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Following her re-election, Argentina’s President Cristina Fernández de Kirchner’s government announced an expansion of foreign exchange controls. The new measures stem from pressure on the central bank’s international dollar reserves, which by some accounts, have dropped by $2.4 billion since August from a high of $50 billion, and from increasing capital flight levels. The steps taken by Ms. Fernández’s administration include background checks on all foreign currency purchases intended to increase the supply of dollars on the local market. The government news service Telam reported that AFIP, the national tax agency, will now cross-check a buyer’s foreign currency request with their declared income.
Whether or not the new measures will succeed as intended in halting capital flight and in fact put dollars on the local market more easily is dubious at best. There are a host of reasons for such a conjecture.
Populist messages to the contrary, free capital markets are not primarily, nor merely about “making money from money.” Factories, plants and offices do not build themselves – it takes capital. Capital naturally flows to those areas with the highest returns and where it is used most efficiently.
Empirical data show that in the last two decades developing countries have received more than one quarter of all worldwide investments. The general trend is an enormous transfer of capital from developed to developing countries. An estimated $200 billion a year flows where conditions to invest are ripe and least hampered. This has helped tremendously to overcome the greatest impediment to economic development: the shortage of capital.
Moreover, foreign capital investment places sorely needed resources into production, promoting technical progress, and raising livingstandards. Capital investment leads to building new factories, adding more productive machinery, and hiring more workers all working to boost output and productivity, leading to higher living standards as well as giving investors a higher return.
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All of the foregoing is contingent on the mobility of capital with as few restraints as possible. This is so, in part, because banks and capital managers need to diversify their risks and to avoid suffering losses for their investors. Capital managers at pension funds, for instance, seek to increase the growth of funds for a population looking to retire and live off proceeds. They need the flexibility to protect those assets by transferring investments speedily and without undo expense. The more difficult the flow, the less likely investments will take place at all.
During the “Asian crisis” in the 1980s Malaysia, for example, imposed strict foreign exchange controls to stop an impending capital outflow. Making it harder for investors to move their capital had long-term consequences causing many to flee and to avoid that country in the future. In addition, the contagion spread to Indonesia as investors fled its market for fear of similar controls.
The Argentine government’s new procedures, making transfers by ATMs (cajeros automáticos), telephone and Internet harder will only slowdown the rate and raise the costs of transactions. It is also likely the new procedures will promote corruption and law breaking as people scheme to get around these onerous practices.
Further, requiring foreigners who buy Argentine companies and real estate to deposit the full amount of their transaction in Argentina, or repatriating the proceeds of export sales are all excellent ways to promote capital outflow. Ultimately, these measures serve to place a cloud over investing in Argentina.
The loss of the central bank’s international reserves results largely from the government’s domestic economic agenda. Bank rolling ever-expanding social programs, while it may attract votes, will not attract capital. The effect of raising minimum wages, while another popular political gesture, will make it more difficult of hire the least productive workers. Restricting outflows of capital is a sure way to impede it from ever coming back to help boost production.
The net effect of all these policies is to make Argentina a riskier place to invest and to redirect large sums of capital to those economies that place fewer restrictions on people’s freedom to decide what to do with their own resources.
While the government’s actions, no doubt, stem from the noblest of intentions; political intentions and economic consequences are not always naturally aligned. If the government wanted to chase away capital and resources, it could not have sent a more precise message. Soon after its enthusiastic victory it has sent the world capital markets a resounding notice: Don’t invest in Argentina!
Fernando Menéndez is an economist and principal of theCordoba Group International LLC.