Government Interference Wrecks Argentina's Economy

In an effort that is almost certainly futile, Argentine Interior Commerce Secretary Guillermo Moreno is reviving a 1974 law that compels holders of suitable stockpiles of flour to sell into the market at frozen prices.

In an effort that is almost certainly futile, Argentine Interior Commerce Secretary Guillermo Moreno is reviving a 1974 law that compels holders of suitable stockpiles of flour to sell into the market at frozen prices.

This follows hard on the heels of a policy that froze supermarket prices in February of this year in an equally futile bid to bring inflation under control.

Wheat production in South America's largest producer has fallen in recent years as farmers react to massive uncertainty. Punitive measures — including fines and imprisonment — further reduce the incentive to produce goods and bring them to market.

Returning to the rule of law and securing property rights are critical in order to restore productivity to Argentina's battered farmers and affordable food to its long-suffering populace.

Both output and the acreage under wheat have fallen as increasing government interference decreases the attractiveness of farming.

According to data from the U.S. Department of Agriculture, in a study by North Dakota State University's Richard Taylor and Won W. Koo, harvested area in 2011 fell to 12 million acres, compared to 15 million acres in 2000 — while output fell to 14.5 million metric tons from 16.2 million metric tons, respectively.

Last year, the area planted dropped again, to 9 million acres, the lowest in 100 years. This fall came in the face of rising global prices, placing the blame squarely on domestic policies.

The decline in production began in 2006, when then-President Nestor Kirchner set export quotas. These quotas are still in place, leaving producers at the mercy of bureaucrats granting the necessary export permits.

That is just too risky a proposition for many people, who have witnessed the government's many ham-fisted attempts to control inflation by imposing price controls, closing down stores if stocks run low, or — as in the latest iteration — threatening fines and imprisonment.

Just as worrisome is the history of expropriation, with President Cristina Fernandez de Kirchner's decision from late last year to nationalize the country's leading oil company, Yacimientos Petroliferos Fiscales, merely being the latest and most spectacular example.

As Argentina demonstrates, lavish endowment of natural resources is not enough to make or keep a nation wealthy. At the turn of the 20th century, Argentina was one of the 10 richest countries in the world. According to the World Bank, it now ranks 62 and is likely to keep sliding.

With its large swaths of fertile land and excellent climate, it still remains one of the world's largest exporters of wheat, but as output shrinks, Argentina risks sharing the fate of Russia, which is similarly blessed and went from being one of the world's largest exporters of wheat to the world's largest importer.

Prior to the establishment of the Soviet Union, Russia was one of the world's major exporters, accounting for a quarter of the product on the global market. This changed dramatically following Joseph Stalin's farm collectivization.

While reliable data are difficult to obtain, 93% of peasant households were collectivized by 1938, compared to less than 4% in 1929. Yet production dropped from 73 million metric tons in the mid-1920s to less than 70 million metric tons despite a significant increase in acreage sown.

By 1933, Russia was suffering famine, and agricultural output continued to decline through the entire existence of the Soviet Union.

Certainly, the Argentine situation is not as extreme as Russia's in the 1930s.

Nonetheless, Argentina has a long history of poor macroeconomic policy, high inflation and currency crises. This time around, the threat of expropriation and uncertainty surrounding the ability to market output is effectively acting as a tax on investment.

These policies decrease the security of property rights and make investment much riskier.

Wheat is largely a cash crop, whether for the domestic market or for export. Now, the farmer faces the risk of price controls in the domestic market, compounded by the risk of not being able to secure an export voucher for the global market.

That is, too low of a domestic price risks selling at a loss; lacking a voucher denies access to the export market.

Even then, there is also an export tariff. While there is talk of a rebate, the precarious fiscal situation makes it unlikely that the government will actually deliver.

In any case, it is yet another uncertainty that adds to the calculus of risk.

As the case of Russia shows, bad policy can overcome natural advantages, to the detriment of the populace. Restoring the rule of law, such that all people can plan voluntary exchange with relative certainty is the best way to ensure there is enough flour for bread at affordable prices.