Signs of Trouble in Argentina

The Argentine Economy has been a topic of major discussion in the past few weeks. Following the landslide re-election of President Cristina Fernandez de Kirchner on October 24th coupled with the economic boom Argentina has been experiencing in the past few years they are certainly under the spotlight in terms of Latin American economies.

Despite their recent successes Argentina is facing various problems and controversies. Many have speculated that Argentina’s recent economic prosperity can be largely attributed to soaring Soybean prices, one of the countries major exports, and that the country’s economy is too dependent on the prices of commodities. According to this article from the New York Times: “Argentina’s continued success relies on commodity prices remaining high and on strong demand from China and Brazil, but economists say those factors may soon be undermined by the global economic downturn. Growth is expected to slow to 4.6 percent next year, in line with the rest of the region, but inflation may remain stubbornly high, economists said.”

Delving deeper into the problem – various sources report that despite the inflow of cash from exports the country is experiencing record levels of capital flight from the country. According to this recent article from MercoPress economist Carlos Melconian is quoted as saying “The government of former president Fernando De la Rúa blew up when 19 billion dollars flew out of the country and here we are with 51 sustained months of capital flight, four times more and so far nothing has happened. This is because the 98 billion dollars of agro-exports have been sufficient to sustain such a drain”

All of this information coupled with a report released yesterday by the CIF Leader Index stating that the probability of a recession has me wondering – clearly President Kirchner is aware of these warning signs, but what is doing to fend off this pending economic recession? Lately, it seems that many leaders are unable to learn from the past mistakes of other countries. The housing bubble in the United States led to one of the worst recessions in history yet there was no lack of warning signs leading up to it. What’s more this situation is eerily reminiscent of the real estate bubble that occurred in Japan in the 1990’s. Clearly property value bubbles and soaring export revenues are two different things but that is not to say situations like Argentina’s have not occurred in the past. I guess the question now becomes: is Argentina’s faith in Cristina Fernandez de Kirchner misplaced, or will she be able to learn from past situations and enact economic policies that continue the trend of economic prosperity in Argentina?

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The Mystery of Capital

I recently read The Mystery of Capital (2003), written by Hernando De Soto. The subtitle of the book is “Why Capitalism Triumphs in the West and Fails Everywhere Else.” Following the fall of the Berlin Wall and the global collapse of communism, what ensued was the greatest economic experiment in history.  During this period the Soviet Union’s global power and influence over smaller countries was relinquished and it became profoundly clear that capitalism is the most widely successful and legitimate type of economic system in the world. In light of this fact, many countries saw adopting capitalism as the path by which they could enact economic prosperity.

De Soto explains that the majority of non-western countries that have attempted to implement a capitalist economic system have not experienced the same growth and prosperity as western countries such as the United States and Germany. De Soto argues that economic growth can only be enhanced in capitalist countries that have a highly developed system of property rights, something that many non-western countries lack – especially those in Latin America.

Hernando De Soto himself is a Peruvian economist and as such he uses Peru as one of the main subjects of his argument. De Soto notes that during their time spent in Lima, the capital city of Peru, he and his colleagues found that: “To obtain legal authorization to build a house on state-owned land took six years and eleven months, requiring 207 administrative steps in fifty-two government offices.”  He explains that the inefficiency in Peru, largely caused by a lack of regulation and legal infrastructure, has led to the creation of “extralegal” or informal markets. People cannot afford to and do not want to take the legal road and as such they go out on their own and build houses and buildings and such on their own accord. The result is a multitude of properties that are not recognized by the government, not measured by GDP, with no potential to be used by the owner to create more capital in the future – something De Soto refers to as “dead capital.” These trends are something I was entirely unaware of prior to reading this book and I would strongly recommend it to that anyone interested in Latin American economics.

I will conclude this post with a few startling facts: De Soto estimates there are 9.3 trillion dollars of dead capital in countries throughout the world. According to this article, there is 1.2 trillion dollars of dead capital in Latin America alone. Bolivia is a Latin American country with access to plentiful natural resources that encourages free trade, foreign investment and the privatization of major industries. However, Bolivia is the poorest country in South America and its dismal economic situation can be attributed in part to the fact that the informal – or in De Soto’s terms “extralegal” – portion of the economy accounts for more than two thirds of the country’s GDP (source).  It seems that Bolivia and many other countries Latin American countries could learn from De Soto’s findings and perhaps use them to majorly improve their economies.

Latin America Matters

In my experience Latin America generally goes unmentioned in the everyday conversations of U.S. citizens – even those regarding business and the globalized nature of the world economy. When you consider the global effects of the “Euromess” and the clout of international economic super-powers like China, India, Germany, and Japan this isn’t quite so surprising. In addition, the amount of business being done between China (the second largest economy in the world) and Latin American countries, most notably Brazil, is detracting from U.S. trade relations with the region. However, The Latin American economy is growing and expanding and according to the U.S. Council on Foreign relations: “Latin America has never mattered more for the U.S.”

The United States are the largest export destination for Latin America, in 2010 more than 40% of Latin American exports ended up in the U.S. Conversely, “The region is the largest foreign supplier of oil to the United States and a strong partner in the development of alternative fuels. It is the United States’ fastest-growing trading partner, as well as its biggest supplier of illegal drugs. Latin America is also the largest source of U.S. immigrants, both documented and not. All of this reinforces deep U.S. ties with the region—strategic, economic, and cultural—but also deep concerns.”

These factors coupled with the recently approved trade agreements with Colombia, the consistent growth and stability seen in Chile’s economy, the booming nature of Argentina’s economy in the past few years, and the fact that Brazil is the 9th largest economy in the world make me wonder… why aren’t more people talking about Latin America?

Studying Abroad: the FREE Way to Do it

There is no better way to learn about a country than to spend some time living there. According to this article from The Daily Beast, business students who go abroad gain knowledge and experience that gives them an instant advantage over their competition in the job market. However, in considering whether or not to visit other countries, many students and travellers alike are deterred by high costs or the thought of having a gap in their work history. There is an easy solution to this problem: go teach English in another country you can spend an elongated period of time in the country of your dreams for free, in fact, odds are you will make some money while you’re at it. The beauty of it is, if you are a current student, hold a bachelor’s degree (generally unimportant in what) and are able to read this post – you’re likely already qualified!

The thought of packing up, leaving your hometown/city, and going to live in another country for a while is enticing for many people whether they be International Business students or not. However, there are many obstacles that one must overcome prior to making this leap. Few people have jobs that are flexible enough to afford them the luxury of taking several months of vacation. Also, let’s not forget that even if you are able to get the time off, you still have to pay for it!

What about studying abroad? In going abroad you have the same basic costs as living stateside – food, rent, tuition, etc. However, study abroad programs that simply work out the logistics of taking care of these commodities for oftentimes are not the most cost-effective option. Not to mention the cost of living in other countries varies greatly and depending where you go – it could be one extremely expensive summer, semester, year, what have you. Granted, it is possible to work whilst studying abroad to help offset these costs, but many would rather take this opportunity to travel and, well, party.

Your wallet is already starting to hurt, isn’t it? Don’t fret, here’s the good news: the large majority of ESL programs cover your living expenses including food and rent, as well as your airfare. Most importantly, they pay you to do it.  In some countries you can earn up to $20,000 per year teaching English and while that may not seem like much at first, don’t forget that your living expenses will more likely than not be paid for as well. Consequently, it may be beneficial for students thinking about studying abroad to consider putting it off until after graduation and saving themselves a whole lot of money. What’s more, ESL programs generally only require 20-25 hours of teaching per week. This means that your weekends are open for travelling and if you’re ambitious enough, getting another job is totally doable if you really want to take advantage of your free living situation.

So what about the fact that you won’t be attending classes? While I was studying abroad in Chile I had great teachers and I did learn a ton of Spanish in class. However, there are countless language skills resources available online which are either free, or relatively cheap, that teach the same exact material you will learn in classes. And to be completely honest, the way that I learned to communicate effectively and really learned the language wasn’t from taking classes – it was from going out, getting lost, and taking advantage of every possible opportunity to mingle with locals. What better way to do this than engaging on a day-to-day basis with Spanish speakers who you must relate to in order to do your job effectively?

Since I am very biased toward Chile I feel obligated to include the link to this program that is held via the Chilean Ministry of Education in conjunction with the U.S. Government:

English Opens Doors Program

Also, here are a few links to take a look at that provide information regarding, and access to ESL programs in countries all over the world:

GoAbroad.com

LanguageCorps

Teach English Overseas 

3 Advantages to Buying Property in Chile

  • Economic Safety and Stability

–       Chile holds the strongest sovereign bond rating in all of South America (CIA World Factbook) and recently became the first Latin American country to be admitted into the Organisation for Economic Co-operation and Development (OECD).

–       Chile is known for having sound financial institutions and is listed at 7.2 out of 10 (10 being absolutely no corruption) on Transparency International’s 2010 Corruption Perception Index.

–       Chile has experienced consistent growth in GDP and GDP Per Capita over the past decade and has proven resilient to the effects of the recent global financial crisis.

  •  Cheap and Easy

–       Foreigners receive the same treatment from banks as Chilean citizens, there are no special regulations or obstacles for foreign buyers.

–       Transaction costs are very low. According to Global Property Guides the total transaction cost of buying and selling the property is between 5.3-6.9% of the property’s value.

–       Chile’s agricultural land is exceptional value and ranges from 3 to 10 times less than comparable land in North America and Europe.

  • Wide Range of Unique Properties

–       According to Chile Investments: There is a huge range of residential, commerical and agricultural real estate for sale in Chile that can suit the requirements of every investor, from seaside properties with stunning views over the Pacific, city apartments, mountain lodges, historic Colonial houses, hotels and lodges and country getaways amongst others.

Tourism and Real Estate in Chile

Considering Chile’s extremely unique and diverse geographical composition it is no surprise that tourism is quickly becoming one of the country’s principal industries. According to this article from MercoPress Chile’s national tourism service, Sernatur, has indicated that by 2020 it hopes for tourism to be the third largest sector of Chile’s GDP.

It would appear that they are already making headway – listed at number one atop New York Time’s Top 41 Places to Go in 2011 was Chile’s capital city: Santiago. I am proud to admit that when I first read this article, I had already been living in Santiago for two months. I guess we’ll just have to chalk that one up to good judgement. I digress.

Similar to the tourism industry in Chile, the real estate market has also begun to expand and attract foreigners to the country. According to this article from the New York Times, the Chilean real estate market has been receiving a great deal of attention from foreign homebuyers. Here is one interesting excerpt from the article:

 Luis Rodríguez, co-owner and regional director of Re/Max Chile, says affluent Americans, especially baby boomers, have increasingly sought out homes. “They are coming here to retire and have a good quality of life,” he said. “You can buy a property that is virtually identical to a California property for a fifth of the price.”

While this article is clearly directed toward a homebuyer audience my own intuition tells me that purchasing real estate in Chile for investment purposes is likely to be equally beneficial and infinitely more profitable. In searching for online content that may support this hypothesis I stumbled upon some very interesting information.

Below are the links to several articles and websites that explore the Chilean real estate market and the investment opportunities it provides:

–       This Overview of Chile provided by Global Property Guides includes an interesting tidbit regarding small apartments and their capacity to return gross rental yields of over 10%.

–       This article from BusinessInsider provides an interesting assessment of Santiago and the prices per square meter that can be found in different areas of the city.

–       According to this article from NuWire Investor Chile is the number one real estate market in Latin America.

–       Chile Investments is a real estate consulting firm made up of both foreign and Chilean businessmen that aims to attract foreign investors in real estate. Their website is full of valuable information.

In my next post I will explore the logistics of purchasing property in Chile in greater depth and take a look at notable aspects of the Chilean marketplace that may influence foreign investors.

Thanks for reading!

Attention Entrepeneurs: Start-Up Chile Awarding $40,000 Grants, Visas, Connections

Start-Up Chile is a one of a kind opportunity for global minded entrepeneurs. The Chilean government along with Corfo, a governmental agency formed to promote economic growth in Chile, are offering $40,000 grants, 1 year visas, and access to business connections and networks to “early stage, high-potential entrepreneurs to bootstrap their startups in Chile, using it as a platform to go global.” The program began in 2010 and during its pilot stage Start-Up Chile gave awards to 22 startups from 14 different countries according to the program’s official website. The program is currently accepting applications which must be written in English, and provide all required documentation. The application process is open until October, 27th – very short notice I know – however, judging by the past success it has had and the enthusiasm with which the Chilean government is promoting this program I would wager it will be around for years to come. Applicants be warned: the directors of Start-Up Chile are only considering the most innovative and well-thought-out business plans and in order for your idea to be successful it must first be approved by top Chilean government officials and Stanford academics. You can view the full list of directors in this article from Start-Up Chile’s blog which provides the most current information on the program.

I, personally, have never heard of such an amazing opportunity and if I had the right experience, idea, and resources you can bet I would be back in Santiago in a heartbeat. After having spent the last few weeks looking deeper into the make-up and state of the Chilean economy it has become clear to me that Chile is rife with opportunity. If you’re looking for a place to invest Chile should be close to, or on top of your list.

Don’t take it from me, here are a couple articles that go deeper in exploring Chile’s potential:

http://www.mint.com/blog/trends/chile-the-new-land-of-opportunity/

http://seekingalpha.com/article/297986-looking-for-an-emerging-market-try-chile-on-for-size