BUENOS AIRES – Argentina is a curious country. During the past eight years, the economy put up exceptional indicators: GDP grew almost 70% (nearly as dynamic as China ) and formal employment increased more than 30%. The country’s unprecedentedly solid fiscal results are accompanied by foreign-trade surpluses that are the envy of even the world’s most fiscally solvent countries. All of this represents an utterly unexpected recovery from the vast public and private external indebtedness of just a decade ago. Indeed, Argentina ’s sharp rebound has generated a huge accumulation of foreign reserves for the country.
Also surprising is the increase in Argentina ’s domestic savings rate, which has enabled self-financing of investment – which has doubled – and, paradoxically, capital outflows. Robust economic growth, driven by high international commodity prices, has underpinned record-high tax revenues and, after eight years of generally very prosperous trade, the country’s corporate sector is in better health than ever before.
Most economists predict a healthy 5% annual growth rate in 2011, together with positive fiscal and external results. Moreover, the international situation for Argentina is highly favorable, with excellent terms of trade guaranteeing strong performance for producers of raw materials. Brazil , with its burgeoning economy and strong currency, is Argentina ’s best partner, particularly for the automotive sector.
But Argentina ’s economic landscape is more complex than the main economic indicators suggest. Since mid-2007, expectations regarding long-term sustainability have been weakening. Indeed, the efficiency of public spending is doubtful, with scant positive results to show for it. Moreover, the international economic crisis and tight energy-supplies have taken a toll on confidence, as have tensions over the nationalization of pension funds and conflicts with soy producers, who oppose an increase in their already high taxes.
In a country with one of the worst histories of economic crisis and volatility, fears of a new meltdown are growing, and investors have been dollarizing their portfolios in order to protect their capital. Over the past three years, $52 billion in capital has fled the country. The threat of crisis in 2011 has eased, but doubts about the longer term remain.
Argentina requires a comprehensive program to demonstrate that, in addition to the ability to generate wealth that it has shown over the past eight years, it can sustain economic growth and not revert to the volatility of the past. The key economic-policy goals should be to rationalize public spending, rein in the growth in the money-supply in order to tame inflation, stem capital outflows, and address utility rates and subsidies. Argentina ’s high levels of social exclusion and poverty remain unsolved problems that must be addressed if long-term growth is to be sustained.
Failure to address these important problems risks a continuing high rate of inflation, now running in excess of 20% per year – one of the highest annual rates in the world, and well above the rate at which the Argentine peso is depreciating. This is eroding the external surplus, weakening domestic purchasing power, and causing investments to be postponed.
A key priority must be to increase investment by creating a climate of trust. The financial sector is seven times smaller than the OECD average, and almost all companies rely on short-term loans. Opening negotiations with the Paris Club over the debts that the country renounced in 2002, and appealing to the International Monetary Fund for technical assistance to give credibility and transparency to official statistics, would contribute to normalizing access to international credit markets. Moreover, in order to provide much-needed finance to local firms, Argentina needs some of the savings that have been sent abroad to return.
Today, the macroeconomic, business, and international context is extremely favorable for Argentina – as it is for all countries with abundant natural resources, a strong capacity for enterprise and innovation, and a qualified labor force. But an overarching collective commitment is needed to take advantage of this opportunity, and to achieve inclusive development.
In order to avoid the recurring crises of the past, Argentina must re-establish trust and implement a macroeconomic program to slow inflation, maintain fiscal balance, and promote investment, technological development, and education. Only then can Argentina achieve greater social equality and boost economic competitiveness. Argentina has been given yet another chance in the past eight years. This time, it had better make the most of it.
Bernardo Kosacoff is Director of the Center for Entrepreneurship, Competitiveness and Development of ITBA and Universidad de San Andrés (CECyD) , and was formerly Director in Argentina of the United Nations’ Economic Commission for Latin America and the Caribbean .
Copyright: Project Syndicate, 2011.