A Constant Feeling of Crisis
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.
According to the Argentine government, inflation in Argentina is 10 percent. That's bad compared with the U.S. and the European Union, where the rates of inflation are 2.7 percent and 3.1 percent, respectively, but economists not affiliated with the government say the real figure is at least twice as high. (The government has responded to these reports with typical aplomb. Earlier this year, the Argentine commerce department fined a handful of consultancies $125,000 each.) "The government is lying," says Alberto Cavallo, an economics professor at MIT's Sloan School of Management. Cavallo, who is Argentine and who started an online-payments company in Buenos Aires before entering academia, pegs the rate at 25 percent. "Inflation makes it very hard for entrepreneurs to plan ahead," he says. "You don't know how much you can charge and how much you should pay your employees. It's a constant feeling of crisis."
Even so, entrepreneurs start companies in Argentina. Most of these businesses are small and born out of necessity—desperation, even—but not all of them. "Argentina has been all over the place," says Marcos Galperin, the founder of the auction website Mercado Libre, which, with a $4 billion market capitalization on the Nasdaq, is widely regarded as the country's most successful entrepreneurial company. "But all those changes have fueled entrepreneurship, because the only way to survive in Argentina is to be entrepreneurial." To live in Argentina is to get used to adapting to life's hardships, to make the best of a crisis. "We're comfortable working with risk," says Alejandro Mashad, the executive director of Endeavor Argentina, a nonprofit that promotes entrepreneurship in the country. "It's something we get used to from the day we are born."
Over the course of two weeks in Argentina, I crisscrossed the country, interviewing dozens of entrepreneurs in a variety of industries. I met winemakers in the foothills of the Andes, manufacturers in the country's agricultural heartland, and the founders of some of the country's biggest and most successful tech companies. I met jaded old-timers and fresh-faced kids too young to really remember the worst excesses. I spent a lot of time listening to complaints.
The single biggest one—and the most obvious way that Argentina is much, much worse off than America—has to do with money. Argentina does not have a modern financial system. Business credit is nonexistent. Only businesses with many years of operating history can qualify for things such as lines of credit or overdraft privileges. Small-business loans are extremely unusual, and it would be crazy to tap credit cards for operating capital: They have low limits and interest rates of up to 45 percent. "It's hard to explain it to Americans, but there is no financing in Argentina," says Patricio Fuks (pronounced fooks), a co-founder of Fën Hoteles. "There are no seed investors. The stock market is so small that if you invested a million dollars, you'd move the market."
I met with Fuks in his palatial office in Buenos Aires. Dressed like a nightclub promoter—a black suit and a black T-shirt—Fuks told me his entrepreneurial story with a mix of pride and genuine wonder that it had even happened. In a span of eight years, he has built a group of 34 four-star and five-star hotels in six Latin American countries, under the brands Dazzler and Esplendor. Together, the hotels, which charge roughly $100 a night per room and take design cues from Starwood's W hotel chain, account for $40 million in annual revenue and employ 700 people.
Fuks grew up in an entrepreneurial family. His father founded a construction company and a small hotel in Buenos Aires, and the family spent summers in New York City, where Fuks says he first got the urge to start something himself. "I realized that I wasn't going to be able to have the kind of life people have in the States—a good house, a nice car, maybe a summer house—if I finished school and went to work for a company," Fuks says. "It wasn't for me." During his sophomore year of college, he dropped out of school and founded an advertising agency.
But by 2001, the advertising work started drying up, and in November of that year, Fuks closed his agency. On December 20, the day the rioting started, Fuks and his wife boarded a ferry to Uruguay. They spent New Year's Eve there, then traveled to Costa Rica and then to Miami. Fuks considered getting a job in Miami, but he couldn't stomach the idea. "I didn't know what to do," he says. "But I was just thinking: A crisis is an opportunity. What's my opportunity?"
Fuks had $25,000 in cash, which he then used to pay off the $200,000 mortgage he had taken on his apartment in 2001. (The devaluation of the peso brought the value of his mortgage down to $50,000, which he was able to pay off by buying bank bonds at a 50 percent discount.) He then scraped together $40,000 from three friends—an enormous amount of money in Argentina in 2002. "Raising $40,000 would have been like raising a million today," says Alejandro Frenkel, Fuks's co-founder and Fën's current CEO. After making a few calls to hotels that had closed over the past year, Fuks found a hotel owner willing to rent him a four-star establishment, the Bisonte, for just $5,000 per month. Labor costs were low, too: The going rate for a hotel manager was just $400 a month. (Today, it's $2,500 a month.) "I figured that if we could rent rooms for $25 at 75 percent occupancy, we'd make $30,000 a month in profit," Fuks says.
Fuks renamed his hotel the Dazzler—he thought the name would appeal to foreign tourists—and ended up renting rooms for just $14 a night. Even so, the hotel was immediately profitable, and Fuks used the earnings to rent another hotel and then a third. By the time the crisis was over, in 2003, Fën was managing five hotels. "It was an amazing time," he says. "I was getting all these hotels. I knew I was never going to see this in my lifetime again." Armed robberies were a monthly occurrence, but Fuks would simply take the loss and keep expanding.
This happened all over Argentina, on scales large and small. The crisis gave entrepreneurs with money the chance to buy assets and hire staff at a fraction of the precrisis cost. "For the top 1 percent of us, the crisis was great," a serial entrepreneur told me. "We had money, our savings were not in the banks, and we were paying one-quarter the salary. Of course, for people with salaries, it was horrible. It was very sad."
Unfortunately, the crisis made starting up much harder for those entrepreneurs who did not have seed capital, says Silvia de Torres Carbonell, a professor of entrepreneurship at IAE Austral, the top M.B.A. program in the country. "We are an entrepreneurial people," says Carbonell, "but the quality of our companies suffers from the context."
As we talked, a dozen or so entrepreneurs whom Carbonell had invited to meet me trickled into the conference room, and the conversation quickly turned into a kvetchfest about the difficulty of raising money. There was the founder who had a term sheet from an American investor canceled after the investor saw something on the Internet about a protest in Argentina; the founder who had given up 80 percent of his company to secure seed capital; and the founder who was so strapped for cash that he had had to raise an angel funding round just to go to a trade show in San Francisco. Toward the end of the meeting, I asked the members of the group how many of them had received some form of bank financing. Laughter erupted. Not a single one had.
A lack of financing is often seen as a cause of economic stagnation, but in Argentina it's more a symptom of something graver: persistent uncertainty and instability. "Money is not the problem," says Zoltan Acs, a professor of public policy at George Mason University in Virginia. "The problem is, Does the country reward people for effort? If the answer is no, nobody will do it."
Acs says that nonprofits like Endeavor Argentina, which provides free legal and accounting advice to entrepreneurs and connects start-ups to more established companies, have helped. But in Argentina, even the most successful entrepreneurs are never entirely sure how safe they are. "I'm more worried than ever," says Susana Balbo, the founder of Dominio del Plata, a $12 million winery in Mendoza that makes some of Argentina's finest Malbec and Torrontés. Balbo is 55, with blond hair and the hearty, weatherworn skin of someone who has spent a lifetime picking through vines. She is also the most successful wine entrepreneur in a booming industry, but she tells me that she often dreams of leaving Argentina, maybe for California or New Zealand. "But I already have everything planted here," she says, with tragic resignation. "So I must continue to the end."
Balbo has flirted with disaster ever since she started her first winery, in 1991. At the time, inflation in Argentina was rampant—prices were rising 30 percent a month. Balbo coped by spending her money as soon as she had it. (During the worst periods of hyperinflation, this was a common practice, even in households. One Argentine entrepreneur I met recalled having to take a day off from school every time his mother got paid in order to help her spend her paycheck as quickly as possible.)
Every Monday, Balbo would call suppliers for prices on bottles, corks, and labels. She would then do a quick calculation and, in the late morning, call her distributors with the price for a case of wine for the week. Her customers would have to place their order and wire the money into Balbo's bank account by midday so that Balbo would have the cash to pay her suppliers when they delivered her dry goods on Tuesday morning. She would deliver her wine by Friday and start the process over again the following Monday.
Of course, running a company this way means it's almost impossible to grow. But doing anything else is dangerous. In 1994, Balbo accepted an order for 25,000 cases of wine without taking payment up front. When the buyer defaulted, she nearly lost her business, and the experience caused her to reevaluate her entrepreneurial ambitions. She was a single mother supporting two children; she could not handle the risk anymore. She sold the business and with the proceeds bought U.S. Treasury bonds. "I wanted to have the money for my kids' college," she says.
After four years of consulting for other winemakers, Balbo tried again in 1999. Her approach was even more conservative this time: She rented a winery instead of buying, and for three years she produced very small batches. In 2001, she purchased a former potato and lettuce farm and started building another winery. She had $800,000 socked away, which she figured would be enough for a building and tanks.
But in the fall, things started to get weird. The Argentine government announced that it would not seize money in local savings accounts. The announcement was meant to quell speculation that the government would do just that, but Balbo sensed that she was in the midst of an Orwellian moment. She immediately called her bank and asked to have her money wired to an account in Switzerland. "If the government says your savings is safe, then you know something is going to happen to it," she says. Her funds never made it out of the country. On December 1, Argentina's economy minister announced a policy that became known as the corralito—the little corral, or the playpen. Balbo's assets were frozen for 90 days and were later converted into Argentine pesos, which rapidly depreciated.
Balbo's company had one important thing going for it: Nearly all her customers were based in the United States. Suddenly, their dollars had tripled in value against the peso. Her company, which had been under enormous pressure, was suddenly enormously profitable. Today, Balbo hopes that a similar dynamic will help her stave off the effects of the latest Argentine predicament. Her costs have been rising at more than 20 percent a year, but the peso has barely moved against the dollar, meaning that Balbo's margins have been shrinking. To compensate, she is trying to market her wines in Brazil, where the currency has also been appreciating against the dollar. "I know how to swim in these waters," she says. "I survived hyperinflation. I can survive this."
To try to get a sense of just how bad things can get in Argentina, I met with a business owner who agreed to talk about the dark side of doing business here, on the condition of anonymity. This entrepreneur, a middle-aged woman who spoke in careful, halting English, owns a small wholesale company. "It's very hard to do business here," she says. "It's like you're in a disco, and you have to dance to whatever music the DJ plays."
We chat for a few minutes, and then she leads me down a hallway. The walls are white and bare, save for a print in a wood frame that seems strangely out of place. "Look," she says, removing the frame from the wall and shooting me a sheepish smile. "I'm going to show you something." Underneath is a white and red inspection sticker: The building has failed inspection. "I'm outside of the law," she says. Her company applied for a permit to operate in the building more than two years ago but still hasn't received an answer, so now she pays a bribe. The cost of staying in business in an unlicensed building? So far, she has paid $9,000.
Like the owners of most small companies in Argentina, this entrepreneur does some of her business off the books—in the black, in the Argentine parlance. If a customer orders an item for delivery, the deposit is recorded on the books, but she collects the balance in cash and does not report it to the tax authorities. "If I paid every tax I'm supposed to pay, I could never be in business," she says.
She may be right, but by choosing not to pay, she is helping to drive rates up further for those who do. According to the World Bank, taxes on commercial profits in Argentina add up to an effective maximum rate of 108 percent. (Believe it or not, six countries—Congo, Burundi, Gambia, Sierra Leone, Central African Republic, and the tiny island nation of Comoros—have higher rates.) "The worst part is, I don't feel like I'm doing something wrong," she says. "I can't do anything else."
Though companies that do not pay taxes sometimes profit from their crime, the decision to cheat can hobble them in the long run. Because she does business in an unlicensed building, the wholesaler I met would have to offer a discount to a buyer if she ever tried to sell her company. "Entrepreneurs who do business in the black will never be able to sell their companies," says Carlos Adamo, one of Santiago Bilinkis's first investors and a founder of Aconcagua Ventures, a seed investment fund in Buenos Aires. This creates a Catch-22: If a company wants to become large and eventually be sold, it must pay its taxes. But paying those taxes makes it difficult to compete with smaller competitors, who cut corners and can price accordingly. "You are competing with restrictions that your competitors don't have," Bilinkis says. "To do the right thing is hard."
In the months that followed the 2001 financial crisis, Bilinkis's company slowly recovered. Brazil, which had been widely expected to follow Argentina into crisis, avoided serious financial turmoil, and Officenet's sales continued to grow there. Just three years after his darkest moment in business, Bilinkis negotiated the sale of Officenet to Staples. Bilinkis won't say how much money he made, but he clearly did all right. He lives in a penthouse apartment in one of the city's ritziest neighborhoods, and last February, he took his kids to the Super Bowl in Dallas and cheered for the Packers. He left Officenet last year and is now investing money in local start-ups and mentoring entrepreneurs.
Bilinkis is a man who takes his responsibility to society seriously, but he admitted to me that when he sold the company, the thought of hiding the proceeds from the sale in a foreign bank account flitted through his mind. Every few years, Argentina's tax authorities, desperate for more revenue, announce a tax amnesty, allowing wealthy individuals who have evaded taxes to report their income and pay as little as 1 percent in tax instead of the standard 35 percent income tax. Bilinkis paid the full rate. "I felt like such an idiot," he says. "I knew at some point there was going to be a tax moratorium."
On the day that Argentina exploded, Bilinkis's co-founder, Andy Freire, was in São Paulo at Officenet's Brazilian headquarters. His wife called him and told him that a hundred or so looters had broken into the local supermarket and were taking everything. Freire decided it was time to leave. "I felt like the universe was against me," he says. "We had been ethical entrepreneurs building value in a market where no one was as ethical as we were. The value destruction we were going through was unfair. I wasn't going to put all of my risk in Latin America again in my life." At the end of 2002, he left the company and moved his family to Miami.
The following year, Freire founded Axialent, a management consultancy focused on leadership and corporate culture. He had imagined Axialent as a second act—a modern, global company with headquarters in the U.S.—but Argentina slowly pulled him back. For one thing, the cost of employing accountants in Argentina was a third of what it was in the United States. Freire began hiring back-office help in Buenos Aires and now has 40 employees in Buenos Aires and 110 in the United States. "I realized that this is what Argentina can do," he says. "We have amazing talent, but the market is not Argentina. The market is the world."
Freire splits his time among Miami, New York, London, and Buenos Aires, but he is a full-time booster of his home country, serving as an adviser to the mayor of Buenos Aires, Mauricio Macri. When I met Freire in Axialent's Argentine office, he told me that his country's problems, while serious, were not intractable. "The reality is that people don't have to be unethical," he says. "It's the terrible power of the environment and the culture. When I'm in the U.S., I stop at every Stop sign. I come here and I say, 'What is a Stop sign?' " (Officials from the federal government's ministries of finance, industry, and justice did not respond to requests for interviews.)
American entrepreneurs are blessed in this way. Our country has so far escaped the cancers of uncertainty, mistrust, and cynicism. We may complain about taxes, but the vast majority of us pay what we owe. Our country has low inflation and sane regulations. The Argentine entrepreneurs I met see America as a model of efficiency and stability. They keep their money in U.S. bank accounts, buy apartments in New York City, and take their kids to Disneyland. Argentines see America as a country that works.
A few days after I return to the United States, I meet up with Patricio Fuks, who has come to New York City to pitch American investors on a $25 million real estate fund he is starting so he can build more hotels in Latin America. As we drink beer in a glitzy rooftop bar, he complains that American investors seem more interested in putting their money in exotic financial instruments than in tangible assets like hotels. "Every guy I meet is a hedge fund guy," he says. "A hedge fund guy is like an astronaut to me. I don't understand how they make money."
He tells me that if he were a reader of Inc., he would be trying to sell products to the developing world—Argentina or Brazil or Peru—where there is still demand for the basic things a society needs to function. You don't need to be a hedge fund guy to make money in Argentina; you just need to look around and see what's missing. Hotels, for instance. "Americans don't look abroad," he complains.
Of course, this was a self-serving suggestion, but it's one I heard a lot in Argentina, and I think the advice has some merit. If American business owners are truly worried about the long-term prospects of the U.S. economy, they should be doing what the Argentines do: looking outside their borders to find markets in which there is less uncertainty—or at least different kinds of uncertainty.
Later, we walk along Central Park South toward the Ritz-Carlton, where Fuks was staying, Fuks lights a cigarette and looks out on the park, admiring the view. "I really think the U.S. is a model society," he says. "Look at you: You're a journalist. You can't afford a private jet, but you can get married, maybe have kids. If you were a journalist in Argentina, you'd be making $1,000 a month, and the only way you could make more would be to write what the government tells you to. In America, anybody can be anything."
Max Chafkin is a senior writer for the magazine. He wrote about entrepreneurship in Norway for the February issue.