Cry, the Beloved Argentina
|May 24, 2012||Posted by Fred Foldvary under Progress Report, The Progress Report|
Cry, the Beloved Argentina
by Fred E. Foldvary, Senior Editor, 21 May 2012
Argentina is a country that serves as a warning to the wealthier countries that they too can squander their wealth and decline into poverty. A hundred years ago Argentina was on par with the United States and western Europe in wealth. The countrys agriculture was like Iowa, and its capital city Buenos Aires was like Paris. But over the past century, its welfare state and nationalizations of industry resulted in debt defaults and self-inflicted poverty.
The people of Argentina have not yet learned the economic lessons of history. As reported in progress.org, in May 2012 the Buenos Aires provincial governments executive branch proposed a higher land tax to the legislature as well as higher income taxes. The measure passed the Senate, but failed to pass in the Lower House. The tax hike was intended to reduce the provincial governments budget deficit.
The president of the Argentine Rural Association complained that many small-area farmers would not be able to pay the tax increase of over 1000 per cent. He said that farmers dont sell land. They sell wheat, maize, beef and milk.
In fact, farmers do sell land; it is not the possession they sell, but the yield of land. Consider farmer A who with 1000 hours of labor produces 100 bushels of wheat. Farmer B owns less productive land; with the same quantity and quality of labor, he produces 60 bushels. As extra 40 bushels is the greater land rent he obtains relative to farmer B. Farmer A is selling that extra rent. He sells the benefit of his land. The purpose of land ownership is to obtain the benefits of land, so the economically significant sale is not the transfer of land title but the sale of the rent.
Farmer A could justify keeping the extra yield as compensating him for having to buy land A at a higher price. If he inherited the land, he might still object to sharing that higher rent with others, in the form of a levy on his extra rent, because he has built his life around that higher yield, and he regards the land as his. But the same could have been said by slave owners. They are my slaves; I bought them with my own money. My lifestyle is based on the wages I extract from my slaves. They are my property! How dare you confiscate the property value of my slaves!
Of course a sudden huge increase in a land-value tax creates an economic shock and encounters resistance. A land-value tax should be implemented with minimum shock. It should be presented not as a tax increase, but as a tax shift. It should apply the same tax rate to all land. Also, either implement it gradually, or else if implemented suddenly, compensate those who have net losses.
The national government of Argentina has also failed to heed both economic theory and evidence about economic growth. Investment moves to where it is best treated. Argentina inflicts capital punishment on investment. A prime example is the governments take over of the YPF oil company. President Cristina Fernandez de Kirchner expropriated the 51 per cent share in YPF held by the Spanish company Repsol SA. The Argentine Congress approved the move. Repsol is demanding compensation, and has canceled shipments of liquefied natural gas to Argentina.
This nationalization of industry will make future investors shun Argentina. The president said that the company had not invested sufficiently in Argentina, but the government had put a price ceiling on oil in Argentina, and the company had better opportunities elsewhere. Oil production in Argentina has fallen since 1996.
Argentina has a history of nationalizing foreign companies. The current government has enacted several protectionist measures. They protect the privileged gains of the domestic industry chiefs and their political allies, but they do not protect the people. The governments hostility to private enterprise has hurt the economy and reduced tax revenues, so the state once again resorted to money expansion and inflation. The government then tried to fool the people by reporting inflation at ten percent instead of the true rate of 25 percent. Economists and news reporters who published the actual higher rate were threatened with fines and prison.
Investors have good opportunities in neighboring Chile and Brazil, where political risks are lower. Many Argentineans are applauding this takeover, but if country keeps on confiscating investment, rejecting a shift to land value taxation, and resorting to high inflation, the country will not regain the glory it had a century ago. Argentina will remain poor while its neighbors Chile, Brazil, and Uruguay get rich. Cry, the beloved Argentina!
– Fred Foldvary
Copyright 2010 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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