To prevent capital flight, don't try to stop it

Argentina's central bank has been hemorrhaging reserves this year in its attempt to keep the paso from falling more rapidly against the dollar. Money is fleeing Argentina—possibly as much as $20 billion dollars so far this year—because people don't trust the government and don't trust the currency. The peso is becoming overvalued, the government is understating inflation, and the government is trying accomplish by force that which can only be achieved by trust. The government is actively trying to prevent people from taking money out of the country. In the latest move, sniffer dogs are being deployed at border crossings to detect bundles of dollar bills.

The more the government tries to stem capital flight, the more there will be. Capital only stays in places where it is welcome and free to leave. Argentina instead punishes capital with steeply progressive tax rates, by hiking export taxes and limiting access to cheap and essential imports, and now by limiting how much Argentines can spend when they want to travel abroad. It is almost impossible for a government to prevent capital flight by force; there is no shortage of ways that fearful citizens and corporations can manage to circumvent capital controls—and the more a government tries to stop it, the more fearful and resourceful people become. We've seen this movie many times in the past, and it always ends with a tragedy. If there is one thing certain about Argentina's future, it is that there will be yet another major devaluation and the inevitable recession that follows. The only question is when. At this rate the timetable is accelerating. Very sad.

HT: David Gordon