Over at Naked Keynesianism, Luiz Carlos Bresser-Pereira (“Argentina is Right“), starts with a powerful conclusion,

There is no sense in leaving to a foreign company the control of a sector that is strategic for a country.

I disagree, there is — although mine is a more general argument which may or may not apply to Argentina’s YPF, as we will see.

Imagine Ruritania, a country without the accumulated means of efficiently mining petroleum and processing it into gasoline. Efficient here not only refers to the comparison of between benefits and costs of oil production, but also opportunity cost (which ought to be included in costs). It can follow an isolated pattern of growth, accumulating savings and investing them in wealth creating (productive) processes. Over an undefined period of time, which we will arbitrarily assume to be 200 years, Ruritania will develop towards the technological status required to produce refined gasoline.

Alternatively, Repsol — Spain’s leading petroleum firm — buys the land which contains these underground oil fields. Repsol, which benefits from an existing wealth of technological know-how and sufficient capital and means of distribution, believes it can earn sufficient profit if it mines, processes, and sells Ruritania’s oil. In order to start drilling and processing Repsol estimates it will need two years to prepare the infrastructure.

Let me put into perspective: 200 versus 2 years. These figures are, of course, arbitrary, but given the situation it will always take longer for Ruritania to develop the technology on its own than it would be for a foreign investor, who already has the technology, to provide the technology itself. So, if we assign the time it takes for Ruritania to accumulate sufficient capital the variable δ and the time it takes for Repsol ζ, we know that ζ > δ (always). In other words, foreign investment can be more economic and much faster than domestic investment, if foreign investment is a more advantageous position than domestic investment. How do we know who is in a better position? The pricing process, since it is prices which allows market agents to economize resources.

I assume perfectly free markets, and this assumption is unrealistic. This is why I admit that my analysis may not, after all, apply to YPF. Why not? If there is some form of collusion between Spain, Argentina, and Repsol which is guaranteeing the latter control of YPF, even though there are domestic investors ready to take YPF themselves (and willing to pay the price), then this association is sub-optimal. But, this is not the basis of Bresser-Pereira’s argument.

Bresser-Pereira further argues that multinational corporations exploit Argentina’s market without offering “their” market, in return. What benefits does foreign investment bring,

Greater economic efficiency (integration into the global division of labor); It frees up local savings to be used on other investments; It imports foreign savings to be used to pay wages.

In fact, arguing that foreign investment is not good is like arguing that it is not good for a Argentine merchant from some backwater town, with little to offer in terms of a “domestic market,” to sell in Buenos Aires. Adding political borders to our economic exercise does not change the relationship.

Whatever issues Argentina has accessing foreign markets has very little to do with direct foreign investment. In fact, the purchasing or Argentine pesos — free of monetary manipulation — ought to increase the value of the peso relative to the currency used by the multinational firm (in this case, the euro), which should inspire the purchase of foreign currency (to buy foreign goods). Whatever monetary problems Argentina has are due entirely to monetary manipulation, much like they have been throughout Argentina’s modern financial history.

Instead of worrying about redistributing “strategic1” assets to domestic owners, Argentina ought to embark on an internal review of its political, fiscal, and monetary policies which continue to slow economic growth in a country which, honestly, ought to be considered an advanced industrial nation by now. The import of foreign savings can only help wealth creation, and if foreign investment has not helped Argentina the only entity to blame is its own government.

I want to end with a note regarding the use of broad examples to prove points or show trends. Bresser-Pereira looks at China as an example of a growing country with a trade surplus. The merits of Chinese economic expansion are questionable. We are looking at a country that cheats its producers and citizens out of wealth, by subsidizing foreign importers of Chinese goods by reducing the value of the renminbi in comparison to other currencies. However, China has had decent political policies which have strengthened domestic investment (and foreign direct investment) — these are the policies which promise real wealth creation, not monetary manipulation. They are policies which respect the role of the entrepreneur and reduce obstacles that entrepreneurs face when looking to invest in production. When you look at these examples, you really have to comb them with a fine-tooth brush, so that you can extrapolate all the variables. Otherwise, you are going to be wrong in establishing causation.

Notes

1. I rather have a “strategic” resource “controlled” by a company subject to profit and loss — that is, the whims of the consumer — than one redistributed to a company that is protected from loss. And, if both alternatives are subject to profit and loss, then I rather have the one which can most efficiently provide for the consumer, even if it means “foreign” ownership.