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Why Argentina Is Struggling to Find Lifelines

2:20 PM, Mar 26, 2014 • By JAIME DAREMBLUM
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Argentina is a nation of vast natural resources, including agricultural commodities and oil and gas reserves. In fact, it has more shale-oil reserves than all but three other countries (America, China, and Russia). But such resource wealth does not translate into broad-based prosperity without substantial investment—and investment only flourishes when government policies treat capital and private property with respect.

Next-door Bolivia offers a good example of what can happen when government officials fail to respect property rights or the rule of law. The landlocked nation boasts enormous hydrocarbon reserves and mineral deposits. However, President Evo Morales nationalized the oil and gas industries in 2006, and he has made a habit of lawlessly seizing private businesses, including electricity, telecom, and smelter companies. The result has been capital flight and declining foreign investment. In the Behre Dolbear Group’s 2012 rankings of investment risk in 25 leading mining countries, Bolivia placed second to last (ahead of only Russia). In the 2013 rankings, Bolivia didn’t even make the list. Behre Dolbear explained that “Bolivia’s unstable political climate strongly discourages foreign investment as the government continues to nationalize mining companies.”

And yet, with better economic policies and a stronger commitment to the rule of law, Bolivia could attract far more investment and become a much richer country. The same is true of Argentina, whose current predicament is largely the result of bad policy decisions rather than bad luck.

A bit of good news arrived earlier this month, when the Paris Club invited Buenos Aires to begin official debt-settlement negotiations in late May. “Argentina needs to take many steps to regain access to international capital markets and this is one of them,” Alejo Costa, the head researcher at a prominent Buenos Aires brokerage, told Bloomberg News. “This will help unblock loans from European countries and attract foreign direct investment.” Meanwhile, even though Moody’s recently slashed Argentina’s government bond rating, Bank of America recently upgraded its rating, citing factors such as the stabilization of foreign-exchange reserves and the announcement of the upcoming Paris Club talks. As mentioned earlier, the Kirchner government recently agreed to $500 million worth of legal settlements with various foreign companies, and it has begun publishing inflation figures that, while not perfect, are much closer to reality than the laughably bogus data that earned Argentina a censure from the International Monetary Fund.

Make no mistake: Argentina’s economic crisis won’t be resolved quickly, and its ongoing legal battles with former creditors make default a very real possibility. But smart policy moves, along with successful debt resolutions, could ease the crisis significantly. In October, Capital Economics analyst Michael Henderson told the Financial Times: “A few small tweaks could make a massive difference in returning the economy to a more sustainable growth path.” That may have been excessively optimistic. But Argentines are not doomed to suffer through economic dysfunction forever. Bad government policies created the mess, and better government policies can help clean it up.

Jaime Daremblum, who served as Costa Rica’s ambassador to the United States from 1998 to 2004, is director of the Center for Latin American Studies at the Hudson Institute.

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