Monday, June 13, 2011

A Constant Feeling of Crisis (Must Read Article)

Hello FerFAL,
I very much enjoyed reading your book. Not only was the information extremely useful, but I also appreciate your common sense writing style which makes the message much more actionable.
Having begun to follow your blog I thought you might be interested in a recent article I read in the June issue of Inc. Magazine regarding doing business in Argentina. The focus was on the unique business challenges faced with the expectation of economic crisis. Many parallels were discussed similar to those you brought up in your book regarding preparation and mindset. It might be worth your looking at and commenting on if you are after new content for your blog.
Thank you again for your efforts.
Best regards,

A Constant Feeling of Crisis

Buenos Aires, Argentina
Think the U.S. economy feels shaky? Try doing business in Argentina, where corruption is the norm, regulations are absurd, inflation is rampant, and financial crises are a dime a dozen (11 cents next month).
By Max Chafkin | @chafkin | From the June 2011 issue of Inc. magazine

On the day his country exploded, Santiago Bilinkis stayed at home and watched the riots on television with his wife and infant son. It was painful. In Buenos Aires, one of the world’s great cities, looters were attacking grocery stores. Bilinkis’s bank account—along with every other account in the country—had been frozen by executive decree three weeks earlier. Argentina was out of money.
This was December 20, 2001, a Thursday. That afternoon, several people were killed by police in front of the executive office building, known as the Pink House, and President Fernando de la Rúa resigned and fled the capital in a helicopter. In the days that followed, Argentina would cycle through four more presidents and default on debts totaling $155 billion. Unemployment would soar to 25 percent, and local governments, unable to pay their workers, would simply invent and print their own currencies. It was the beginning of the worst financial crisis in Argentina’s history—and by some estimations the worst peacetime financial crisis in the history of the world.
Not that Bilinkis was surprised. His country had been spending far more than it collected in taxes for as long as he had lived, and paying for the shortfall by printing money or borrowing from international investors. Although he was only 31, Bilinkis had already lived through two coups, one bloody political purge, and 15 years of hyperinflation. Whereas the rest of the world treated financial crises as one-off catastrophes, Argentines looked at them like seasonal floods and prepared accordingly. You stocked up on U.S. dollars and canned food, and you waited for the crisis to pass. The general rule of thumb was one financial crisis every 10 years. It had been 11 years since the last one.
Bilinkis’s preparations were slightly more elaborate, because he had more to lose than most Argentines. The son of a psychoanalyst and a sociologist, Bilinkis grew up in Buenos Aires, went to a prestigious private college on a scholarship, and graduated at the top of his class. In 1997, after two boring, well-paid years at Procter & Gamble in Argentina, Bilinkis and a college friend co-founded Officenet, an office-supply company that served businesses in Argentina and Brazil.
At the time, this was a highly unusual decision. Since the 1950s, a series of dictators had devastated the Argentine private sector, concentrating wealth into the hands of politically connected oligarchs, corrupt government contractors, and, most recently, foreign investors. In Argentine Spanish, the word for businessman—empresario—had become synonymous with criminal, and it was widely assumed that the most successful people had robbed and cheated to get where they were. The word for what Bilinkis was—emprendedor—was not in regular use. “I’d gone to one of the top business schools, and I’d never heard the word entrepreneur,” Bilinkis says. “I just knew I wanted to start my own thing.”
Bilinkis also knew that he wanted to start a different kind of company. Officenet paid all of its taxes and eschewed corruption of any kind. At a time when software piracy was rampant in the developing world, he paid thousands of dollars for Microsoft Windows licenses. This put Officenet at a disadvantage relative to its competitors, but Bilinkis rose to the challenge. “We survived by being more productive than our competitors,” he says. “If you’re focused on evading taxes or paying bribes, you’re not focused on warehouse productivity or customer service or business intelligence.” By 1999, Officenet was profitable. The company had 200 employees and revenue of $20 million a year. Bilinkis had always dreamed about being acquired by a big American office-supply company; now he sometimes dreamed that he would be the one doing the buying.
But the crisis changed everything. Bilinkis knew a lack of cash in the economy would devastate Officenet’s sales. (Over the following months, they would fall nearly 80 percent.) His personal stake in the company—a block of stock that had been worth millions of dollars on paper—was now effectively worthless because of liquidation preferences on preferred shares given to outside investors. Many Argentines in this position, including his co-founder, simply decided to leave the country, but Bilinkis wanted to stay. “I thought there was a fight to be had,” he says. Officenet’s cash—some $20 million left over from a private equity investment in 2000—was safe in a U.S. bank account. If he could just get expenses in line, the company would survive.
On Friday morning, he took a taxi to the office and retrieved a folder that contained a worst-case-scenario plan. The plan—code-named Pi for plan inflación—had been kept secret from all but two senior managers. The first and most brutal step was an immediate layoff of a third of the company’s workers. “It was ugly,” Bilinkis says. “So ugly. I knew that most of the people we let go that day would not get another job for a long time. We were pushing them to the crocodiles.”
But it had to be done. That afternoon, four days before Christmas, he mailed (as stipulated by Argentine law) termination notices to 80 people. The move was prescient: The following week, the Argentine government suddenly changed the rules for severance payments—instead of one month’s salary per year of service, it would be two months’ salary. If Bilinkis had waited just one week, his company would have gone under. “There are stupid changes in context that can happen at any time that will completely screw your business,” Bilinkis says. “You have to be ready to face whatever life throws at you.”
The meltdown of 2008—which nearly destroyed the world’s banking system, sent the United States into its worst recession in 80 years, and put half of Western Europe on the brink of economic collapse—barely registered in Argentina. Andy Freire, Bilinkis’s co-founder at Officenet, told me that he finds it hard not to laugh when his American friends complain about their problems. “Retail sales fall 5 percent in the U.S., and people say it’s a major crisis,” Freire says. “Our sales went down 65 percent in a single month. That’s a crisis.”
I’d come to Argentina to find out what we Americans might have to learn from entrepreneurs like Freire. Argentina is one of the toughest business climates on earth, and, in some circles at least, a cautionary tale for U.S. policymaking. A 2010 Washington Times op-ed, written by Richard Rahn of the Cato Institute and illustrated with a Photoshop job of the American President in an Argentine gaucho outfit, offered a litany of parallels between the two countries: “Argentina has extensive import bans and controls. The Obama administration has been advocating protectionist trade policies…[Argentina has] a value-added tax (VAT) and a wealth tax. Officials of the Obama administration and some members of the U.S. Congress are flirting with a VAT,” and so on.
Of course, comparisons like this are disingenuous. According to rankings maintained by the World Bank and the Heritage Foundation, the U.S. is one of the most business-friendly countries in the world. We have stable, transparent regulations, and we pay a smaller percentage of our income in taxes than almost every other rich country.
Moreover, it’s hard to chalk up Argentina’s problems to any one ideology. Argentina is an equal-opportunity boondoggle, a deeply divided place where politicians oscillate among the extreme right, the extreme left, and the extremely weird. The causes of the crisis that nearly killed Bilinkis’s company were many: a patronage system, started by Juan and Eva Perón in the 1950s, that grew into a bloated government bureaucracy; a corrupt privatization of government services that sold off some of the country’s most valuable assets at fire-sale prices; and a reactionary monetary policy that exacerbated both of these problems. In 1991, the government launched a plan known as convertibility, in which it pegged the Argentine peso to the dollar and promised to exchange pesos for dollars at any time. The plan—a sort of update on the gold standard—was intended to stop the country from simply printing money and to force it to live within its means.
But it’s hard for a country to live within its means when it is unable to collect revenue. Income-tax-evasion rates in Argentina are roughly 60 percent, and evasion of the value-added tax is roughly 40 percent, according to Marcelo Bergman, a professor at Mexico City‘s Center for Economic Research and Teaching and the author of Tax Evasion and the Rule of Law in Latin America. (Evasion rates are 10 percent to 20 percent in the U.S.) Bergman says that Argentina, like other countries in which tax evasion is widespread, suffers from a “noncompliance equilibrium.” People see their neighbors cheating with impunity and conclude they should cheat, too. “In order to change this, they’d have to do some kind of shock and awe and go after everybody,” Bergman says. “But that’s impossible. You can’t audit everybody.”
The result of all this has been something rare and tragic in modern history: a rich country made poor. In 1913, Argentina was the 10th wealthiest country in the world, ahead of Norway, France, Germany, and Japan. Today, it is in 66th place, with a per-capita income of $7,600.
The strange thing is that it’s easy to spend time in Argentina and miss all of this. Argentina is sparsely populated and resource rich—producing soybeans, wheat, wine, and, of course, beef—and has more arable land per person than all but five nations. Demographically, Argentina feels familiar to Americans—most Argentines descend from European immigrants who came during the late 19th and early 20th centuries—and its capital city could easily be mistaken for Paris or Madrid. Wealthy Argentines live in opulent apartment buildings or in gated communities, wear designer clothes, and drink espresso out of tiny cups.
But although Argentina talks and walks like a European country, its style of doing business is distinctly Third World. The country ranks 115th on the World Bank’s Doing Business index and 138th on the Heritage Foundation’s Index of Economic Freedom, thanks to a tangle of taxes, tax credits, subsidies, prohibitions, exemptions, and delays. These rules change constantly, aren’t enforced uniformly, and are forever subject to bending or breaking if a bribe is paid. And almost everybody pays: Transparency International ranks Argentina 105th in terms of corruption, worse than famously corrupt countries such as Mexico, Egypt, and Liberia.
Thanks Wade, the article is outstanding and explains with great detail and example why its so hard to do business in Argentina and why everything is so volatile. That also means there’s new business niches and opportunities created as well, but as appealing as that may sound the country can change all of a sudden yet again, the rules are rewritten or corruption just may make it impossible to run a business.
I can’t recommend the article enough because it brings up so many good points.
In a nutshell the lesson is that here in Argentina you learn to swim with the sharks as the article says, and live on the edge both financially and physically which is what I constantly try to explain when I mention keeping a constant level of awareness.

When it comes to business and finances the game is also different from what you guys are still used to, in spite of the crisis. Here in Argentina, companies survive on weekly basis. A medium term plan is 6 to 12 months and long term business plan is 1-4 years. It´s just impossible to plan anything beyond that because the rules will change every election period, probably  before that.

My wife and her sister inherited her father’s small company when he passed away, a company they had already been running over a decade ago when her father first got sick. She knows better than anyone that here, small/medium business are run in a per week business: The prices of metal and other supplies change every day, any week a new wage increase can be declared after a union protest of political rally,  transferring that increase to the product they sell and likewise increasing inflation. The ever increasing wages just never manage to catch up with the even faster increasing inflation so even with constant raises there’s more and more poor every month.

What you can learn from all this is that post-collapse business is erratic and risky, that there are opportunities, especially if you have some capital to start with (precious metals being the closest thing to a form of bomb-proof liquid capital) but the business must be one that has a relatively quick turn around, and as always, be ready to cash in and move to the next idea if it comes to that.

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Anonymous said...

Cool info about Argentina though I take anything from the "Heritage Foundation" the "Cato Institute" and for that matter the also supposedly non-partisan organization, the "John Birch Society" with a grain of salt. They are pets of the likes of Jim Puplava (a real loser investor though his program is very informative) and are all front organizations for the Koch Brothers (though they and the Koch-heads deny this vehemently, the paper trail says otherwise).

Dan said...

One of the things that keeps me from starting my own business is the maze of local, state, and fedgov regulations. Did you find that Argentina's collapse a) made any of the regulations go away, b) kept the same level of regulation but people ignored them more, c) kept the same regulations and people obeyed them the same as they did before the crisis, or d) increased regulation?

I'm wondering if the American collapse will change anything for those of us who want to start our own business but don't want to deal with the red tape.

(P.S. : I know what the answer really is: start the business before the collapse, so you know what you're doing when it really counts. Just want to know what kind of regulatory environment I should expect.)

damian said...

asi que hay que festejar al sorete que teniendo 20 millones de dolares en el exterior "no tuvo otra" que despedir a 80 empleados (sabiendo que -en sus propias palabras- "los tiraba a los cocodrilos")?? ustedes estan locos, despues no quieren que la gente piense que empresario es sinonimo de hijo de puta

CapnRick said...

Damien... este sitio... ... no podria existir si el h de p habia sacrificado todo para proveer empleo para los 80 despedidos. Lo que no sabemos... porque el articulo no dice... es cuantos empleados quedaron en este momento con empleo a full. Suponemos que un cantidad de empleados continuaban con empleo porque el dueno aviso que el negocio bajo 65 porciento en un mes. Ahora, cienes de empleados tienen empleo por el sacricio de los 80.

damian said...

si, claro, anda a decirle eso a los que se quedaron sin trabajo en pleno 2002, "ustedes se sacrificaron para que el dueño de staples no perdiera ni un centavo de los 20 millones de dolares que tenia en el exterior, les estamos muy agradecidos". Y encima festejan que los echaron un dia antes de que la indemnizacion se fuese al doble! caraduras, sinverguenzas, atorrantes, mezquinos...el odio de la gente se lo tienen bien merecido

FerFAL said...

Hola Damian, no conozco en detalle este caso pero no tengo dudas de que con lo que pasó en el 2001 muchas empresas cerraron por que realmente no podian seguir. Siempre esta el "vivo" Argentina, tambien hay gente de negocios honesta. Lamentblemente ser honesto no suele ser bueno en Argentina. No olvides que vivimos en un pais en el que el reality Gran Hermano lo gana (por voto popular!) un delincuente confeso que robó gente a mano armada y vendia drogas, tipo violento y tramposo. Quiza en algun punto merecemos lo que nos toca.