Incommensurable Defaults

21 July 2011

Thursday


Just a few days ago in Axioms and Postulates of Strategy I wrote the following:

“Emphatically, facts do not speak for themselves. Perhaps it would be better for formulate it like this: facts cannot be counted upon to consistently and univocally speak for themselves. In some contexts and situations, facts sometimes speak for themselves, but this is a function of the conditions under which the facts are manifested. All other things being equal — i.e., when the conditions under which a fact is manifested cannot be controlled or limited — facts do no speak for themselves. This is what Nietzsche meant when he wrote that there are no facts, only interpretations. The modern quest to attain insight through accumulation of and immersion in a mass of detail is more likely to overwhelm than to enlighten.”

It follows from the fact that facts do not speak for themselves, and many (or at least several) different constructions can be erected on the same set of facts. This is the source of incommensurability. Two incommensurable bodies of knowledge — two incommensurable sciences, or even two incommensurable economies — can be raised on a single set of facts.

In the complex world of the social sciences, which involve not only the ambiguities of the world and its facts, but also the ambivalence of human agents whose motivations and purposes are present throughout every claim and counter-claim, the possibilities of incommensurability are raised to a higher order of magnitude. And so it is with economics, which is perhaps the most mathematized of the social sciences, or I could say that it is the most social of the “hard” sciences. Incommensurable economic doctrines flourish, and so the intellectual world is awash with economic claims and counter-claims, both of which seem to be supported by “hard data” (as the contemporary idiom has it), but which also seem to be mutually inconsistent, if not to describe entirely different worlds.

This incommunsurability, the ability to raise plausible but mutually incompatible constructions upon what would appear to be a single state of affairs, was on display in a page-long article by Jude Webber on Argentina’s debt default in the Financial Times for Tuesday 19 July 2011. The article was billed on the front page as “Wise or Lucky: Argentina’s model default,” while on the inside page it was called “Argentina: A high-risk recovery.”

The subject of default is uppermost in the minds of those in the financial community because of the looming default of Greece, a member of the Eurozone, and the shaky condition of Ireland and Portugal. The financial contagion is spreading through the Eurozone and now is affecting Italy and Spain also, whose borrowing costs have risen dramatically just in the past few days. Comparing Argentina in 2001 to Greece in 2011 is of course a lot like comparing apples and oranges. Nevertheless, comparisons are made, and this FT article made a number of comparisons of this order, both implicit and explicit.

I was surprised at the extent to which the author went easy on the Argentine default, and although the article hedged on any kind of outright declaration that Argentina was a “model” for other insolvent nation-state, given its current economic growth some ten years on after the default, this was clearly the picture that emerged. Part of this is to be put to the fact that a Greek default is now considered inevitable, and no one expects the debt to be paid off in full (investors are said to received a “haircut”), the Europeans are looking to a silver lining to the clouds, trying to convince themselves that default is not disaster and that there is a future after default within the Eurozone.

There was, in the article, no explicit recognition of the fact that, since Argentina’s default, that country has been cut off from international credit markets, and as a result of this has had to budget within its means for the past ten years. At least part of the present performance of Argentina’s economy is due to this forced budgetary discipline. This is not, of course, the only reason for Argentina’s superficially good economic statistics. The article chooses to focus on the ways in which international market conditions have, for the past ten years, converged to Argentina’s benefit, which the explicit proviso made that conditions could change at any time and, which them, the relative fortunes of the country. I do not disagree with this, but it is far short of an adequate picture.

I wrote above of Argentina’s “superficially good” economic statistics, and it is important to look beyond the surface in order to get the fuller picture. It is also important to consider the history of Argentina’s economy. History is always relevant to the interpretation of the present, but in the case of Argentina it is more than relevant, it is poignant, because Argentina was once a wealthy country. While Argentina has recently been admitted to the G20, and seems on the path to recovery, and perhaps even eventual wealth, it seems questionable whether the combination of sovereign debt default and a political balancing act within the Argentinian economy can produce lasting results, or whether the country will slip into a prolonged economic twilight of the sort that most pundits now predict for Greece.

Argentina is a large country, geographically extensive with a temperate climate that favors agricultural production. During the nineteenth century Argentina was among the wealthiest countries in the world due to its agricultural exports. That is to say, Argentina relatively early in its history moved to industrial-scale agricultural and an export-based economy. We all know, from recent financial reportage from east Asia, and especially from China, of the vulnerabilities of an export-driven economy, and the need to build an internal market in order to increase resiliency and decrease vulnerability.

Agriculture has continued to be a mainstay of the Argentine economy throughout the twentieth century up to the present, and it is still synonymous with the production of beef. But the agricultural economy is not the whole story. Set in the midst of Argentina’s vast spaces are many surprisingly large cities. I have previously wrote about how Sarmiento urged the urbanization of Argentina because he considered cities to be a civilizing force. This is one of Sarmiento’s intellectual legacies, and comes across clearly in his Facundo.

In a recent BBC piece, Rise of the Asian megacity, the focus of the article is Asian cities, but I was interested to note that for the statistics in 1990, when only ten megacities were named, while half were in Asia, the other interesting fact, not expressed in the BBC story, was that the other half of the ten cities were all in the western hemisphere, and Buenos Aires was one of these ten largest cities in the world. According to current statistics, Buenos Aires is now larger than Los Angeles, and the only larger cities in the western hemisphere are Sao Paulo, Mexico City, and New York.

When I visited Argentina last year I didn’t travel to Buenos Aires, but I did fly in and out of Cordoba, which is Argentina’s second city, with just over a million in population. I was quite surprised by the size of the cities in the Argentina. On every map a city just looks like a small dot, and the unfamiliar traveler often doesn’t know what to expect. Thus when I arrived in Santiago del Estero, San Miguel de Tucuman, and San Salvador de Jujuy, I was taken aback by the shear size of these cities of which I had no previous knowledge. All were big, bustling urban centers.

To get to these cities, however, one had to pass through mile after mile of open country, and as one passes through the small towns along the highway one sees the legacy of Argentina’s agriculturally-based economy: almost every small town had a John Deere dealership, and the greater part of the heavy truck traffic on the highway consisted of agricultural shipping.

Like many places in the world, Argentina has a divided soul: it is both rural and urban, and both rural and urban traditions have contributed substantially to its cultural heritage. I suggest that Argentina is as profoundly affected by The Rural-Urban Divide as is the US, if not more so. Apart from Sarmiento, the literature of the southern cone is rich in stories of inter-generational alienation between the gaucho tradition and the emergent urbanism the transformed the gaucho from a vital part of the landscape to a romantic literary motif. (This is especially the theme of Uruguayan playwright Florencio Sánchez.)

Argentina’s divided soul (no less than that of the US) has led to divided policies, but whereas the divided souls and policies of the US has resulted in less that optimal economic polices, the increasing marginalization of agricultural as an economic force has limited the impact of these policies. In Argentina, where agriculture is still a major force in the economy, policies that have sought to placate urban populations through the politics of subsidy have been devastating for agriculture, and therefore devastating to the economy on the whole.

The Kirchner-Fernández administration has been actively interventionist in the economy, and has been interventionist in the Peronist populist tradition. But this has been an urban populism that treated the agricultural sector as a producer of wealth that can be expropriated and redistributed. The result has been a series of policy interventions that have penalized the traditional agricultural export model, and has even forced agricultural producers to sell at a loss to the domestic market.

Not surprisingly, some major Argentinian agri-businesses have been moving assets to neighboring Uruguay, and indeed the Financial Times article mentions in passing the problem of capital flight. There can be perhaps no more dramatic illustration of this than the fact that Uruguay has now bypassed Argentina as an exporter of beef. I urge the reader to look at a map and compare the relative geographic sizes of Argentina and Uruguay. Even the reader who is unfamiliar with Argentina’s tradition of producing beef for export will immediately see that something is a little strange when diminutive Uruguay can export more beef than Argentina. (Take a look at Uruguay forecasts beef exports will total 1.4 billion USD in 2011.)

In other sectors of agriculture, Uruguay’s exports of fruit have increased sharply. For example, blueberry exports have doubled (mostly going to the European Union), while overall fruit exports have exceeded US$100 million for the first time in its history. Uruguay’s fruit exports are still dwarfed by those of Argentina, but we see a broadly based increase in Uruguay’s agricultural production and export. Thus while Argentina’s economy has been growing at 6 percent per year since the initial contraction following the default, its agricultural industry has been lagging while neighbors pick up the slack. The traditional engine of industrial development and national wealth in Argentina has been marginalized by political intervention, and this puts the sustainability of Argentina’s present financial model in question.

While it is easy to say that policies can be changed and the agricultural industry can resume its role, there will be an inevitable loss of market share and perhaps lost decades of national wealth. Unlike, for example, the mineral wealth of the DPRK or the petroleum reserves of the US held in ANWR, which are essentially resources banked in the ground, and which can be extracted more efficiently and more profitably in the future with improved industrial technologies, the loss from missed agricultural opportunities is a loss that cannot be made up at a later date. If you don’t sell fruit or beef this year, someone else will sell it, and the purchaser will likely consume it this year. You may sell to them next year, but you missed your chance to profit from this year.

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