only hypotheses, but they are interesting. In New Zealand, university botanists in 1920-40 developed better strains of ryegrass combined with clover that could fix nitrogen and reduce fertilizer use. So, better pasture. Then, in 1940-66 the country started using aerial topdressing (dropping fertilizer from airplanes) combined with a great deal of government investment in things like rural roads and electrification. 

In Uruguay, well, they saw what was happening in New Zealand. In 1951, Uruguay sent a team of experts to New Zealand to copy their technology for improving grasslands, but it never really went anywhere, with improved lands stalled out at 12% if the total around 1975. (Graph 10.) Why? Well, results on improved lands seemed to fall behind those in New Zealand. Since farmers were not really making more money, they stopped bothering.

In other words, something stopped Uruguay both from developing its own indigenous technology and from successfully adopting techniques from New Zealand.

What could that block have been?

Observatorio Argentino 31: China is not a superpower

 OK, I am only hearing about this now, which is a little embarrassing: but last month the Argentine Naval Division (its coast guard) sunk a Chinese fishing vessel that was encroaching on the Argentine exclusive economic zone (EEZ). 

One might have thought that China would use its putative economic might to demand apologies or compensation or something. After all, the country regularly buys U.N. votes and threatens the neighbors. But in this case, pretty much nothing. The captured Chinese weren’t even sent home until April 10th. 

In the words of the Argentine ambassador, “It is very clear that this was a police matter and has nothing to do with diplomatic issues.” 

It may be that China is merely speaking softly while carrying a big stick. But its behavior elsewhere makes me doubt that. Rather, its stick ain’t that big.

The U.N. did not just give the Falklands back to Argentina

 There seems to be some confusion about a recent U.N. decision to let Argentina expand its territorial waters. Some correspondents seem to think that the U.N. stripped away the Falklands’ exclusive economic zone. That’s not what happened.

What happened: In 2009, Argentina filed a claim to its continental shelf under Article 76, paragraph 8, of the United Nations Convention on the Law of the Sea (aka, UNCLOS). The Obama administration gently reminded the U.N. that the United States does not recognize Argentina’s Antarctic territory, and so the U.N. did not consider it. (The Russians did the same.) The U.N. agreed.

The U.K. also rejected Argentine claims to Antarctic waters but went a little further. It pointed out that the Falklands lie on the same continental shelf, and so the U.N. had better not apportion out any territory adjacent to the Falklands’ maritime zone, because, you know, the Falklands might also want to expand its claim. This map shows the total Argentine claim (absent Antarctic waters) and divides that claim up into the parts that the U.K. was okay with and the parts to which it strenuously objected:

If you want to see a map with all Argentine claims on it, see this post. A dagger pointed at the heart of Antarctica.

The U.N. just made a preliminary advisory ruling granting all of Argentina’s claims. So nothing is settled. But for reasons unclear in this age of low oil prices, British observers are quite upset that the U.K. might possibly be locked out of the bonanza that is the South Atlantic. The Falklands will be encircled! Or something. It isn’t clear. 

But there you have it. I wonder what Donald Trump thinks?

Observatorio Argentino 30: Why Big Oil loves Kircherismo

 The first round of the Argentine presidential election threw up a surprise: the center-right mayor of Buenos Aires, Mauricio Macri, came within a hairs-breadth of Daniel Scioli, the candidate of the leftist ruling coalition. The result forced the election into an unexpected run-off between the two leading candidates. Macri is now believed to have a very good chance of winning the run-off tomorrow. Macri and Scioli are far apart on many issues. The markets, certainly, think that the election matters: Argentina dollar-denominated bonds due in 2017 jumped 10% on the first-round election results. The Merval stock market index rose almost 5%. Analysts have predicted an additional rally of as much as 30% if Macri pulls out a victory.

In other words, this election matters. And one of the ways it matters is in energy policy. But the way it matters is a little odd. Actually, a lot odd.

Short version: if you like big oil companies, then you should love Peronism! The Kirchners are the best thing for Big Oil since, I don’t know, the Iranian Revolution? 

Longer version: The Kirchner administration (2003-07) and the first half of the following Fernández administration (2007-date) did everything they could to make life difficult for the upstream sector, culminating the nationalization of Repsol YPF in 2012. Since then, though, the Argentine government has been running hard in the other direction, handing out windfall past subsidy to the upstream sector. (The government resolved the Repsol expropriation in a way that satisfied the oil companies.) In petroleum, those windfalls run pretty far downstream.

A bit more detail:

1. Argentina controls the oil trade. Exports are allowed only when the international price is below $77; imports are banned. When world prices were high, Argentine producers hated this. But now that world prices are low they love it: Argentine crude oil producers currently sell domestic crude similar to WTI for $85 per barrel at a time when their American counterparts are lucky to receive $42. As an added sweetener, whenever prices are below $81 ($66 for some fields) the government will hand them a $3 per barrel direct subsidy.
2. Argentina controls retail gasoline prices. In October 2015, Argentine gasoline prices averaged $4.96 per gallon. The pre-tax price averaged $3.00. (Calculated from data on page 79.) Argentine refineries paid an average of $77 per barrel. Well, the last time that crude cost $77 in the United States was November 2014, at which point American gasoline prices averaged … wait for it … $3.00 per gallon. In other words, the petroleum industry ain’t hurting.
3. Natural gas producers now get $7.50 per MMBTU for production from new sources. This at a time when the landed price of liquefied natural gas in Argentina is $6.77! Not too shabby. While we’re at it, Scioli, the left-winger in the race, has promised to raise the domestic price for new natural gas production to $12.50.

In short, the left-wingers in the Casa Rosada are in the midst of engineering a massive wealth transfer from Argentine consumers to hydrocarbon producers. ¡Viva Kirchnerismo!

So where is the populism in modern-day energy Peronismo? Electricity. Electricity prices have been controlled since the 2002 crisis. The government authorized a 72% rise in 2013, but that still left average retail prices around 1¢ (U.S.) per kilowatt-hour. At those prices, the only way to keep the lights on has been to pump public money into electricity generators and distributors. (See below; the 2015 figures are my estimates from Argentine nominal GDP data provided by a private consultancy combined with data on electricity subsidies for the first six months of the year.) They have been more successful than Venezuela’s monumental incompetents, but there have been growing brownouts and the utilities are facing bankruptcy despite the subsidies.

There are subsidies and they are not unaffordable … but like most electricity subsidy schemes, they benefit the middle class and the rich rather more than the poor.

Scioli would keep the hydrocarbon subsidy schemes in place. That would be awesome for oil companies. He would also likely keep the electricity subsidies in place for as long as the country can afford it. Which could be a long time, if he gets public spending in order elsewhere. It isn’t how I would spend the national fisc — and it begs the question of how you limit consumption in the absence of price signals — but it won’t arrive at Bolivarian levels of crazy for a few years yet.

Macri would scrap the upstream subsidies. His chief energy adviser is Juan José Aranguren, the head of Shell Argentina, and Macri has said that he intends to appoint Aranguren to a cabinet-level post if he is elected. Aranguren is long-standing critic of the Fernández administration’s energy policies. I’ve met the man — he has a refreshingly German level of bluntness about him — and I have little doubt that he will unwind the web of controls and subsidies.

Argentina being Argentina, this is one of the few cases around the world where an openly right-wing policy immediately redistribute billions of dollars downward. ¡Viva Aranguren!

Electricity policy under Macri is less clear. His political party, the Republican Proposal, has an in-house think tank called Fundación Pensar, and Fundación Pensar’s energy policy head, Sebastián Scheimberg, has publicly stated that electricity subsidies need to be removed. But that would hurt a lot of people very quickly, including a lot of poorer people. (Saying that the subsidies benefit the middle class and rich more is far from saying that they don’t also help the poor. They do. A lot.) And Macri got burned from a price hike during his time as mayor of Buenos Aires. Since punting and waiting for another opportunity to score is an option, then I think that is exactly what he will do. He might surprise with a social tariff, but I do not think it will be a priority. 

Happy election watching tomorrow!

Observatorio argentino 29: Cristina should root for Macri to win

 Consider: whomever wins the Argentine presidency is going to have to manage a rough transition. They are unlikely to come out smelling of roses. The blue market has lasted longer than I expected, in part because the government has made it fairly easy to get blue market pesos, but a devaluation is coming. Another commodity-price boom does not look probable. Inflation will have to be contained or run up to Venezuelan levels.

In short, the new president is likely to be less-than-popular when the 2019 election rolls around.

And who better to come back and take over from those repulsive reactionaries of the right? Cristina Elisabet Fernández de Kirchner! 

Which makes me want to ask better observers of Argentina: is there evidence that Cristina is not giving Daniel Scioli (her party’s candidate for president) the support that he might expect? I mean, it just seems so obvious and so Argentine ...

Syrians to South America?

 Here is a question for you: why aren’t flights from the Middle East to South America crowded with Syrian refugees?

On paper, most of the Southern Cone countries have remarkably liberal immigration regimes. Start with Argentina. Refugees are automatically accorded two years of residency and receive legal representation. (See the 2010 Migration Act.) Now, the law is not as liberal as American activists would have you believe: undocumented migrants can still be deported (page 17), but the Argentine government has explicitly opened its doors to Syrian migration. Uruguayan immigration law is even more liberal than Argentine. All you need to do to migrate to Uruguay is demonstrate an income stream of $500 per month. After that, naturalization comes within a few years. Brazil has a liberal new refugee law. 

The problem isn’t cost. A ticket costs around $800, rather less than the monetary cost of making it overseas to Europe. 

But in practice, all three countries are pretty much closed.

Start with the official Argentine program for Syrian refugees. The refugees need to have links to an Argentine sponsor either through family ties (out the fourth generation) or via a “pre-existing personal relationship based on whatever legal, reasonable, and justifiable reason: family, social, educational, work, etcetera.” 

Unless a Syrian in a camp somewhere can demonstrate a tangible documented link with somebody in the Argentine Republic, then they do not get a visa. This policy lets Buenos Aires claim that the doors are open while actually keeping them firmly shut. 

The policy may change, depending on how seriously Argentine authorities take the definition of a family link. Supposedly, 4 million Argentines trace some ancestry to Syria. In reality, no. In the peak years of 1897-1913, net migration from Syria came to about 103,000. To get from that to 4 million you have to assume almost total exogamy, which is not likely. (For the pedantic: if you assume the same birthrates as the general Argentine population, a generation of 35 years, and total exogamy, then about 3.4 million Argentines should have some “Syrian” ancestry by now.)

Moreover, a 1936 census registered only 11.2% of the Syrian-born residents of Buenos Aires as Muslim. (Page 17, once again.) Some of that is surely conversion, but it also implies that the “Syrians” came much more from Lebanon than from Syria.  

Nor is this policy in violation of Argentine refugee law. Article 10 exempts anyone under U.N. protection. Article 11 exempts anyone who has “voluntarily settled inside or outside the country which he left owing to fear of persecution.” Depending on the definition of “voluntarily settled,” that could include precisely every Syrian refugee. It certainly includes anyone in a UNHCR camp. Only a few hundred people have escaped under this not-so-generous regime. 

Uruguay is worse. After the country took in a whopping 42 refugee families, a counterreaction set in, and the door are now firmly shut. In theory, the country has pledged to admit ... wait for it ... 120. Now, Uruguayan law opens up an interesting way from European countries to send their unwanted refugees to Uruguay: give them an airplane ticket and a $500 per month stipend. That said, given what happened with the 42 refugees the law would be changed right quick if a European government tried to take advantage of it. 

Chile, meanwhile, has a liberal refugee law that only considers people who manage to make it to Chilean territory. So no visa for that plane ticket from Dubai. 

And then there is Brazil, which had settled 1,740 Syrian refugees as of March, and 2,077 as of this month. That is nice, but still a very small number. The Brazilian issue is that the bureaucracy is slow, so even without formal quotas few applications get processed. (The Brazilians also exempt anyone under U.N. protection.) It is probably the most open, but still not enough for a mass exodus.

The Brazilian case shows how much bureaucracy can turn an ostensibly open process into a closed one. The Mexican government is coming under a surprising amount of domestic pressure to accept 10,000 refugees. I bet there will even be a bill. And it will sound good.

But the devil will be in the details. Do not wait for Latin America to open its doors in any serious way.

The Philippines move right!

 Carlos Yu and I have a long-term plan to write a book on the Philippines under American rule. But it won’t be done until 2018 at the earliest.

One thing that we discovered while writing our book on the Panama Canal was that Panamanians drove on the left until April 15, 1943. The reasons for the changeover are obvious; less so is why Panama started out on the left. The influx from the British West Indies is often cited. (Colombia did not start to regularize its traffic codes until Panama had already seceded but appears to have always driven on the right.) Argentina drove on the left between 1889 and 1945. The first traffic code, from 1872, mandated driving on the right but the country switched to the left in emulation of the British-built railroads. (You can still see this in the Buenos Aires subway.) It moved back to the right on June 10, 1945.

But neither of us had any idea that the Philippines also drove on the left until March 10, 1945! That is more than slightly amazing. The vast majority of cars were imported from the United States. So how did the rule survive so long? Even more amazing, the reason for the shift given in the text of the executive order implies that imported cars had been physically reconfigured to right-hand-drive before the switch:

EXECUTIVE ORDER NO. 34: AMENDING TRAFFIC REGULATIONS FOR VEHICLES

WHEREAS it is deemed advisable to change the existing regulations providing for the driving of vehicles on the left side of the road so that the vehicle traffic in the Philippines shall conform with the practice of driving on the right side of the road obtaining in most countries of the world;

WHEREAS such a change would bring about certain economic advantages to the people of the Philippines in that it would reduce the price of motor vehicles imported into the Philippines from the United States;

WHEREAS during the present emergency the great majority of the motor vehicles of the United States Army used on the roadways in the Philippines are right-hand driven and the drivers thereof are accustomed to driving on the right side of the road; and

WHEREAS the present affords the most propitious opportunity to effect this desired change;

NOW, THEREFORE, by virtue of the powers vested in me by the Constitution and the laws of the Commonwealth of the Philippines, particularly Commonwealth Act No. 671, I, Sergio Osmeña, President of the Commonwealth of the Philippines, do hereby order;

1. That section 60 of the Revised Motor Vehicle Law, Act No. 3992, be amended, as it is hereby amended, to read as follows:

“SEC. 60. Drive on right side of road.—Unless a different course of action is required in the interest of the safety and security of life, person, or property, or because of unreasonable difficulty of operation in compliance herewith, every person operating a motor vehicle or guiding an animal drawn vehicle on a highway shall pass to the right when meeting persons or vehicles coming toward him, and to the left when overtaking persons or vehicles going the same direction, and, when turning to the left, in going from one highway into another, every vehicle shall be conducted to the right of the center of the intersection of the highway.”

2. That all other sections or parts of the said Revised Motor Vehicle Law and amendments thereof shall be considered as amended or modified as they are hereby amended or modified accordingly so as to conform with the provisions of the Executive Order; and all other provisions of law inconsistent with or contrary to the provisions of this Executive Order shall be considered repealed as they are hereby repealed.

Done at the City of Manila, this tenth day of March, in the year of Our Lord, nineteen hundred and forty-five, and of the Commonwealth of the Philippines, the tenth.

SERGIO OSMEÑA
President of the Philippines

Unless most American imports had been reconfigured before sale in the Philippines, then there is no reason why switching the side you drive on would make imports cheaper. Today the Bahamas drives on the left but enforces no such rule; neither does the U.S. Virgin Islands. Was there a mechanics lobby group in the Philippine Islands that insisted on reconfiguring imports before 1945? 

There has got to be a story here.

Juan Linz was wrong

 I think I need to spell it out more clearly: Juan Linz was wrong.

(1) There are very few instances of democratic collapse in Latin America which involved partisan gridlock. The only one which clearly fits the bill is the Brazilian coup of 1964 ... except for the fact that Brazil tried a parliamentary system in 1960-63, which did nothing to resolve the country’s underlying political conflicts. Three others fit if you squint hard: the Argentine coup of 1966, the Honduran coup of 2009, and the Chilean coup of 1973. The latter, however, also involves a President who was in open defiance of the Supreme Court as well as Congress.

This is a small subset of the democratic collapses in Latin America. 

(2) Now, Latin America is all presidential regimes, save the 19th-century Brazilian Empire and that brief early-Sixties experiment. But Africa has a mix of presidential and parliamentary systems. And on that continent, both systems are equally-likely to break down.

(3) Postwar Europe has not had a lot of democratic collapses, but there have been a few close calls. They do not fit the Linz formula. Perhaps the coups in Czechoslovakia and Hungary should not count, because they both involved the Soviet Union ... but they nonetheless occurred in parliamentary systems. The collapse of the Fourth French Republic was not a coup per se but it was certainly a constitutional breakdown ... and the Fourth French Republic was a parliamentary system. The 1982 putschists in Spain launched their assault on a parliamentary government. Finally, the 1960, 1971, 1980, and 1997 coups in Turkey overthrew prime ministers, not elected presidents.

The U.S. may go into a crisis. We may develop a political culture most unsuited to our constitutional structure. Jonathan Chait explores that idea here. But if that causes us to go into crisis, it won’t be because of our constitution per se.

Observatorio argentino 28: La cosa más rara en una historia ya rara

 By now I suspect anyone reading this is well aware of the Nisman saga in Argentina. For those of you who are not, Chris Hayes had a pretty good synopsis:

But that isn’t the weirdest thing. Nor are President Fernández’s weird rambling Facebook posts the weirdest thing. Not even her bizarre tweets are the weirdest thing. No, the weirdest thing, if correct, is a story for which I have not been able to find corroboration. According to Mercopress, when the House Foreign Affairs Committee announced that it would send a group of low-level staffers to Argentina to find out what the hell was going on, Ambassador Cecilia Nahon delivered an angry message saying: “Argentina will not tolerate any United States intervention in the investigation of prosecutor Alberto Nisman’s death, and will consider any attempt as an interference in the country’s domestic affairs and a violation of Argentine sovereignty.”

If true, and I am not yet sure that it is, that would be an incredibly dumb response to a pro-forma investigation by a House committee. It makes it sound like they are worried. But if they are, then they should not show that they are. 

But then again, this is the administration of the president that publicly mocked the accents of her Chinese hosts when trying to whomp up investment from that country. So who knows? The political incompetence is interesting to watch ... but I have the luck to not be Argentine. I suspect I would feel more strongly about it if I were; there is a reason why the apocryphal Chinese curse is considered a curse. 

Observatorio argentino 27: Correlation is not causation

 Argentine financial markets have been on a roller-coaster. A lot of headlines attribute that to the falling oil price. But others say low prices are good for Argentina! What is going on?

Only ... no. It is true that low oil prices are terrible for YPF, but YPF makes up a small chunk of the Argentine stock market. (The BCBA had a market capitalization around 3.9 trillion pesos on December 18. YPF had a market cap around 108 billion pesos.) So it is not the direct effect.

Low oil prices should be good for Argentina. The country is a net oil importer. It is also a net gas importer ... and the price of its pipeline gas imports from Bolivia are linked to the price of oil. In total, net imports could drop by $2.7 billion next year. Now, that ain’t huge in a $609 billion economy, but at 0.4% of GDP it’s not nothing.

The thing is, low prices will mess with YPF’s plans to make Argentina into the second major producer of tight oil after the United States. But investment plans were greater than $2.7 billion for 2015. A fall in investment spending could cancel out the benefit from lower hydrocarbon imports. 

That still is not enough to explain the selloff. So what is it? Well, the recent decline in oil prices has all the hallmarks of a demand shock, albeit one enabled by the recent rise in North American oil production and the return of Libya to world markets. (See the chart below, from the IEA.) The economic slowdown in Europe and China that is cutting demand for oil will also cut the demand for other Argentine products. And that does not augur well for the Argentine economy.

In short, the same factors driving international oil prices down are hitting Argentina hard. But the effect is not causal.

I had plans to travel extensively in Argentina in 2015, investigating YPF. It now looks like it will not happen. Life intervenes: new job, opportunities in Albania and the Philippines, and I happen to prefer spending time with my children. (I feel for my co-blogger, who continues to travel!) And it is particularly disappointing since Argentina just may be my favorite country on the planet, both in terms of the culture and in terms of its intellectual fascination. 

Ah, ni modo. There’s still Mexico!

The Argentine crisis that isn’t

 Argentina is now in technical default. At the request of three separate individuals, here is an explanation of why that doesn’t matter. 

You heard right. It does not matter. I have refrained from blogging about Puerto Rico, which does matter, because I have a conflict of interest. But the Argentine crisis is just not that important. In fact, the Argentine default barely matters for Argentines, let alone anyone else. (For those of you tracking these things, we stated that the whole thing did not matter back in 2012.)

First and foremost, this has to be among the world’s most-predicted financial crises. There will be losses, of course, but nothing systematic. Moreover, most of the owners of the restructured debt are pretty happy: it is still worth a lot more than they paid. 

Second, it really is not clear that there will be much of an immediate impact on Argentina. The most immediate fear is that 25% of the bondholders will call their bonds. (See page 162 and page 205; for an abriged version of the 2010 restructuring that pulled in a lot of the remaining holdouts go here.) But that is not likely. Why not? Well, for every minute that Argentina is in default, the unpaid coupons accrue interest at an annual rate of 8.28%. Where else can you earn that these days? 

Otherwise, well, Argentina is already locked out of foreign financial markets. It is true that the government is running a relatively small deficit. But it is domestically-financed now and will be domestically-financed in the future. The new bonds it will issue to pay expropriation claims will not be directly affected unless the U.S. courts expand their ruling (which is possible, but unlikely); the effective interest rates that Argentina will need to pay on them won’t rise much.

It is true that it will be hard for Argentina to find a workaround to pay the bondholders. No bank that does business in the U.S. will want to touch the funds. But Argentina can keep paying into an escrow account and just wait for the pot to get large enough to convince the bondholders that they may as well pay the holdouts themselves. 

Now, there will be some costs. Argentina has almost $6 billion in debt that it will need to roll over this year, followed by another $10 billion in 2015. That will now be more expensive. 

Moreover, the Argentine economy is in trouble for reasons unrelated to the legal battle over the debt.

But the fact is that the Argentine Republic is not the United States. This particular form of default, while never certain, was always high-probability and Argentina can live without access to foreign capital markets. In short, interesting but not important.

Bah.

 See title and subject. Photo from before the goal. My daughter actually started to cry from our reaction.

And hopes really were that high. Not just for Messi, who sadly botched, what, three attempts? (I guess one was from lack of support.) But the defense as well.

To some extent, this parallels the pain I feel over the 1997 ALDS, where Cleveland beat the Yankees. But that was about a squad, and here my pain is really over Lionel Messi. 

Ni modo. Back to Albania next week.

Does expropriation matter?

 Not always.

The Argentine expropriation of YPF is now resolved. Congress has approved the deal. Here are the details. (And right here is the actual text of the agreement.) Repsol will receive bonds with a face value of $5 billion.  $500 million will be in a 3-three bond paying a 7% coupon. $3.25 billion will be in 10-year bonds paying a 8.75% coupon. The final $1.25 billion will be in 19-year bonds paying 8.28%. Repsol is free to sell its holdings on the open market. Should the value of the bonds fall below $4.67 billion for a 90-day period, then Repsol can ask Argentina to issue up to $1 billion in additional bonds. On the flip side, if Repsol sells its holdings for more than $5 billion (not including the coupon payments that it will receive) then it promises to return the additional profits to the Argentine government. (Repsol plans to sell its bonds in 2016. The link also contains some information about Repsol’s point of view. They apparently expected to get $7 billion from arbitration, uncoincidentally close to what we predicted on this blog.)

What effect has all this had on YPF’s ability to develop the Vaca Muerta fields? Well, so far, not so much. First, Chevron has now promised to invest an additional $1.6 billion in the fields (on top of its existing $1.24 billion plan) taking the number of projected wells up to 331. Ultimately, the Chevron-YPF team expects to drill 1,500 wells to produce 50,000 barrels of oil and 3 million mcf of associated gas per day. At $7.5 million per well (which seems rather low) that’s an anticipated investment of $11.25 billion.

So Chevron is still interested. But they have to accept YPF as a partner. Has YPF been weakened by the controversy?

Apparently not. In February, it successfully issued $1 billion in ten-year bonds (at a coupon of 8.75%, about what the Argentine federal government borrows at) in international markets. A year earlier, the company issued five-year bonds at 8.875%. Meanwhile the company has upped its number of rigs in operation from 25 to 69 with 15 more slated to come on-line this year. 

A lot can still go wrong in the Vaca Muerta. Argentine regulation is a mess and both YPF and Chevron are certainly betting on changes in the price and export rules. Neuquén province has infrastructure but it’s old, and geology get a vote.

All that said, now that compensation has been arranged, the expropriation appears to having remarkably little effect. 

Observatorio argentino 26: How long has Argentina been in decline?

Randy McDonald brought this article to my attention. The title captures the argument quite well: “Argentina: The Myth of a Century of Decline.” The author is contesting an Economist article that dated the country’s decline to 1914.

Here is the key argument:

Below I will try to show that instead of a “century decline,” what characterizes Argentina’s economic evolution as compared to other countries is that it suffered a deep economic collapse from the mid 1970s to the end of the 1980s (in what follows, data is from the Maddison Project. http://www.ggdc.net/maddison/maddison-project/data.htm).

This structural break in the evolution of the GDP per capita (GDPpc) in Argentina can indeed be attributed to internal conditions in that country. But other than that, there is not much difference in the evolution of Argentina, when compared to, for instance, Australia, or Uruguay, two countries mentioned by The Economist as either not having suffered the “hundred year decline” and/or to have followed better economic and institutional policies than Argentina. It is true that other countries such as Korea or Spain, which had far lower GDPpc than Argentina during great part of the 20th Century overtook Argentina by a large margin since the 1970s. But it is also true that if Argentina had avoided the sharp drop in the 1970s and maintained the share of the US GDPpc that prevailed before that structural break, the country would have had now an income per capita above all countries in LAC and many European countries such as Portugal, the Czech Republic, Hungary, and Poland. And if it had maintained the lineal trend growth from the 1960s to the mid 1970s it would be now at about the level of New Zealand or Spain, according to the data of the Maddison Project. In other words, if Argentina had avoided the real tragedy that started in the mid 1970s, the country would be now a developed country.

I’m not sure I fully understand the argument. It hinges on a rhetorical definition of “decline” and a debate over the correct counterfactual. Contemporary Argentine opinion leaders thought their country was one of the richest in the world in 1914. Now, the author is correct that compared to Australia it was already running significantly behind (66% of per capita income) ... but Argentina had achieved a rather respectable 82% of Canada’s per capita income. 

Still, 82% is less than 100%, even accounting for the difficulty in measuring these things. And there are other indicators that Argentina was in fact already behind in 1914 despite its elevated income figures. Filipe Campante and Ed Glaeser have a good comparison of Buenos Aires and Chicago around 1914. The differences?

1. Much higher education levels in Chicago. This was not in fact a result of Chicago’s public schools, although those schools were better and more prevalent than in Buenos Aires. Rather, it was a product of Chicago getting rural Americans and German immigrants, who were better educated than the Spaniards and Italians pouring into B.A.

2. Chicago was more industrialized, despite competition from the old industrial centers in the American northeast. In fact, businesses in general were more mechanized: Chicago had 2.4 times as much capital per worker as B.A.

3. Finally, Argentina didn’t have universal male suffrage until 1912 ... which led to riots and revolts that could and did topple national governments. Chicago had riots and political machines, but the government remained stable.

Thing is, the Economist piece makes a big deal of the Campante and Glaeser article. Why is Díaz-Bonilla different?

Díaz-Bonilla points out Argentina did not start to lose further ground against Europe until WW2 ... and he notes that fate also befell Australia. The problem is that much of Australian economic history is dedicated to explaining the country’s relative failure after WW2. Comparisons with Argentina were rife at the time as both countries slid down the league tables. I am not sure what the Australian experience proves for Argentina.

Finally, he shows that the wheels come of the slowing Argentine bus with the spectacularly incompetent military governments of the 1970s.

I understand what the author is trying to argue, but it’s not as effective as it might sound. “Argentina was poorer than people think in 1914, fell further behind (along with Australia and Uruguay) after 1940, and then collapsed in the 1970s” is less catchy than “one hundred years of decline,” but it doesn’t sound categorically different.

I think the author is trying to push the argument too far. 

That said, the author makes two good points. First, the Argentine juntas really were that bad. Second, the relative decline after 1914 cut across the entire southern cone, including southern Brazil. The whole region was relatively richer in 1900 than it is today. Brazilians in particular seem to forget this point, but it is an important one to remember, especially when diagnosing Argentina’s modern economic problems.

Observatorio argentino 25: How many constitutions has Argentina had?

The Economist drew attention to two interesting articles on constitutions and constitutional reform: one paper by Gabriel Negretto of CIDE and another paper by Jose Luis Cordeiro.

The two papers have very different definitions of what it means to replace a constitution. Cordeiro, for example, dates Argentina’s constitution to 1853. (Page 6.) Negretto, on the other hand, dates the current constitution to 1994. Who is right?

Negretto uses two definitions for a “new” constitution. First, did the framers claim that it was new? Second, in cases of doubt, were the changes enacted by a constitutional convention?

The first definition is a problem for Argentina. You can find popular references to the “Constitution of 1994,” but the callers of the constitutional conventional of 1994 were very explicit that the purpose was to amend the existing constitution. In fact, the text of the Congressional resolution calling for the convention starts with: “It is declared necessary the partial reform of the national constitution of 1853 including the amendments of  1860, 1866, 1898 and 1957.”

It should be noted that all of the above-mentioned reforms were passed by means of constitutional conventions called by Congress.

Moreover, it should be noted that there was no way to change the Argentine constitution without calling for a convention! Here is a translation of Article 30 of the constitution as it stood before the 1994 reform: “The Constitution can be amended in all or some of its parts. Congress shall declare the need for reform by a two-thirds vote of its members; but no amendment shall be carried out without a Convention called for that effect.”

As for the 1994 reform, they held elections to the required Convention on April 10, 1994. Congress set out the terms of the election in Article 10 of the resolution calling for the amendments. The Peronists received 37.7% of the vote and 44.6% of the seats; the Radicals got 19.9% of the vote and 24.6% of the seats. (See page 26.) The convention then put meat on the bones of the reform that Congress had passed.

It seems to me that Argentina is still governed by the Constitution of 1853 and has, in fact, amended its magna carta rather less than us Americans.

In short, Negretto is wrong. Oh, he is right by his own definition ... but that definition implies that the only way to amend the Argentine constitution is to replace the Argentine constitution. Since the Argentine congress can and does constrain constitutional conventions, that does not seem to be a reasonable definition.

I do not know enough about the other cases in his data set, but I would worry that his results depend on similar arbitrary definitions.