In a small office in Buenos Aires, a black market deal is underway. If they’re caught, those involved could end up in jail. But it’s not drugs or weapons being sold. It’s money. Despite the risks, deals like this are commonplace in Argentina’s capital. And they are one in a long list of economic woes. Like hyperinflation. President Menem inherited a country in economic and social disorder. Bank runs. Even an ex-president found guilty of defrauding the state. Fernandez de Costa has dismissed the trial. It’s a witch hunt.
The problem is that, as we normally say, Argentina is a country that never misses an opportunity to miss an opportunity. Argentine’s frustration with the economic dysfunction saw the rise of a radical presidential hopeful in the 2023 election. The only ones who want Argentina free are us. Javier Millet wants to dollarize the economy, a move he says would blow up the central bank. But the change that Argentina needs will take more than one man. The main reason Argentina’s economy is so chaotic is because of consistent economic mismanagement over decades. Without big solutions, things could get much worse. Events of the past few years have been difficult for the world economy.
This is going to be a tough year, tougher than the year we leave behind. This financial storm hit when Argentina was already in peril. To understand how bad it is for South America’s second largest country, take a look at inflation. Countries like Britain have experienced annual price rises on par with the world average, in high single digits. Argentina’s inflation hasn’t been that low in decades. The rate has been higher than 100% for almost all of 2023.
Right now, only Venezuela and Lebanon have higher rates. It’s really hard to kind of just imagine what that’s like. For some people, they just can’t make ends meet anymore. Inflation this high forces many Argentines to get creative. Argentines save in dollars because saving in local currency in a local bank has been a recipe for disasters. Even this isn’t easy.
Right now, Argentines can only legally buy $200 a month at the official exchange rate. That has created a vast black market for currency. Dealers line the streets of the city center. While people hoard stashes of cash at home. But buying dollars on the black market is more expensive than the official rate. The gap is huge. El Flaco is one of a handful of bosses in Argentina’s currency black market. He’s agreed to talk to us on condition of anonymity.
I’ve been working in the parallel market for 30 years. There are 15 operators, no more than that. He claims the black market has tacit approval. In the stock exchange, everything is negotiated. And it’s also negotiated in the banks. Banks have money tables, and in those money tables, prices are formed, which obviously are worked in parallel, it is not a legal way of working. So let’s say it is an illegal market, but pseudo-legal, according to what you see daily. With a GDP of 630 billion US dollars, Argentina is one of the largest economies in South America. But this booming black market is a symptom of just how bad things are, and the roots of the problem run deep.
The main reason Argentina’s economy is where it is today is historical. Once one of the richest countries in the world, there are many reasons behind Argentina’s decline, including the legacy of this man, Juan Domingo Perón, elected president in 1946. He came to power after having been inspired by Mussolini’s fascist Italy. Basically, what he took from fascism was a strong state that’s very intrusive, a strong emphasis on nationalism. And he combined that with also having a very strong labor movement.
He introduced the eight hour workday, increased wages for the poor and created vast, expensive welfare schemes. He also embraced economic isolationism. The emphasis on national sovereignty led to kind of the coddling of workers by protecting them from foreign competition. It has shut itself off from international trade.
Today, Argentine politics is still dominated by his legacy. Peronists have been in power for 16 of the past 20 years. One of the issues with Peronism is they haven’t evolved with globalization and with the world. Argentina’s exports have shrunk as a percentage of global exports year after year. In the mining sector, Argentina has one of the largest reserves of lithium and also it’s very rich in copper, just to think that Chile is the biggest copper exporter in the world and Argentina produces zero copper and we share the same mountains.
As well as remaining isolated from the world economy, the government also still hugely overspends on things like price subsidies. The average European spends around $40 a month on electricity. The average Argentine spends $5, eight times less. In 1972 alone, this cost the government 12.5 billion dollars, around 2% of Argentina’s GDP. But government largesse goes beyond welfare. Of the 13 million people in formal employment in Argentina, over a third of them are employed by the state itself. A lot of spending goes on paying salaries and pensions. You actually wanted to go on things like investment, technology, infrastructure, helping the poor rather than paying public wages.
All of this points to the main issue in Argentina’s economy. Argentina has been running fiscal deficits for the last 13 years. If you are in a difficult time for 13 years in a row, well, you have a big problem.
Policies to counteract this deficit, like printing money, only make things worse. Governments have become dependent on the central bank printing money to basically finance spending. And the more money you print, the worse inflation gets.
Local shopkeeper Marta Valdez feels the direct impact of more money being pumped into the system. Here we have 1000, 2000, 3000, 4000 pesos with all this. Look if this is going to fit in the register box, it doesn’t fit. In the morning we set a price and maybe in the afternoon we set another price. For example, the price of dairy products is from 480 to 580. In that period we lost, because in the afternoon it’s another price. You work for nothing, because you don’t earn anything.
Printing money is only one way the government tries to fund its spending. Another is borrowing. So Argentina has borrowed a lot of money, but it has also defaulted so many times that people don’t want to lend it money anymore. Despite the risks, there is one institution that continues to lend.
I have decided to start conversations with the International Monetary Fund. Today, Argentina’s debt to the IMF is more than double that of Egypt, the second highest borrower. All told, Argentina holds almost a third of all of the IMF’s total lending. One of the criticisms that most economists have posed to the IMF is that the conditionality that they put to Argentina was so light. They didn’t need to stabilize the economy, they didn’t need to do any homework, and they received money. I think that was another missed opportunity for Argentina.
Borrowing and printing money are not unusual tactics for governments, but the extent that Argentina’s government does both is extreme and damaging. In part because loans from the IMF need to be repaid in foreign currency. And one tactic Argentina employs to get that foreign currency only complicates things more. Trade restrictions. Soybeans are one of the country’s biggest exports.
The soybean producer in Argentina, they face an export tax of 33%. If a ton of soybean costs, say, $500, I receive $500 minus 33%. Leaving the farmer with $335. They then have to exchange these dollars for pesos at the official exchange rate. When the dollar rate is bad, farmers have to make harsh decisions. The incentive is to keep your soybeans in your silos until the exchange rate changes. If everybody does that, the supply of dollars in the economy is scarce, so the government invented something that we call the soybean dollar.
The Soya dollar is a slightly better exchange rate specifically for profits on Soya exports. But it’s not the only market with confusing rules. If you want to organize a concert in Argentina and bring a British singer, you have to pay the official dollar and then an extra tax. We call it the dollar cold play. If you want to travel abroad, you use your Argentine credit card and you pay the official dollar plus taxes, and we call that the dollar Qatar. This idea of having 10, 15, 20 different prices for the same thing doesn’t make any sense. That’s a distortion. With a set of distortions, it’s impossible that Argentina grows.
Over the years, different presidents have proposed different solutions to the economic conundrum. But the outcome tends to be the same. More debt and more inflation. Today we are poorer than before. It’s really, really hard to fix Argentina’s economy. And that’s because many of the things that we’ve talked about are linked. Everybody agrees the government needs to spend less. One way to do that is by reducing subsidies. But if you do that, you’re going to push up inflation. Everyone knows the currency needs to be devalued, but if you devalue the currency, that will also push up inflation. So it’s really hard because tackling one part of the puzzle means that things could get much worse before they actually get better.
As the 2023 presidential election approaches, it will be difficult to convince a disillusioned population that short-term pain will bring long-term prosperity. We are in a very, very bad situation.
