Asymmetrical Information

From the desk of Mindles H. Dreck:

Kry for Me, Kleptocracy

A reader ("Eric") writes in on my Krugman/Argentina post:

'Mindles', it's sad that Krugman can only deal with Argentina as a political football. But his conservative opposition hasn't been much better, calling instead for more liberalization when 20% of the people are out of work isn't going to happen.

The sad thing is, the US Fed was the cause the deflation in Argentina, but the deflation is affecting the US economy as well. The best way to solve the problem would be for the US to devalue. That would end deflation in both countries.

I responded:

Well, a U.S. devaluation is an interesting idea, but it doesn't cure the following Argentine problems:

1. A tendency to confiscate private wealth - bank accounts (which they did in 1989 as well as recently) and private retirement plans, whose assets they confiscated and replaced the assets with worthless government debt.

2. Fiscal irresponsibility. Argentina was about 10% of emerging market GDP but accounts for 65% of sovereign emerging market debt.

Without fixing these things, the government will always receive a no-confidence vote from its citizens. These are the core issues, and a U.S.-cushioned devaluation would be only a band-aid, if that. This is over. Argentina's joining the ranks of fourth world countries. Krugman's probably right about that. But it's kleptocracy that done it.

Now Fredrik Norman, John O'Leary, Ian Vasquez, Walter Willaims, Ana Eiras and Fredrik's readers are weighing in, particularly on the "kleptocracy" charge:

[Not] a single Argentine government since the 1930s, "capitalist" or otherwise, has made protecting property rights a cornerstone of its reforms.

Rather than excerpt further from Fredrik's post, I'll just suggest you go there. I will add, however, that Hernando de Soto's The Mystery of Capital is a topical read on on how property rights and the legal systems to enforce them are the major hindrance in "third world" development. To get a sense of his thinking, you can read , this interview. The following is a decent summary from Tim Murphy's review:

.....such countries have yet to establish and normalize the invisible network of laws that turns assets from "dead" into "liquid" capital. In the West, standardized laws allow us to mortgage a house to raise money for a new venture, permit the worth of a company to be broken up into so many publicly tradable stocks, and make it possible to govern and appraise property with agreed-upon rules that hold across neighborhoods, towns, or regions. This invisible infrastructure of "asset management"--so taken for granted in the West, even though it has only fully existed in the United States for the past 100 years--is the missing ingredient to success with capitalism, insists de Soto. But even though that link is primarily a legal one, he argues that the process of making it a normalized component of a society is more a political--or attitude-changing--challenge than anything else.

The most fundamental "attitude change" necessary for capitalism to work has to come from the government. They have to protect your right to property, and they certainly can't just confiscate your assets.

The Mystery of Capital excerpts extensive research on the proprty documentation process in developing countries performed by de Soto. He has painstakingly chronicled the number of steps necessary to open a newstand or start a grocery in various countries, even depicting the process graphically (and amusingly). Argentina definitely still had these problems. Here's Ian Vasquez on Argentine red tape:

Regulation continues to be a problem nationwide. To open a business in Argentina, for example, requires 12 bureaucratic procedures, 77 business days and $2,100 in fees. In Canada, by comparison, the same operation takes 2 days, 2 procedures and $280. Argentina’s extremely rigid labor laws, a legacy of the authoritarian Peronist era, also remain unreformed. The consequently high cost of labor is directly responsible for the country’s chronically high unemployment rates that have ranged from 14 to 18 percent in the 1990s.

De Soto's book, written well before Argentina's current crisis, is relevant reading, not only to analyze Argentina's half-baked reforms, but also to think about some of the reasons the secular Islamic kleptocracies have failed to grow consistently, and are breeding terrorists instead.

Posted by Mindles H. Dreck at January 2, 2002 11:27 AM | Technorati inbound links