Chris Blattman

Subtle signs your economic policy may not be sustainable

So many nervous citizens have taken their money out of the country that Argentina’s tax agency now uses Labrador retrievers trained to detect the ink used to print dollar bills in an effort to stanch capital flight at the airports, ferry terminal and bus terminal in Buenos Aires.

The response to nationalization policy in Argentina.

9 Responses

  1. @Vivek, I’d use “one person one vote” to define the real population.

    In the West the median cash savings are in the vicinity of a couple of month wages I think, which may be a bit irritating to lose/devalue, but is not as such life changing, and ordinary people with liabilities also may benefit from devaluations.

    So I’d expect the people you have in mind in the Argentine case (rich enough to have life changing amounts of cash savings, but without the clout to move fast enough) to be a minority. If I were to hazard a broad guess, I’d say they are second decile. It’s not that they should be ignored, but their welfare should be weighted against that of others (and not by asset size!). Also many economics/development bloggers are probably first- or second-decilers themselves, so it may be tempting to view the world through own-decile glasses, even if not consciously.

    Yes, I get you that some institutional fixes can get to a better equilibrium, sometimes, but you could also get to a worse one: e.g. pay distressed debt rates while not defaulting forever because your lenders keep on having doubts. Basically I doubt you can successfully turn Argentina into Switzerland, and trying may hurt them more than following the old normal: take the money of yield chasers — there are always some — and default every so often to normalise the cost. If you add the high vol anomaly (people overpay for risk), it’s an even more dominant strategy.

  2. re @cig: are financial crises worse than the stable/stabler option for the real population:

    Think it through.
    1) The net effect is uneven across the population. The better-informed (or better-educated, or elites) are the ones leading the capital flight. Before Argentina’s 2001 financial meltdown (especially right before capital controls were imposed), capital flows went exponential. But there were lots of people who didn’t convert pesos to dollars while they could, and there were lots of people whose bank accounts were subsequently frozen. So the +/- depends on what the ‘real population’ is.
    2) Financial crises aren’t all the same: your question fits when thinking about a short ‘blip’ correction vs. a longer, slower stable path, but it doesn’t fit a case where a crisis is more symptomatic of institutional failures/gaps. In the latter case, following the stable path might result in a completely different (better) equilibrium.

  3. This is disappointing. The financial folly book (which I’ve not read but I know of) may not answer the question I’m interested in: are financial crisis, all of them, net worse for real populations’ welfare than the realistic stable(r) option on the table? I fear these guys just take it as given that instability is adverse and thus produce a lament that doesn’t address the interesting question. Argentina is a particularly interesting case due to their being a remarkable corner case (perennial defaulter yet not totally failed) with possibly a different optimality. Though the question applies to the west as well (eg do housing market bubble cycles have positive net redistributive impact? This is non obvious).

  4. Criador, of course the controls were previous to the nationalization of YPF. But the point of the post is that (a) Argentines are not approving of their government’s economic policy, and therefore (b) they are not willing to invest their money in their own country; however, (c) the government mistakenly interprets this as a problem of law enforcement rather than misguided economic incentives.

  5. I travel regularly in Argentina, both domestic and international. I have not come across these dogs at any point. I would also say there’s a low chance that dogs could be trained to sniff for bills.

  6. I think post hoc ergo propter hoc arguments are acceptable for blogs, but in this case you don’t even have the order of the “hec” right: those controls were previous to the nationalization of repsol.

    And people crossing a river to a country with bank secrecy is also and old Argentine habit. Maybe it’s the law enforcement that’s changed…

  7. You seem to imply that this form of capital flight is a bad thing. Maybe, but could you expand on your reasoning? For example, was the capital fleeing used to be employed in a way that was a net benefit to argentine society before? This is not a rhetorical question, I’m genuinely curious on how this might pan out. The typical western media response essentially seems to be “they’re bad because they’re not like us”, which has weak explanatory power.

  8. well, some say madness is doing the same thing over and over again, and expecting a different outcome. The European counterpart is Greece. Both are just waiting for the next default, just to find out that all good will of the IMF and neighbours is used up.
    “Why Nations fail” reminds us that even Empires will fall one day, but some seem to be in a hurry to shoot themselves in the foot.

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