Venezuela vs. Argentina, Which Will Run Out of Money First?Politics / Emerging Markets Oct 17, 2012 - 01:12 PM GMT
Martin Hutchinson writes: After a surprisingly comfortable re-election, Venezuela has decided to stick with Hugo Chavez and all that comes with him.
That has prompted The Wall Street Journal and other pundits to forecast nothing less than economic doom for Venezuela in 2013.
But when it comes to poorly run South American countries, Cristina Fernandez de Kirchner is someone that could easily give Chavez a run for his money.
As Argentina's president, Fernandez de Kirchner is a master of economically inept policies in her own right.
So who will win this race to the bottom?
Let's examine which one of these losers will run out of money first, starting with Venezuela's Chavez.
After all, when it comes to wealth destruction, Chavez has had a pretty big head start. He was elected in 1998, while Fernandez's husband was first elected president in 2003 (she succeeded him as president in 2007; he died in 2009.)
What's more, the wealth destruction in Venezuela did not begin with Chavez. The Conference Board Total Economy Database shows that Venezuelan productivity was more than 20% lower in 1998 than it had been in 1970.
In fact, I did a study on the potential for Venezuelan corporate finance for a client bank back in 1990 and came to the conclusion that there was very little potential for it.
Other than the oil company PdVSA, there were very few corporations in Venezuela for which one could imagine doing corporate finance deals of any substance. There were a few local monopolies like the tobacco company, but essentially all business activity beyond the mom-and-pop store level centered round the oil sector.
That same thing was not true in Argentina.
Venezuela vs. Argentina
Argentina was genuinely rich in 1929, and its minerals and commodities business was sufficiently diversified that even when I was there in the 1980s - a low point - there was obviously lots of locally owned stuff going on.
What's more, the Argentine economy was decently run in the 1990s, with the currency pegged to the dollar. At the time, free market policies were basically in force and the level of corruption was reduced to a manageable level under President Carlos Menem.
However, commodity prices were low throughout the 1990s, so the budget and balance of payments ran into difficulties. That resulted in a default on debt and a sudden devaluation of the peso from parity against the dollar to 4 to 1, wiping out many middle class savings which were forcibly "pesified."
The skills needed to run a decent economy in the two countries thus are different.
In Argentina, while commodity prices are high, you just need to run a free market system and keep the government from bloating itself. If you can stick to that, wealth will come.
Of course, since Argentina ran more or less free-market policies in the 1990s, which ended badly, and admirably free-market policies in the 1930s, which coincided with the Great Depression, the chances of the Argentine electorate accepting decent policies is pretty slim.
By comparison, Venezuela is more difficult.
If PdVSA is run properly (a job at which Chavez is failing - Venezuelan oil output is down by about a third since 2001), then there will generally be enough revenue to keep the place afloat.
However, it will all be concentrated in the government.
Even if PdVSA were fully privatized, a rational government would charge it huge royalties and produce the same effect. Thus Venezuela has not had free market policies since the 1950s, and is unlikely to get them as long as the oil lasts.
Even if the Venezuelan electorate underwent a mass conversion, Venezuela would still remain badly run; its troubles are far less the fault of its people's foolishness than in Argentina.
Argentina Takes the Lead
So while the two countries are fairly close on their road to ruin, Argentina has the lead.
Venezuela has nationalized almost all the foreign companies operating in the country, whereas Argentina has only begun by nationalizing the oil company. Indeed, in Argentina several mining companies are expanding, foolishly imagining they will avoid the treatment.
Both countries operate rigorous foreign exchange controls, both countries have "free market" exchange rates far lower than the official rates, and in both countries the governments have taken steps to seize the foreign exchange reserves.
Still, even though Venezuela has been slightly more hostile to foreign investment, my bet would be on Argentina running out of money first.
The reason is that Venezuela already controls its main source of export earnings through PdVSA, whereas Argentina is reliant on its agriculture sector and foreign mining companies to provide foreign exchange.
Thus bad behavior by the Argentine government will eliminate the flow of foreign money, whereas provided Chavez can find even a few top managers for the oil company, Venezuela's foreign money flow is guaranteed.
So here's the bottom line: unless Chavez gets sick again, Venezuela can probably stagger on for some years.
Argentina, on the other hand, could collapse within a year.
Needless to say, you should avoid investing in either one of these black holes.
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