I’ve been studying AE for some time and I have a question, it may be simple but I haven’t figured it out by myself. I hope some of you can help me.
Let’s say that a French company operates in Argentina. It’s made a profit of 1 million pesos in 2010, they exchange this money for Euros and send it back to Europe.
For this example’s sake let’s say that they employ very few people and pay few taxes, so in the end they end up sending more money abroad than they leave on the country.
Is this company hurting Argentina?
I know that if they simply ship their profits abroad (as pesos) they’d have to spend them back in Argentina, so no hurt is done to Argentina, but what if they exchange this money for Euros in Argentina and send it to Europe? Wouldn’t them not only be shipping wealth from Argentina but de-evaluating the Argentinian currency in the process? (making the Euro more expensive to all other Argentinians)
What wealth are they shipping? Assuming that this is a good investment, it brings two major economic positives: jobs and goods/services. Argentine Pesos that might be spent on these goods and services don’t dissapear. The British company usually exchanges them for pounds, and the pesos are re-circulated in Argentina. In some way, the investment is helping Argentina.
The profits would be the ‘wealth’ I’m referring to. And let’s say that the jobs/services that this company generated in Argentina would amount to a total inferior to 1 million pesos, let’s say, 800k pesos. If they ship 1 million abroad, wouldn’t Argentina be 200k pesos poorer?
You have to think of multi-trade systems in terms of the axiom of mutual benefit from exchange. When you try to think in terms of entities such as “Argentina” for this it clouds reality. Here is some hypothetical math in production.
If the wages they’re offering a less than the going wages of an alternative employer, then obviously workers will prefer to transfer to that alternative. Most of the time, companies that investment in foreign countries offer nominal wages that are higher than those of their competitors (for example, IIRC, sometimes those foreign owned “sweatshops” tend offer higher wages than alternative forms of employment in those countries).
But, again, two points:
Argentine pesos are only good in Argentina. Since you can’t spend Argentine pesos in England, English people who hold Argentine pesos are likely to use them to buy Argentine products (the only products you can buy with an Argentine peso). Argentine money isn’t just accumulated abroad. There’s no point to hold money you can’t spend, and the only purpose of money is as a medium of exchange. If you’re going to hold money, you exchange pesos for the local currency, and the new owner of the pesos will then spend them on Argentine products. One way or the other, the peso returns to Argentina.
Money is not wealth. Wealth is composed of real goods. They are tangible means of providing satisfaction. The foreign owned company running in Argentina is producing real wealth by producing goods and services. The Argentines who buy these goods and services are exchange a medium of exchange for real wealth. That’s the entire reason they do it; the exchange makes the Argentine individual better off.
Case A: Jean-Paul, the hero of Kafka’s Metamorphisis, is sitting in a room in France, a pile of Euros and a laptop in his hands. He opens a parcel containing pesos and exchanges one kind of money for the other.
Case B: Jean Paul gets on a plane to Argentina, the same pile of Euros and same laptop in his briefcase. He lands safely in Argentina, gets off the plane for a second, opens a parcel of pesos, and exchanges one kind of money for the other. He then hops right back on the plane and flies back to France.
How are the two cases any different? How do they differ in their effect on the Argentine economy? Answer: They are not different at all.
What happened is this: The French company produced wealth in Argentina, new shoes or whatever. They sell the shoes to the locals, making them happy, and get pesos for their trouble. If they want, they spend the pesos in Argentina and buy steaks. Some local, Jose, who happens to have a pile of Euros in his posession, buys French wine with his money.
If they want, the Frenchmen can trade with Jose, exchange their pesos for his Euros. It matters not if Jose and the Frenchmen are in Argentina or France at the time. Jose will eventually buy Argentinian steaks. The French go home with the Euros and buy wine.
For this example’s sake let’s say that they employ very few people and pay few taxes, so in the end they end up sending more money abroad than they leave on the country.
Taxes are a net bad. The Argentenians are better having the money they spend on the company thrown into a pit and burnt than having it given the government who will use it to waste resources and disrupt society. Taxes always produce a net loss.
The same goes with tax revenue within a single country: we would be better off if the government took all the tax money it took in and spent it in vacations in Peru or shredded it than if they actually spent it. The government makes people poorer by taking tax money and by spending tax money. All government action is economically destructive.