Argentina is suffering from severe economic problems with a three year recession worsened by the Covid-19 pandemic and with runaway inflation of around 40%. Recently, the government has declared telecommunications services a “public service” and decreed no price increases for the remainder of 2020.
At the root of Argentina's financial problems is the fact that the government has been persistently running a budget deficit of around 5% per year, and the country has a significant balance of trade deficit. As a result, the country had to borrow from international lenders and has had troubles paying back the loans.
As a result, the country is facing increasing difficulties borrowing overseas, and its currency is significantly devalued. Since Argentina has only limited ways to fund its government deficit through external funds, it is printing money to cover the government spending. Consequently, inflation is rampant, and increasing amounts of money are chasing the same or even shrinking pool of goods and services.
In a perpetual race akin to a dog chasing its tail, businesses need to raise prices as the cost of imported raw materials increase, these increases filter through to consumers, who now need more money to buy the same goods and services, who then demand more money from their employers and the circle continues.
In order to get inflation under control, the best course of action would be if a government would stimulate exports. The low hanging fruit is literally agriculture and raw materials. The more difficult but more sustainable solution would be high-tech products and services, an endeavor that would take a 10 to 20-year consistent effort.
South Korea is the shining example for this path from destroyed country to affluence through high-tech.
Argentina, on the other hand, has been trying to close the trade deficit by increasing agricultural exports, most recently to China. In a worrying turn, Argentina announced plans to nationalize Vincentin SAIC, the country's largest soy exporter. The proceedings around Vincentin SAIC are perceived to be the canary in the coal mine. Companies that are afraid that they will be nationalized and either receive no compensation or below-market compensation from the government are understandably reluctant to invest.
Telecommunications is declared a 'public service'
In terms of telecommunications, the government has declared telco services a “public service” and decreed no price increases for the remainder of 2020. Policies like nationalization and price controls are a proverbial band-aid on a sucking chest wound that hurt the country more in the long run than the short-term benefits.
Argentina’s mobile networks have been very strong with more than 80% availability of 4G networks, with speeds on par with Brazil, and only slightly behind Uruguay. These price controls could not come at a worse time as Argentina prepares to roll out 5G networks. Argentinian operators have to be confident to be able to realize a positive return on their investment without the specter of nationalization as the next step of being a public service.
Investments in the existing 4G networks would also slow down and could fall below maintenance capital expenditure, which are necessary to keep the networks running at the current level. Experience from other countries ranging from Venezuela to Zimbabwe have shown the negative outcomes of price controls and nationalizations. Nothing good has ever come out of it.
It is also a warning sign for the U.S. that price controls on telecommunications services ultimately create the opposite effect that was intended. Prices will get lower initially, but what has been intended as a price ceiling becomes a price floor as operators can blame the government for prices.
The wireless CPI clearly shows the benefits of competition. If prices are tied to the cost of production two problems occur: One is how do you define cost, and two you are taking away all incentive to invest into new technologies that lower cost since at best your profits stay the same.
While we are not there yet for the United States, other countries involuntarily serve as a teaching tool of either how to do it or how not to do it. Argentina deserves better and needs to break the vicious cycle of balance of trade and budget deficits that impoverish a country that was, one hundred years ago, the richest country in the world.
Roger Entner is the founder and analyst at Recon Analytics. He received an honorary doctor of science degree from Heriot-Watt University. Recon Analytics specializes in fact-based research and the analysis of disparate data sources to provide unprecedented insights into the world of telecommunications. Follow Roger on Twitter @rogerentner.
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