Economy of Argentina
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Convertibility and liberalisation
When President Carlos Menem took office in 1989, the economy of the country was in a critical state. Argentina had piled up huge external debt, and output was plummeting. Inflation during had reached an annual rate of 3,080% in 1988, and in July 1989 it was almost 200%.
To combat the crisis, the government embarked on a path of trade liberalisation, deregulation, and privatisation. In 1991, it implemented radical monetary reforms which pegged the Argentine peso to the United States dollar and limited the growth in the monetary base by law to the growth in reserves. Inflation fell sharply in subsequent years. The 1991 "Convertibility Law" (Ley de Convertibilidad) established a quasi-currency board.
The government privatised most state-controlled companies, opened the economy to foreign trade and investment, and created private pension and workers compensation systems. As a result of these policies, Argentina experienced a boom in economic growth in the early 1990s, followed by a period of somewhat more erratic growth in the second half of the decade.
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International crises
In 1995, the Mexican peso crisis produced capital flight, the loss of banking system deposits, and a severe, but short-lived, recession; a series of reforms to bolster the domestic banking system followed. Real GDP growth recovered strongly, reaching 8% in 1997.
In 1998, international financial turmoil caused by Russia's problems and increasing investor anxiety over Brazil produced the highest domestic interest rates in more than three years, halving the growth rate of the economy.
While macroeconomics recovered fairly quickly from the effects of the Mexican crisis of 1995 (known as the Tequila Effect), Argentina could not return to strong growth after the recession that followed the successive shocks from East Asia, Russia, and Brazil.
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Effects
The structural reforms provided stability and boosted confidence after decades of decline and chronic bouts of high inflation, and fostered major new investment in services and industry in the 1990s, particularly in the telecommunications, food processing, banking, energy, and mining sectors. As a result, Argentina's exports more than doubled, from about $12,000 million in 1992 to around $25,000 million in 1999. However, one of the drawbacks of the fixed low exchange rate soon became evident, as the trade balance turned strongly deficitary (except for minor surpluses in 1995 and 1996).
The opening of the economy and the deregulation of the labour market also fostered unemployment, which went from less than 7% in 1991 to over 12% in 1994, then increased sharply propelled by the Mexican shock, and remained afterwards always over 12%.
In spite of these problems, Argentina was still considered a model for free market reforms among developing countries, and allowed to indebt itself to support this model. The national public debt, composed in large part by bonds denominated in dollars, increased continuously, growing by more than 60% between 1994 and 1999.
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The crisis
In 1999, following the 1998 international crisis, GDP fell by 3% and Argentina entered fully into recession. President Fernando de la Rúa, who took office in December 1999 following the 10-year administration of Carlos Menem, sponsored tax increases and spending cuts to reduce the deficit, which had ballooned to 2.5% of GDP. The new government also arranged a new $7,400 million stand-by facility with the International Monetary Fund for contingency purposes — almost three times the size of the previous arrangement. The new government passed laws intended to change the country's labour code, and attempted to address the precarious financial situation of several highly indebted provinces.
The issue of Argentina's massive public debt became a subject of considerable controversy, and increased tension between Argentine governments and the IMF. In 2001, capital flight increased, and the government found itself unable to meet debt payments. The crisis exploded after the corralito (an almost complete freezing of bank deposits) caused massive protests. After the December 2001 riots, President De la Rúa resigned.
On December 23, 2001, interim president Adolfo Rodríguez Saá declared a short-lived debt moratorium. After a few days, Argentina officially defaulted on $93 billion of its debt.
In January 2002, the convertibility plan that pegged the Argentine peso to the U.S. dollar on a one-to-one basis was scrapped, after nearly 11 years. The peso was floated and suffered a swift and sharp devaluation (losing about 75% of its value), which in turn triggered a surge in inflation.
The poverty rate of Argentina grew from an already high 35.9% in May 2001 to a peak of 57.5% in October 2002; the last official report is 23% for the first semester of 2007, which means the country has just returned to pre-crisis levels.
The country has seen double-digit unemployment since the mid-1990s until the 4th quarter of 2006, peaking at 18.4% mid-year 1995. The May 2000 unemployment rate was 15.4%; it climbed to 18.3% in December 2001, and by the 4th quarter of 2006 it was around 8.7%.
In 2002, Argentina's GNP sunk by 10.9% with respect to the previous year. Soon, however, the country managed to return to growth, with surprising strength: 8.9% in 2003, 9.0% in 2004 and then again 9.2% in 2005. This was initially due to a surge in exports (over all previous historical records), and then also to the return of local and international confidence, which boosted local consumption and both local and foreign investment.
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Debt restructuring and the role of the IMF
In a speech before the United Nations General Assembly in May 2004, President Kirchner asked for "a structural redesign of the International Monetary Fund", which has changed "from being a lender for development to a creditor demanding privileges".
Shortly after, at the meeting of the IMF and the World Bank, leaders of the IMF, the European Union, the Group of Seven industrialised nations, and the Institute of International Finance (IIF), warned Kirchner that Argentina must come to a debt-restructuring agreement, increase its primary budget surplus to pay more debt, and impose "structural reforms" to regain the trust of the world financial community.
The debt restructuring process was long and complex. Argentina offered a steep discount on its obligations (approximately 70%) and finally settled the matter with over 76% of its defaulted creditors (the default did not include the IMF, which has continued to be paid in due time).
In December 2005, Kirchner decided to liquidate the Argentine debt to the IMF in a single payment, without refinancing, for a total of $9.8 billion. The payment was partly financed by Venezuela, who bought Argentine bonds for $1,600 million. [3]
In 2006, Argentina reentered international debt markets selling US$ 500 million of its Bonar V five year dollar denominated bonds, with a yield of 8.36%, mostly to foreign banks and Moody's boosted Argentina's debt rating to B from B-. [4]. However, the reliance of Argentina on Venezuela for a large portion of its financing needs has not been well received in Wall Street circles. On July 18, 2006 Goldman Sachs Emerging Markets Research noted: "Instead of trying to restore its credibility with the broad capital markets, the government keeps on relying on Venezuela as its main credit supplier" (as quoted in the Wall Street Journal on July 28, 2006). The total amount of Argentina's debt held by Venezuela is estimated at around US$ 4 billion. [5]
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Economic expansion
With a high rated dollar in comparison with the local currency that allowed to produce goods with competitive prices in the international market, some industries in Argentina started re-flourishing after the crisis, mainly the construction (40% increase in 2005), textiles, food and car parts. The increment in the volume of exportations and their assossiated taxes also provided the country a positive balance of trade, cash flow and reserves.
According to the Heritage Foundation, a Washington-based conservative think tank, the state's role in the economy has expanded since the start of the Kirchner administration, primarily through price fixing in some industries and the creation of a state-owned airline and a state-owned energy company. The Heritage Foundation assigns Argentina a score of 3.3 (mostly unfree) in economic freedom on a scale of 1 to 5 of, which places the country in the 109th position of the 157 evaluated at the Index of Economic Freedom.
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Banking
During the 1990s Argentina's financial system was consolidated and strengthened. Deposits grew strongly, even after the recession that started in 1998.
Yet, the banking system lent dollars and took deposits in pesos. When the economy crashed in 2001, there was a run against all banks in the system, a freeze in deposits, and an asymmetric devaluation of loans and deposits, which made many banks technically bankrupt.
Nowadays the Argentine banking sector is dominated by state-owned banks (the largest one being the Banco de la Nación Argentina). The banks are again gaining deposits, which amounted to more than $43,000 million by October 2005, and are starting to increase their lending portfolios.
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Foreign trade
Argentine exports are mainly of the agricultural type. Soja products (soybeans, vegetable oil, etc.) account for more than one quarter of the total exports. Cereals (mostly maize and wheat) make up less than one tenth. Petroleum-related products take up roughly another 20% of the total. Next come automotive products, bovine products (beef, leather and milk), each accounting for 6% of total exports, and finally the products of the steel industry.
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Investment
U.S. direct investment in Argentina is concentrated in telecommunications, petroleum and gas, electric energy, financial services, chemicals, food processing, and vehicle manufacturing. The stock of U.S. direct investment in Argentina approached $16 billion at the end of 1999, according to embassy estimates. Canadian, European, and Chilean firms — other important sources of capital — also have invested significant amounts. Since 2000 Brazil also became an important investor in Argentine assets. Spanish companies in particular have entered the Argentine market aggressively, with major investments in the petroleum and gas, telecommunications, banking, and retail sectors. Several bilateral agreements play an important role in promoting U.S. private investment. Argentina has an Overseas Private Investment Corporation (OPIC) agreement and an active program with the U.S. Export-Import Bank. Under the 1994 U.S.-Argentina Bilateral Investment Treaty, U.S. investors enjoy national treatment in all sectors except shipbuilding, fishing, nuclear-power generation, and uranium production. The treaty allows for international arbitration of investment disputes. In October, 2004 China announced that it will invest 20 billion USD in Argentina. An agreement was signed that time about Chinese investment in railway reconstruction (worth 8 billion USD) and oil research (5 billion USD). The agreement failed to materialize.
In 2005 Argentina attracted $2.4 billion in foreign direct investment (FDI). As percent of GDP, its FDI is one of the lowest in Latin America. Current policies of Kirchner's administration and difficulty in enforcing contractual obligations are blamed for this poor performance.
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Other statistics
Investment (gross fixed): 22.7% of GDP (2007) [3]
Household income or consumption by percentage share:
- lowest 10%: NA%
- highest 10%: NA%
Agriculture - products: sunflower seeds, lemons, soybeans, grapes, corn, tobacco, peanuts, tea, wheat; livestock
Industrial production growth rate: 12% (2004 est.)
Electricity:
- production: 81.39 TWh (2002)
- consumption: 81.65 TWh (2002)
- exports: 2.818 TWh (2002)
- imports: 8.775 TWh (2002)
Electricity - production by source:
- fossil fuel: 52.2%
- hydro: 40.8%
- nuclear: 6.7%
- other: 0.2% (2001)
Oil:
- production: 755,000 barrel/day (2004 est.)
- consumption: 486,000 barrel/day (2001 est.)
- exports: NA
- imports: NA
- proved reserves: 2.9 billion barrel (2004 est.)
Natural gas:
- production: 37.15 billion m³ (2001 est.)
- consumption: 31.1 billion m³ (2001 est.)
- exports: 6.05 billion m³ (2001 est.)
- imports: 0 m³ (2001 est.)
- proved reserves: 768 billion m³ (2004)
Current account balance: $12.409 billion (2006)[4]
Exports - commodities: edible oils, fuels and energy, cereals, feed, motor vehicles
Imports - commodities: machinery and equipment, motor vehicles, chemicals, metal manufactures, plastics
Reserves of foreign exchange & gold: Dec 2006: $31 billion [5], March 2007: $35 billion [6], May 2007: $40 billion [7], March 2008: $50 billion [8]
Debt - external: $124.332 billion (2005 est.)
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References
- ^ Economy. Argentina. CIA Factbook
- ^ [http://www.imf.org/external/pubs/ft/weo/2008/01/weodata/weorept.aspx?pr.x=57&pr.y=13&sy=2006&ey=2013&scsm=1&ssd=1&sort=country&ds=.&br=1&c=213%2C273%2C228%2C298%2C299&s=PPPPC&grp=0&a= IMF estimates for 2007 GDP PPP per capita
- ^ [1]
- ^ Récord total de exportaciones en 2006: US$ 46.569 millones
- ^ Las reservas internacionales del Central superan los US$ 31.000 millones
- ^ Las reservas del Banco Central ya superan los US$ 35 mil millones
- ^ Las reservas volvieron a batir récords: ya superan los US$ 40 mil millones
- ^ [2]
- Bulmer-Thomas, Victor. The Economic History of Latin America since Independence (New York: Cambridge University Press). 2003.
- The Crisis that Was Not Prevented: Lessons for Argentina, the IMF, and Globalisation, Jan Joost Teunissen and Age Akkerman (eds.), Fondad, 2003, book, pdf)
- CIA World Factbook 2000 and the 2003 U.S. Department of State website
- Who Shot Argentina? The Finger Prints On the Smoking Gun Read ‘I.M.F.', Greg Palast, Guardian (London) Sunday, August 12, 2001,)
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See also
| Argentina by subject |
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Communications |
- Agriculture of Argentina
- Argentine economic crisis (1999-2002)
- Argentine Currency Board
- Buenos Aires Stock Exchange
- Economy of South America
- Historical exchange rates of Argentine currency
- Argentina's Economic Recovery: Policy Choices and Implications from the Center for Economic and Policy Research
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