ARGENTINA'S RAILWAY PROBLEM
REVOLUTIONARY APPROACH NEEDED
By PROFESSOR H. S. FERNS*
In his covering letter accompanying this article, Professor Ferns pointedly remarks, referring to the problem of the railway deficit and the course he proposes for its solution: "I do not know how far out one can get and still be listened to, but it does seem to me that discussion about railway pricing policy, railway technology, railway administration and railway politics have produced nothing." He expresses the hope that his article, while it may amuse some REVIEW readers, will also "provoke some discussion." We share his hope. In the incredible welter of information, studies and reports on the subject of the railways that the past few years have produced, the one thing curiously lacking has been genuinely constructive discussion. (Editor, RRP)
It seems to be very generally admitted that the Argentine railways are one of the nation's formidable and stubbornly insoluble economic problems. The large and persistent losses suffered by them are like a wasting disease that weakens the entire economic system. The railways have become the means of enfeebling what they once strengthened and caused to grow.
Because no one has emerged during the past forty years with a solution of the railway problem, perhaps the time has come to think of an absolutely new policy. As a foreign student of Argentine life I wish to make a crazy suggestion; a suggestion so completely loco that its discussion will provoke fresh thinking and, perhaps, lead to an intelligent solution.
I wish to suggest that the railways be put up for auction not as a transport system but as land, buildings and scrap metal. The first obstacle to such a proposal is of course, the vested interests of the railway workers. They have inherited the position of the former owners, and are now the sole interest dependent upon the continued operation of the railways. Let them be dealt with in the same way as the former owners were. Let them be paid off.
How can this be done? To all employees with less than one year of service, let there be paid in cash the equivalent of two months' salary or wages. To all employees with one year of service or more let there be delivered national bonds negotiable on the open market, paying interest at 8 per cent and amortisable over thirty years. The value of the bonds given to each railway employee should be equal to two months' wages or salary for each year of service. Thus a man with six years' service would get bonds worth a year's income; a man with 30 years' service bonds worth five times his annual income. In this way all employees will be released on to the labour market not as impoverished people, but as men and women with assets which can be converted into cash or annuities or capital for other forms of investment or retained as an interest-bearing investment. At once there will be created in the community a large, popular anti-inflationary interest. The immediate cost to the State will be the interest charges plus the payments into the amortisation fund. This will be considerably less than the annual deficit on the railways.
Once the vested interests are paid off the State will then be free to dispose of the railways not as a transport system but as land, buildings, and scrap metal. Let the systems be put up to auction and sold as systems to the highest bidder subject only to two conditions: (1) that the purchaser or purchasers be resident Argentine citizens and (2) that within one year of purchase they pay taxes on their property at the rate of 10 per cent per annum of the value of the land assessed on the basis of current land values in the immediate vicinity. For example, the tax on the land on which Retiro station stands will be assessed on the average value of property in the area of Retiro; land in Zárate will be taxed on values in Zárate, and land in the countryside where lines run assessed at values in the areas through which they run.
Suppose the highest bid for the Ferrocarril Roca is only 100,000 pesos. So what? The buyer will find a profitable use for his property in order to meet his tax bills. Perhaps he will try to run the property as a railway. Perhaps, he will decide to sell off the rails and equipment as scrap, and develop his land for industrial or agricultural purposes or the construction of housing. In any case he will have to make quick and intelligent decisions about economic use.
Suppose no purchaser decides to operate his property as a railway. Again, so what? There is no evidence that Argentina needs railways. Argentina needed them before she got them and she needed them until roughly 1935. Now Argentina does not need them, and the proofs of this are abundant. Let us recall the prolonged railway strike when Dr. Frondizi was President. Argentina got along without the railways, and the Government was saving money. Then, for reasons which make no economic sense, Dr. Frondizi made the colossal mistake of settling the railway strike. The same sort of situation developed subsequently, but no one in authority had the courage or intelligence to see and to say that the railways are dead and useless. The experience of the present Government proves the point in another way. Rates have been increased 70 per cent and revenues have increased only 10 per cent. This proves conclusively that there are alternatives to the railways already in existence. Everybody knows this. How many people in Argentina could not get from A to B without a railway? How much food, finished products and raw material could not get from A to B without a railway? The answer is: very few people and very little freight.
For many years vested interests argued that Buenos Aires could not function without tramways, and the tramway interests fought like demons to keep this belief alive. The tramway companies lost money; the employees were ill-paid; the service was poor, slow and uncomfortable. What happened? The system of colectivos developed--a remarkable Argentine innovation. It may surprise porteños to hear it said that Buenos Aires and other Argentine cities have some of the cheapest and best surface transport systems in the world, and the men who operate the systems are comparatively the best off of any transport workers anywhere.
What is more important in the present circumstance is that the colectiveros constitute a large pool of practical, executive and entrepreneurial experience which can be the means of raising the efficiency of the entire Argentine transport system to the level of the efficiency of the colectivo system in Buenos Aires.
There are two further points worth considering. The renovation of the transport system by extending the bus and trucking system can be carried out largely with equipment manufactured in Argentina, and will not require heavy equipment manufactured abroad. Furthermore, the scrap metal provided by the railways will constitute a domestic supply of raw material for the expansion of the steel industry.
There may be some snags in what I suggest, but I cannot see them. What I see is this: the release of a large body of skilled men for the labour market who are not impoverished but in possession of assets for maintenance or investment; a tremendous opportunity for new investment by men who have already demonstrated their capacities as entrepreneurs, executives and workers; a great release of centrally located sites for industrial and residential development; and a new look for Argentina. Let us not just talk revolution; let us make a revolution.
Published in The Review of the River Plate, vol. cxlii, No. 3649, August 31, 1967, pages 311-312.
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Professor Ferns has clearly expressed the height of frustration with the problem and the shallowness of its analysis.
In one sense he was absolutely right but only by half: Railways should have been privatised, but as going concerns; foreign bidders should have been admitted and the new owners should have been given complete commercial freedom. No regulation of rates and conditions of service should have survived when "there is no evidence that Argentina needs railways." (Ferns)
The thought of selling the railways was sound but there was a snag in his proposal, just as he suspected.
By proposing a confiscatory tax on the purchasers' incomes Ferns has ensured that there would be no bidders at the auction. His plan could not have been executed.
The proposed 10 per cent tax on assessed land values would have been far in excess of land taxes payable by others and therefore discriminatory and unjust. Even if the vacated lands could yield as much as 5 or 8 per cent per annum of their assessed value, the proposed tax would have been super-confiscatory. At the suggested rate of 10 per cent of assessed value, the tax is equivalent to an income tax at the rate of 125 to 200 per cent of income.
His conclusion from the observation of the effect of a rate increase on gross revenue earns a failing mark in any elementary economics course. Economists teach that if people spend more money on a thing after that thing's price was increased, then that is a sign that the thing has few good substitutes. That is what was shown by his observation and by "that discussion about railway pricing policy" that he thought was fruitless. Acknowledgment and advertisement of the fact that Argentine railways did not have good substitutes could have attracted satisfactory bids for railways sold as going concerns. New owners would have had to increase rates and fares sharply. The research Ferns had dismissed meant to show the feasibility of that. The increases necessary to continue running the railways would have been far less than those imposed later. Nowadays most of the country cannot have railway service at any price. If that is acceptable, stiff but smaller price increases should have been more readily accepted.
Before commenting on the effect of a recent rate increase, Ferns should have allowed some time to pass and then check the facts without taking them out of context. From 1966 to 1967 actual railway traffic declined by 6 per cent of passenger-miles and 16 per cent of goods ton-miles, and revenue increased by 32 per cent. (cf. Instituto Nacional de Estadística y Censos, Boletín de estadística, Oct/Dic. 1968, p. 169) The traffic decline was not peculiar to railways. The tonnage of ships coming to port in inland navigation fell by 8 per cent. The tonnage of imports from abroad fell by 14 per cent, the tonnage of exports fell by 19 per cent. (ibid. pp. 148, 153, 170)
One can see now what a dismissal of "discussion about railway pricing policy, railway technology, railway administration and railway politics" has wrought. Nothing has been learned. The same policies are in place. The country's transport industries are still in the same predicament: subsidised and under control of a government influenced now by a stronger union. There are now massive subsidies to what little is left of railways and to consumption of Diesel oil by motor carriers. Subsidies for commuter rail in greater Buenos Aires average 2.14 pesos per ticket sold for 0.65 pesos. Colectivos pay 0.42 pesos per litre of fuel and inter-city buses 0.82, against 2.99 pesos at the pump (La Nación 21 and 27 February 2010). Similar subsidies benefit goods transport by road. Worst of all: the little political influence of railwaymen has been transferred in much augmented and more dangerous form to the Sindicato de Camioneros.
Sylvester Damus.