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Economy of Argentina


Argentina benefits from rich natural resources, a highly literate population, an export-oriented agricultural sector, and a diversified industrial base.

Contents

Overview

When President Carlos Menem took office in 1989, the country had piled up huge external debts, inflation had reach 200% per month, and output was plummeting. To combat the economic crisis, the government embarked on a path of trade liberalization, deregulation, and privatization. In 1991, it implemented radical monetary reforms which pegged the 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 established a quasi-currency board, which has been a pillar of price stability. The government privatized most state-controlled companies, opened the economy to foreign trade and investment, improved tax collection, 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 when the country was hit by a series of external economic shocks. While the economy recovered fairly quickly from the effects of the "Tequila" crisis of 1995, Argentina is finding it harder to return to strong growth after the recession that followed successive shocks from East Asia, Russia, and Brazil.

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. Conditions worsened in 1999 with GDP falling by 3%. President Fernando de la Rúa, who took office in December 1999 following the 10-year administration of former President Carlos Menem, sponsored tax increases and spending cuts to reduce the deficit, which had ballooned to 2.5% of GDP in 1999. The new government also arranged a new $7.4 billion stand-by facility with the IMF for contingency purposes - almost three times the size of the previous arrangement. Key challenges facing the new government include reforming the country's rigid labour code and addressing the precarious financial situation of several highly indebted provinces.

Structural reforms based on macroeconomic stabilization, trade liberalization, privatization, and public administrative reform placed the country on a relatively sound economic footing after decades of decline and chronic bouts of high inflation. These reforms 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 billion in 1992 to around $25 billion in 1999. Imports also grew rapidly during the same period, from $15 billion to over $25 billion. However, Argentina's international trade still remains a relatively small part of its economy. This is in part a heritage of decades of import-substitution policies, but it also reflects the country's relatively diversified economy.

One of Argentina's challenges is to generate growth with more equitable distribution of income and reduced unemployment. The country has seen double-digit unemployment since the mid-1990s, peaking at 18.4% mid-year 1995. The May 2000 unemployment rate was 15.4%, and Argentina resumed modest economic growth in 2000. Many problems remain; public sector corruption, commonly acknowledged as being widespread, is another subject of public debate. The Argentine justice system can be politically influenced, is often inefficient, and provides slow due process.

In recent years, the issue of Argentina's massive debt, regarded by some as unpayable, has become an issue of considerable controversy, and increased tension between Argentine governments and the International Monetary Fund. On December 23, 2001, interim president Adolfo Rodriguez Saa declared a short-lived debt moratorium. In a speech before the United Nations General Assembly on September 21, 2004, President Néstor Kirchner said that "An urgent, tough, and structural redesign of the International Monetary Fund is needed, to prevent crises and help in [providing] solutions." Implicitly referencing the fact that the intent of the original Bretton Woods system was to encourage economic development, Kirchner warned that the IMF today must "change that direction which took it from being a lender for development to a creditor demanding privileges."

According to Argentine Agronomist Alberto Lapolla, who has written extensively on the transformation of Argentina from the "granary of the world" to a "soy republic," 450,000 Argentines died of hunger between 1990 and 2003. Citing the Institut d'études sur l'État et la participation (IDEP), a thinktank, Lapolla adds that every day, 55 children, 35 adults and 15 elderly die in the country from illnesses related to hunger.

During the weekend of October 1-2, 2004, at the annual meeting of the International Monetary Fund/World Bank, leaders of the IMF, the European Union, the Group of Seven industrialized nations, and the Institute of International Finance (IIF), warned President Néstor Kirchner that Argentina must come to a debt-restructuring agreement right away with the speculative "vulture funds", increase its primary budget surplus in order to pay more debt, and impose "structural reform" to prove to the world financial community that it deserves their loans and investments.

Banking

During the 1990´s Argentina´s financial system saw a significant consolidation and strengthening, in large part through foreign investments. In addition to high reserve and capital-adequacy requirements, the Central Bank of Argentina maintained a repurchase agreement with a consortium of international banks to provide a $6 billion safety net in the event of a liquidity squeeze. Mergers and acquisitions, which decreased the number of Argentine banks from nearly 300 in 1990 to fewer than 100 at the end of 1999, were expected to continue and lead to improvements in management and efficiency. The foreign currency reserves of the Central Bank stood at nearly $25 billion in December 1999, or over 9 months of imports. However, by law, these reserves were used to back the monetary liabilities of the Central Bank and were not available for conducting monetary policy.

Despite the recession, bank deposits continued to grow until 2001, although at a much slower rate than in previous years. Total deposits in the banking system stood at nearly $80 billion by mid 2001--more than twice that of June 1995, when deposits hit a low of $37 billion. Foreign-controlled banks held over 40% of total deposits, and six of the top 10 commercial banks were in the hands of U.S. and European financial institutions. Still, the level of bank utilization in Argentina remained relatively low, and bank intermediation represented only about 30% of GDP--a much lower ratio than that in Chile, Mexico, or Brazil, for example.

Nevertheless the banking system sufferd a fatal flaw: it lent dollars and took deposits in pesos (nominally argendollars). By early 2001 deposits reached US$87 billion, when the economy took a second dip, capital started flowing out of Argentina, and deposits started to move away from the weaker players of the financial system, namely provincial banks and large local banks. This eventually led to a run against all banks in the system, a froze in deposits, a currency devaluation, which included an asymmetric devaluation of loans and deposits. Banks were forced to collect its dollar loans at a conversion rate much lower than the rate applied to its dollar deposits. This made many banks technically bankrupt and destroy the confidence of the public on the financial system, which was held responsible for many of the economic ills of the country. Deposits fell to less than US$40 billion by the end of 2002. Foreign banks fled the country during 2002 and 2003, selling its operations to smaller local banks at a fraction of their original investments. Only a few large foreign banks decided to stay in the country. By 2004 the Goverment compensated the banks for the impact of the asymmetric devaluation of deposits and loans through a series of "compensation bonds".

Currently banks are again gaining deposits, which are US$38 billion by December 2004 and are starting to increase its lending portfolios. Its operations and leaner due to the massive lay offs of 2002, that reduced its working force by more than 30%. However the public still remains weary of taking long term loans and rates are high in real terms given Argentina's low rates of inflation. Banking penetration remains low and banking costs high.

Foreign trade

Strong growth in Argentina's foreign trade since 1990 has been key to meeting its external payments. Foreign trade now equals about 17% of GDP--up from 11% in 1990--and plays an increasingly important role in Argentina's economic development. Still, exports represent only 8% of Argentine GDP, almost unchanged since 1990. The U.S. recorded trade surpluses with Argentina every year from 1993-99, as Argentina's firms increased capital goods purchases during that period. This trend reflected the Argentine Government's policy of encouraging modernization and improved competitiveness in Argentine industry through lower tariffs on capital goods.

Argentina's trade deficit dropped from $5 billion in 1998 to $2.2 billion in 1999, primarily because the recession lowered demand for imports. The overall value of 1999 Argentine exports fell 12%, due mainly to low international commodity prices, while imports dropped 19% from 1998. Argentine exports began to increase significantly in the last months of 1999 and continued their upward trend in early 2000. Exports should continue to rise throughout 2000 as rebounding economies in Brazil and Asia increase demand and prices for Argentine commodities move upward; rising oil prices have been particularly significant. The U.S. trade surplus with Argentina was $2.4 billion in 1999, down from 1998 as U.S exports to the country declined from $5.9 to $5.0 billion. Fresh Argentine beef was exported to the U.S. market in 1997 for the first time in over 60 years, and in 1999 its export quota of 20,000 tons was filled. However, beef exports to the U.S. were suspended in August 2000 when some Argentine cattle (near Paraguay) were discovered to have anti-bodies for hoof and mouth disease.

Mercosur, the customs union that includes Argentina, Brazil, Paraguay, and Uruguay, entered into force January 1, 1995. Chile and Bolivia joined the pact subsequently as associate members. Close cooperation between Brazil and Argentina--historic competitors--is the key to Mercosur's integration process, which includes political and military elements in addition to a customs union. Brazil accounts for more than 70% of Mercosur GDP and Argentina about 27%. Mercosur has been one of the largest and most successful integrated markets in the developing world, with substantial foreign investment going to its members. Intra-Mercosur trade also rose dramatically from $4 billion in 1991 to over $23 billion in 1998. More than 90% of intra-Mercosur trade is duty-free, while the group's common external tariff (CET) applies to more than 85% of imported goods. Remaining goods will be phased into the CET by 2006.

Argentina adheres to most treaties and international agreements on intellectual property. It is a member of the World Intellectual Property Organization and signed the Uruguay Round agreements in December 1993, including measures related to intellectual property. However, extension of adequate patent protection to pharmaceuticals has been a highly contentious bilateral issue. In May 1997, the U.S. suspended 50% of Argentina's GSP benefits because of its unsatisfactory pharmaceutical patent law. In May 1999, The U.S. Government initiated consultations under WTO procedures to address these inadequacies and expanded the consultations in May 2000.

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 has also become an important investor in Argentinean 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.

Statistics

GDP: purchasing power parity - $367 billion (1999 est.)

GDP - real growth rate: -3% (1999 est.)

GDP - per capita: purchasing power parity - $11,000 (2004 est.)

GDP - composition by sector:
agriculture: 7%
industry: 29%
services: 64% (1999 est.)

Population below poverty line: 36% (1998 est.)

Household income or consumption by percentage share:
lowest 10%: NA%
highest 10%: NA%

Inflation rate (consumer prices): -2% (1999 est.)

Labour force: 15 million (1999)

Labour force - by occupation: agriculture NA%, industry NA%, services NA%

Unemployment rate: 14% (December 1999)

Budget:
revenues: $44 billion
expenditures: $48 billion, including capital expenditures of $NA billion (2000 est.)

Industries: food processing, motor vehicles, consumer durables, textiles, chemicals and petrochemicals, printing, metallurgy, steel

Industrial production growth rate: -7% (1999 est.)

Electricity - production: 75.237 TWh (1998)

Electricity - production by source:
fossil fuel: 42.71%
hydro: 47.55%
nuclear: 9.47%
other: 0.27% (1998)

Electricity - consumption: 75.57 TWh (1998)

Electricity - exports: 250 GWh (1998)

Electricity - imports: 5.85 TWh (1998)

Agriculture - products: sunflower seeds, lemons, soybeans, grapes, corn, tobacco, peanuts, tea, wheat; livestock

Exports: $23 billion (f.o.b., 1999 est.)

Exports - commodities: edible oils, fuels and energy, cereals, feed, motor vehicles

Exports - partners: Brazil 24%, EU 21%, US 11% (1999 est.)

Imports: $25 billion (c.i.f., 1999 est.)

Imports - commodities: machinery and equipment, motor vehicles, chemicals, metal manufactures, plastics

Imports - partners: EU 28%, US 22%, Brazil 21% (1999 est.)

Debt - external: $149 billion (1999 est.)

Economic aid - recipient: $2.833 billion (1995)

Currency: 1 peso (ARS)= 100 centavos

Exchange rates: EUR 1 = ARS 3.60 (September 2004), USD 1 = ARS 2.85 (October 2003). A fixed rate USD 1 = ARS 1 until January 2002.

Fiscal year: calendar year

See also

Reference

Much of the material in this article comes from the CIA World Factbook 2000 and the 2003 U.S. Department of State website.

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