The future of the Argentine economy

23 08 2010

A few weeks ago, I mentioned that I attended a seminar on the Argentine economy entitled “La economía argentina en un mundo a dos velocidades.” It was a brief lecture at the Universidad Torcuato di Tella in Buenos Aires led by Andrés Borenstein, an Economic Officer in the British Embassy in Argentina. A self-proclaimed optimist about the future of Argentina, Borenstein began the event by introducing the current state of the country. As the world begins to either pick itself up out of a global recession or, depending on your viewpoint, brace itself for the dreaded double-dip, where does Argentina fall?

The recession, which was truly devastating in many places, has until this point only had a moderate impact on much of Latin America, including Argentina. One reason for this is that Argentina has a fairly closed economy, leaving it less vulnerable to economic shocks. However, Borenstein pointed to many other reasons that Argentina has been able to survive this economic downturn, including a sufficient amount in reserves, well-regulated banks, flexible exchange rates, low debt and the freedom to implement anti-cyclical policy. (This last one is something I wish he would have expanded on…) Because of these factors, Argentina, a country with a history of economic turbulence, has been able to avoid a crisis that it would not have likely been able to avoid in the past.

In fact, Argentina has actually seen growth in recent fiscal periods. But what is propelling the country’s growth? Some of the answers to this question are predictable across any range of successful countries: expansive fiscal and monetary policy, for example. Others, however, are specific to current social and political events. For instance, Argentina has a special relationship with Brazil, which serves as a constant source of demand for Argentine products.

Furthermore, Argentina is a country with an extensive natural resource base. Although these resources have long provided energy and food to the people living in and around Argentina, currently the demand for two of Argentina’s most abundant products, corn and soy, is soaring, making the fields of the countryside even more valuable from an economic perspective. Although agricultural production can vary significantly from year to year, Argentina saw a good harvest last year, helping to pad the effects of a possible recession. “La cosecha nos salvó otra vez (The harvest saved us again),” Borenstein exclaimed.

Additionally, Borenstein cited as a catalyst of growth, a national program that provides subsidies to families for each child they have. Presumably, this gives families the opportunity to consume at higher levels, thus benefiting the economy.

Based on these important growth elements, the economist believes that Argentina’s economy could prosper in the upcoming months and years. Other reasons he claimed Argentina could advance include its low levels of debt, its large skilled labor force and shrinking levels of poverty. Also, Argentina does not suffer from the debilitating social conflicts that several other developing and emerging societies face.

Of course, not everyone is optimistic about the Argentine economy. A few fundamental economic pieces are not currently in place. Investment levels have been low and capital flight has been high. Inflation too is remarkably high, hovering around 20 percent, while most other Latin American countries (Venezuela not included) see levels closer to 3-7%. Moreover, there’s a large proportion of the population working in the informal market. Plus, the general public has very little confidence in the government, meaning that the moment the exchange rate begins to move, everyone immediately tries to sell their pesos.

These problems should not be ignored. However, in the opinion of Borenstein, they are unlikely to prevent further growth. He claimed that inflation, for instance, while high, is under control and that low investment rates are 1.) more the fault of Western economies than of Argentina and 2.) would possibly increase as Argentina’s economy continues to hold steady.

Based on conversations I had with a couple of Argentines following the seminar, I would also add that the inaccessibility of credit is a barrier for growth in Argentina. Because people generally do not have access to credit to buy a house, for example, or start a business, they spend their income on things like MP3 players, cell phones and other gadgets. For many, high consumption is a way to prove they have risen out of the 2001 crisis, but this money could instead be invested in their homes and their communities to create wealth and grow the economy.

Looking at all the evidence, it’s hard to predict where Argentina’s economy will be in a few years. In order to succeed, the inflation rate needs to fall and well-regulated credit markets need to be opened. Corruption and a lack of accountability are issues that will need to be dealt with to secure foreign direct investment, eliminate capital flight and encourage citizens to trust the system so they do not rush to sell their pesos as soon as the market begins to fluctuate. But, Argentina has an expansive list of material and human resources at its disposal. And, as Borenstein said, “Es más fácil solucionar un problema institucional que un problema de falta de recursos (It’s easier to solve institutional problems than to fix a lack of resources).”





2 responses

31 08 2010

Interesting. Something I had not even considered, but I’m happy that your scholastic drive motivated you to construct this summary of the lecture :)

4 09 2010

This is an illuminating post. I am curious, however, about whether or not you agree with Borenstein when he states that inflation at 20% is “under control.” (!) I have been keeping up with the recent dropoff in the apiculture, specifically with regard to the Argentine honey exports which accounted for 22% of the global market as recently as 2009, but have been on the decline since 2006 due to flooding and wet winters over the past few years.

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