March 26, 2003
Chile and Argentina

There seems to be a war on, but it's largely passed me by. I simply haven't had time to read blogs, watch much news or even read newspapers, so I only have the most cursory knowledge of what is going on with the war, other than that it's not over yet. The reason for all of this is a lot of travel, with my days being crammed with meetings from breakfast till dinner, and even on the weekends my time has been seriously limited. Hence the limited blogging. I should be back in Amsterdam in a week's time, after which normal blogging is likely to resume.

Meanwhile, a canceled meeting has left me with some time to catch up on my work email (866 unread messages), and now I even have a bit of time to write this, sitting in the lobby of my hotel in Buenos Aires. I'll be flying to Sao Paulo later today, so that's where I'll be posting this from if all goes well. My two experiences with Latin America thus far have been fascinating in their contrast. The sheer difference between the drive into town from the airport into Santiago de Chile and Buenos Aires is remarkable. In Santiago, there's a crowded road that passes scrapheaps (sometimes with people living in them) and shiny new office buildings, leading onto jammed winding highway that goes over hills into Santiago. Coming out of Buenos Aires Ezeiza airport the contrast couldn't be bigger: a gleaming six-lane highway, that could have been lifted straight out of Germany. It spills out onto the wide and spacious avenues of Buenos Aires, including the 9. de Julio, the widest avenue in the world (or so the Argentinians claim). Santiago is a town that started small and has been growing into a big town, with all the concomitant problems. They're currently building a highway under the river that flows through town in an effort to fix the traffic problems at least partially. Buenos Aires has the feel of an imperial city, planned to be big, and planned to impress. The rich 19th century architecture fits in perfectly with the idea of wide avenues and luscious parks.

Looks deceive in this case. Santiago is the more dynamic city in the country with an economy that actually works, whereas Buenos Aires is suffused with a wistful yearning for past glory and still hurting from the wounds of the devaluation that was forced on the Argentine economy. After a very promising start in the 1990s with macroeconomic reforms, the government never quite got its act together on the fiscal side as especially the provinces continued to be profligate in their spending. The peg which had kept the peso at 1:1 convertibility with the US dollar had to be let go, and it's amazing that it survived for as long as it had. The peso was horrendously overvalued at $1, and the economy was simply not producing enough economic added value to justify that exchange rate. Meanwhile, the inflexible labor markets and somnolent corporate management never made the adjustments necessary to maintain competitiveness in the face of the strong peso. Put simply, the price level in Argentina was too high, and deflation was the alternative to devaluation. But cutting wages was politically impossible, so in the end it was the devaluation which achieved essentially the same effect, reducing Argentina's labor costs dramatically. It also resulted in a massive impoverishment of the country as suddenly the value of all peso assets was reduced to a quarter of what it had been previously. Then again, the underlying value of assets in Argentina should not have been as high as it had been in dollar terms anyway. The ridiculous price levels still have their repercussions today, although at 3 pesos to the dollar it's becoming affordable for foreigners with hard currency. But restaurant and hotel prices were pre-devaluation on a par with London or Tokyo, and that was completely unreasonable.

It shows the danger of relying on a pegged currency to conjure up macroeconomic stability. It can work, but it requires a flexible and open economy to survive. The exchange rate is the external price of the currency, and as a price it is subject to supply and demand pressures. Changing prices convey economic information, and if you take away the flexibility to convey economic information through the exchange rate, it will find other avenues to assert itself. The underlying economic information is still there and fixing the exchange rate does not make it go away. A currency peg can work if the economy is flexible enough to respond to economic information in other ways, for instance by lowering the domestic price level. But that is painful to the people, who don't like seeing their wages cut and their house prices drop. A weaker currency does the same thing, but it feels very different. Hong Kong, which has its currency pegged to the US dollar too, is experiencing deflation and as a result the price level in Hong Kong is declining. But Hong Kong is able to respond more flexible than Argentina ever could.

It is sad to see how a once-great country and economy has fallen so far. At the beginning of the 20th century, Argentina was one of the ten richest nations in the world, and the lavish architecture from those days still reminds the current generation of the former glory. As one Argentinian told me, "all the nice things you see were built by our grandfathers, and we have been destroying them ever since." A sense of despairing, fatalistic hopelessness lurks in the background here, but there is also a worrying sense of entitlement, the sense that Argentina deserves better. It would certainly deserve better, but it won't get there without doing something to get it. Magic solutions are not going to fall out of the sky. Coming to terms with former glory is a hard thing to do, and current-day Argentina still hasn't entirely vanquished the ghosts of its own past.

Chile is doing much better. It's not as flamboyant as Argentina, the people are more conservative and scared as hell about the instability in Argentina and Brazil. The Chilean economy has been plodding along without major mishaps for a long time now, and is slowly moving away from its dependence on copper. It's attracting investment from Australia and Asia as a manufacturing base for shipping exports into the Americas. It has reasonably well-developed capital markets and a fully funded pension system (which will be the topic of a future blog entry). There's also an inflation-protected accounting unit, called the UF. Chilean bonds are quoted in UF, and other prices, such as rents, are also expressed in UF, making it almost a parallel currency (more on this later). One question that many Chileans had as the war was starting was about the relationship with the US. The Chilean president had spoken out against the allied military action in Iraq, and Chileans wondered how that would impact US relations. The people I spoke to were unhappy with their government's stance, but then again, these people were not a representative cross-section of the population. Being there on business, I generally avoided commenting too much on the war other than in generic terms, but some of my interlocutors did express their distaste for France, which I found interesting.

Argentina is the flamboyant and overconfident member of the Latin American family. Its little brother Chile is far less conspicuous, but has plodded along calmly without pretension to build a surprisingly solid economy. The price level in Chile is far more appropriate to an economy that's still not quite fully developed, certainly compared to prices in Argentina. The wines in both Chile and Argentina are pretty good, although I still have to give the edge to the Chileans. A big discovery was also the national drink in Chile, Pisco Sour. It's somewhat like alcoholic lemonade, although that description does not do it justice. I wish they would export it, as I never had the time to buy Pisco Sour while in Chile. As it was, I almost missed my flight to Buenos Aires.

It is time to leave for my final meeting in Argentina; more blogging perhaps over the course of the weekend, which I'll spending in Rio (without too many meetings I hope).

Posted by qsi at March 26, 2003 11:37 AM | TrackBack (2)
Read More on Chile , Latin America , Monetary Matters

A quick Googling revealed that Pisco is exported to the US, at least; I didn't turn up anything for Europe (though I did find a UK mail-order shop, or some such; it's been a few days so I don't remember).

Posted by: Devilbunny on March 28, 2003 04:26 PM

My impression was that you mostly followed European politics.

Will you now start on Latin America?

Posted by: Marcus Tullius Cicero on March 29, 2003 11:48 PM

It's nice to see you checking in. Please try to write as often as you can; it's quite enjoyable.

Posted by: Tom T. on March 31, 2003 08:45 PM

Chile v. Argentina & Brasil
Muted Capitalism v. Rampant Socialism
Regards, Tom

Posted by: Tom on April 5, 2003 04:34 AM
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