Sunday, September 9, 2012

Eroding freedom has its price

During my first visit to South America, I was struck by the contrast between Chile (one of the economically freest nations of the Western Hemisphere) and Argentina (only Venezuela and Cuba are worse). Chile has enjoyed the benefits of its economic freedom, as the only Latin American country in the OECD, and through economic might that enabled it to cope with natural disasters and potential national tragedies.

Meanwhile, Argentina is suffering from a man-made disaster of more than a century of corrupt and incompetent rule, first by the oligarchs then by the Peronistas. As Stef Haggard noted in his book Pathways from the Periphery, Argentina was one of the wealthiest countries in the world in 1900, but was easily passed by Korea and Taiwan with their access to education and the concomitant labor mobility.

Last week, the AP reported on the stark consequences Argentina by President Cristina Fernandez. With inflation running at 25% annually (10x that of neighboring Chile) none of the locals want to hold pesos, so for years they have been rushing to trade them in for foreign currency or goods:

Legally trading pesos for dollars or euros has become ever more difficult as President Cristina Fernandez tries to keep dollars inside the country and bolster the Argentine peso's sliding value. And new rules taking effect this week are squeezing them still further by going after credit card spending.
Until now, travel has offered a limited exception to the currency controls first imposed last November: People up to date on their taxes and poised to cross a border, tickets in hand, can get permission to buy no more than $100 per person for each day abroad. The process is bureaucratic and intrusive, and many say their requests are rejected for reasons they don't understand.
Credit and debit cards provided a legal way out, enabling people to make purchases and get money while abroad. But now the government is cracking down there as well.
The new measures make using plastic inside or outside the country less affordable by charging 15 percent in taxes on all foreign purchases that appear on credit or debit card bills, plus a 50-percent customs duty on any goods from abroad that might be brought back to Argentina. Internet purchases on sites such as Amazon, eBay and the Apple Store are included, along with anything bought using online services such as PayPal.
The measures are Fernandez’s attempt to protect her sagging popularity by reducing the symptoms of economic mismanagement, but they don’t do anything to resolve the underlying issues.

Brazil once had an inflation problem too, but seems to have a more competent government that has promoted industrial development and economic growth. I don’t know a lot about Brazil, but the socialists seem more pragmatic (with an economic freedom index comparable to Italy) than in Argentina (which is more like Angola). Both are plagued by corruption (unlike Chile) but Brazil has average property rights and financial freedom versus Argentina’s abysmal record on both counts.

Despite their abysmal economic record, the Peronistas have dominated Argentinian politics for decades. Apparently populist demagoguery trumps actual competence — thank God we don’t have that problem in the U.S.


Kenneth M. Kambara said...

You evolving into a development economist? Chile is pretty complicated. Read Edwards & Edwards' Monetarism & Liberalization from 1990. There are some pretty specific circumstances to Chile that can explain its trajectory that's tied to the sociocultural milieu.

Brazil has some interesting things going of which is low fertility, but I haven't looked at this in years.

Joel West said...

I'm not a development economist, but I'm big on quasi-experiments. Having two countries of comparable (not identical) factor endowments but differing policies is suggestive, although not definitive.