Saturday, March 11, 2006

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The dumbest economic policy of the year

Longtime readers of danieldrezner.com might believe that, given my rantings on the scuttled ports deal, that I would say this is the stupidest economic policy implemented this year.

You would be wrong.

No, when it comes to ass-backward economics, I'm afraid that not even the United States Congress can compete with Argentinian president Nestor Kirchner. Patrick McDonnell explains in the Los Angeles Times:

Argentine President Nestor Kirchner has a plan to fight rising inflation and escalating food prices: Let them eat beef.

In an extraordinary decision, the government this week announced a six-month ban on most beef exports from the world's third-largest purveyor of the meat.

In Argentina, prime beef is a cultural icon, rivaling tango, soccer and the late Eva Peron. Argentines are voracious beefeaters, consuming 143 pounds per capita annually.

But consumers here have been grumbling about beef prices for months, and Kirchner a left-leaning populist often at odds with big business presented the ban as a way to protect his people from export-driven price hikes.

The government hopes that meat targeted for overseas sale will now stay at home. Increased supplies will reduce domestic prices, which skyrocketed 20% last year, surpassing the worrisome inflation rate of more than 12%.

"It doesn't interest us to export at the cost of hunger for the people," Kirchner declared.

The president's edict took effect Friday. Delighted shoppers rushed to butcher shops to inquire whether prices had dropped yet from the $2 or so a pound for the prime cuts that can go for 10 times as much in the United States and Europe.

"The president's move was absolutely necessary in the moment we are living," said Hector Polino, who heads a consumer group that is critical of rising prices.

What will the effects of an export ban be? McDonnell summarizes this nicely:
[C]attlemen said Kirchner's move would kill the golden calf. Beef exports earn vital foreign exchange for Argentina and amounted to a record $1.4 billion last year. Foreign sales rose 24%.

Cattle farmers say the export ban will probably reduce supplies in the long term, cost them hundreds of millions of dollars and throw thousands of people out of work.

"The plants will begin to shut down," Carlos Oliva Funes, president of Swift Armour Argentina, a large meat producer, told the conservative daily paper La Nacion.

"This is like telling Colombia it cannot export coffee," said Javier Jayo Ordoqui, who heads a rancher's association outside Buenos Aires, the capital. "This is cattle country."

Indeed, on Friday, prices were reported to have plunged as much as 20% at Liniers, the country's largest live cattle market. Economists predicted that modestly lower prices would eventually trickle down to consumers.

Kirchner will lower beef prices -- in the most damaging, inefficient way possible.

posted by Dan on 03.11.06 at 10:55 AM




Comments:

Good God! That is, as you say, the most ludicrous thing to do. Short Argentine bonds now might be a good idea.

posted by: Tim Worstall on 03.11.06 at 10:55 AM [permalink]



Yup. No kidding. One of the memorable things about Netherlands are all the 'Argentinian Steak' houses you see all over the place. I've seen them in France, Germany, and the Nordic countries also. So I wonder what they will do? Change their name? And if they do that and go to supplies of beef from other sources, will they ever return to buying from Argentina?

Probably they will, but as a commodity supplier - not a brand name as heretofore. In the long term this will hurt Argentina pretty badly.

posted by: Don Stadler on 03.11.06 at 10:55 AM [permalink]



Argentina has a particular talent for self sabotage.

posted by: Robert Schwartz on 03.11.06 at 10:55 AM [permalink]



Let's assume for a second that this is not being done to reduce beef costs for his countrymen.

Let's assume for a moment that raising cattle for hamburger is being incredibly harmful to their natural environment in ways that cannot be easily recovered. But that selling that cattle for hamburger is in fact the "best" use of their resources in the Ricardian comparative advantage sense.

What would be the best way for a country to wean themselves off of cattle sales?

posted by: jerry on 03.11.06 at 10:55 AM [permalink]



Jerry:

Perhaps you should look at an atlas. You will then, no doubt, discover that Argentina is not Brazil. I'm sure you'll be amazed to discover that cattle farming is not harming the Argentinean prairies "in ways that cannot be easily recovered".

I'd add something witty about the connection between "environmentalist" and "preternatural stupidity", but that would be crass and unbecoming.

Meanwhile, I await your post about the damage soybeans are doing to the Nebraskan rainforests.

posted by: Barry P. on 03.11.06 at 10:55 AM [permalink]



Jerry,

The externalities of raising cattle need to be internalised by taxing pollution in some way -- then people will find ways to raise cattle which doesn't pollute so much, and won't just substitute some other equally polluting agriculture.

posted by: Tom Davies on 03.11.06 at 10:55 AM [permalink]



Barry, the question wasn't about Argentina, the question was about how economists would view a country moving away from what would apparently be a Ricardian comparative advantaged race to the bottom. If you wish, substitute Nebraska and soybeans for Argentina and beef.

Tom, so I agree with you, you need to tax the pollution in some way. How would Dan Drezner and other economists view Argentina or taxing all beef sales to mediate the pollution, especially in a world where Brazil, or the Duchy of Grand Fenwick might choose not to tax their beef products in the same manner.

What is Argentina and its peoples to do?

posted by: jerry on 03.11.06 at 10:55 AM [permalink]



How long will it be before the marginal ranches start closing? Does anyone think that in a few years hence, domestic Argentine beef won't sell for more than before this wacky policy?

chsw

posted by: chsw on 03.11.06 at 10:55 AM [permalink]



Argentina has a grass based cattle production system. If ranchers can afford to hold rather than sell (which they can), Kirchner has a problem.

Exports fall, Argentine currency falls, inflation increases, interest rates increase, export value per beast increases, cattlemen make money ie win, Kirchner loses.

Australian cattlemen & those associated with the Oz beef industry e.g. myself, win. That's the most important part. Onya Kirchner!

I don't think Kirchner's action is as stupid as the Dubai Ports deal. Watch for US Longshoremen being laid off.

posted by: Thomas Esmond Knox on 03.11.06 at 10:55 AM [permalink]



...not sure of the timing here, but would this have anything to do with the recent confirmation of foot-and-mouth disease in Argentine (in which case exports would be suspended anyway)?

posted by: lms on 03.11.06 at 10:55 AM [permalink]



That is stupid, but South Africa is trying to rival it. I ve been following a story in the daily telegraph covering pending legislation banning foreign ownership of residential property as a way of combating local being priced out of the booming property market! Which is worse?

posted by: centrist on 03.11.06 at 10:55 AM [permalink]



Black market in beef?

posted by: centrist on 03.11.06 at 10:55 AM [permalink]



Jerry: They can become rich through trade and then afford to not pollute, of course.

posted by: Sigivald on 03.11.06 at 10:55 AM [permalink]



Echoing Mr. Knox above - is this some kind of OPEC-type ploy to raise world prices, after which the Argentinians will attempt to cash in? Seems all non-Argentinian producers will prosper from this...

posted by: Don Mynack on 03.11.06 at 10:55 AM [permalink]



Jerry:

If this policy is being introduced for environmental reasons, it would make more sense to tax exactly whatever is causing the environmental damage (I am having trouble coming up with a scenario in which only cattle farming is environmentally damaging). Just reducing prices paid for cattle harms anyone who has figured out a non-environmentally-damaging way to raise cattle, and raises the serious risk that farmers will simply substitute to some other environmentally-damaging way of making money.

In the unlikely event that it is only cattle farming that causes the environmental damage, and there is no way in which they can be farmed environmentally safely, (or it is impossible to identify the cause of the pollution more precisely), a tax or an outright ban still makes sense. A tax or ban would reduce local consumption as well as foreign, thus reducing overall environmental damage. A tax would also raise revenues for the government which it may be able to use on something more beneficial than cattle farming.

If the other countries in the world don't tax beef sales, then Argentina still benefits from reduced environmental damage locally, and the population will shift to whatever is now their comparative advantage economically.

posted by: Tracy W on 03.11.06 at 10:55 AM [permalink]



We've all been duped by our imperfect understanding of Latin American politics. This is a case of putting "lipstick on a pig" to use the faddish euphemism for spin.

Argentina announced last week it had dosciovered foot and mouth diasease within its cattle herd. The ban on exports is a market confidence measure - it was likely most countries would have stopped imports of Argentinean beef anyway, so Kirchner is just making a political virtue of necessity. No dark conspiracies, environmental motivations, and nor is it a policy driven by statist economics.

posted by: Sturt on 03.11.06 at 10:55 AM [permalink]



Market Report from Dalby Saleyards weekly sale. 7,100 cattle yarded; market for export cattle dearer. Thank you Mr Kirchner. 72,000 cattle slaughtered in Queensland this week. I estimate 65% of that beef destined for export. The real world.

posted by: Thomas Esmond Knox on 03.11.06 at 10:55 AM [permalink]






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