Argentinas economic status - Essay Example

Country study: Argentina With 23 states and also an autonomous city, Argentina had been the second largest country of Latin America. Covering a total area of 2766890 square kilometer the country stands as the eight largest nations measured 30th in terms of population (CIA World Fact Book 2010, 29). The country had a fairly high per capita income in 1920 but suffered from severe political instability during the 80s due to economic crisis. The country was under 22 years of military rule and after that changed 25 presidents. Currently the country is recovering from a severe downturn that it suffered owing to the 2001-02 economic crises. Reportedly the country has defaulted on debt in 2005 and then made a debt repayment of $9.5 million to IMF in January 2006 (Sullivan). IMF even questions Argentina’s accounting measures and credibility of data especially the one concerned with inflation. Keeping this at backdrop the paper intends to present a study of Argentina’s economic status by looking upon its past history of economic crisis and also examining the extent of recovery from such a crisis currently. Motivation of paper The country of Argentina situated in Latin America had been going through a political turmoil for many years along with disastrous economic conditions. Economic crisis followed by debt crisis has been piling up one after another. Currently the country is facing the problems of high prices and persistent double digit inflation. Hence studying the economy of a country like Argentina would take through the series of almost of sorts of downturns that an economy can encounter and how it tends to survive under such circumstances. The developmental activities of organizations like IMF and World Bank can also assessed through the economic study of Argentina. This is because Argentina is a member country and has acquired financial assistance from such organizations. Recently the country has landed in controversies by providing questionable reports on CPI to IMF and underestimating inflation (Turner). All this makes it an interesting case for study. Hypothesis Even after recovering from economic crisis Argentina is facing the problem of high prices and double digit inflation and this will this have negative effect on growth. Without a significant remedy to the problem the country might head towards economic slowdown. To test such a hypothesis we first consider a brief history of the past economic problems and then address the current economic problem through various findings and analysis. We also look upon the technical and financial assistance provided by the developmental organizations World Bank and IMF. Literature review Several economists have analyzed and performed research studies on Argentina’s economic condition. A research study has been performed to get an idea of poverty prevailing in Argentina due to such economic conditions. The data has been collected from EPH which is the main household survey of Argentina. Real income has been taken as an indicator of poverty and inequality. Fall in real income (8%) for the years 1992-96 comes along with the increase in GDP (8.9%) for the same years. Such a discrepancy reveals an overestimation of GDP in the data provided by local Argentinean surveys. Some unaccounted income such as rent and capital income might also be a cause for such a dubious result (Gasparini). Growth incidence curves have also been used for studying the changes in income pattern. The curves have been below the horizontal axis and positively sloped. High inequality in income is revealed from such a study of income changing patterns (Gasparini). Poverty status of Argentina has been studied using poverty lines with three poverty indicators namely the headcount ratio, the poverty income gap and FGT. Value of poverty lines have been expressed in local currency units. The data has collected for the period 1992-06. Such a study has shown that although Argentina has somewhat recovered from the 2001-02 crisis it has not been able to eradicate poverty. With the crisis there has been an increase in poverty which fails to die down (Gasparini). A survey has been performed in the rural areas of Argentina and the data collected through such surveys has been analyzed b assigning Gini co-efficient to the household per capita distribution of income. The Gini coefficient for urban areas was found to be 0.474 and that for rural areas was 0.482. Such a result obtained points out a huge difference in the pattern of income distribution between rural and urban areas. The amount of inequality has also been found to be varying (Gasparini). However most of the researches and studies on the economy of Argentina have covered mainly urban households. This has been a severe limitation on part of the surveys. Inclusion of Argentina in cross country analysis has been prohibited for existence of such limitation. A consideration of such studies and analysis by the economist gives a clear idea of the economic condition in Argentina. Inequality and poverty have prevailed throughout and the situation has been worse post crisis. Various empirical evidences and findings have been included in the paper in support of the fact. The population composition of Argentina has been heterogeneous consisting not only of original inhabitants but also some colonial settlers (CIA World Fact Book 2010, 29). Internal fights have devastated Argentina after they became independent from the Spanish colonial rule in 1810. The country faced immense political turmoil till 1862. Although the country had gained in some foreign exchange at that time budgetary problems contributed to such an economic crisis. Although Argentina had gained some economic growth by attracting foreign investment in the last 20 years persistent inflation has always troubled Argentina (Saxton). Cyclical downturns and business cycle fluctuations had swept the whole of Latin America during the period 1971-2004. Argentina who along with Chile, Brazil and Chile had made above 70% contribution to Latin America’s GDP and total volume of exports (Table 2, Appendix) was obviously not far behind in this wave. Trade balances have been disturbed owing to such fluctuations. The degree of openness has also been hurt. The volatility has been varying with respect to time and this has restricted the risk taking ability of the country (Aiolfi, Catao and Timmermann). Facts & Issues The data below gives an estimate of the volatility caused by persistent long cyclical fluctuations during the year 1971-2004: Figure1: Column chart showing volatility in Argentina’s businesses for the year 1971-04 Source: Aiolfi, Catao and Timmermann The data above giving volatility estimates for Argentina over the past fifteen years which has led to economic instability in the country. Clearly we see that interest rates and external and internal output had been less volatile as compared to the government spending pattern. Cyclical downturns have also occurred in country’s investment part. Moreover the country has not performed consistently well in trade as evident from fluctuations in export volume. Fluctuations in business cycles had been the sole reason. The scenario of the past economic crisis can be realized if we look upon the data for the years 1998 to 2002. Being a victim of depression for 4 years Argentina suffered a loss in GDP by 28%. Inflation was negative during that time. It got to 41% in 2002. Due to such inflation in 2002 wages fell by 23% (Saxton). Such depression also presented an upward trend in the level of unemployment as shown by the data below: Figure 2: Line Diagram showing rising unemployment in Argentina during 1998-02 Source: Saxton The line diagram above shows that unemployment had been on the increasing side since 1998-2002 due to the economic crisis. With economy experiencing a downturn and people losing jobs at alarming rate poverty was also increasing at an alarming rate and demand urgent poverty eradication measures. Figure 3: Column chart showing rising poverty in Argentina during 1998-02 Source: Saxton Economy continued to face disasters with joblessness and downturns. People were at the same time becoming poorer and poorer and by 2002 more 50% of the population was under poverty line (Saxton). In the last 10 years Argentina has also been caught in the debt trap. The country has taken large amount of loans of external loans during the years 2000-03 which it had failed to repay. Developmental organization IMF has helped the country a lot by lending considerable funds and other financial arrangements to overcome such a trap. The table below shows the country’s loan structure for the years 2000-03 which also reflects the country’s financial position: Table 1: Data showing Argentina’s loan structure for the years 2000-03 Argentina' current financial arrangement Loan taken(year) Loan expiration (year) Amount Approved Amount drawn 2003 2006 8981 4171 2003 2003 2174 2174 2000 2003 16936 9756 2001 2002 6086 5874 Source: Argentina Financial Position in the Fund The data above shows the current borrowings of Argentina as a member country of IMF. The loan amount has been expressed in units of SDR million which consists of both net cumulative allocations as well as holdings. For Argentina the net amount allocated is 2020.04 and the holdings amount to 2053.01 (Argentina Financial Position in the Fund). IMF and World Bank have led considerable support to the country in such loan repayment matters. The first loan was due in 2003 and amounted to $1 billion. IMF support involved certain conditions for the country to fulfill such as achieving a fiscal surplus and make repayments on the accumulated interest amounting to $15 billion. Presently IMF has removed strict timelines. But the country has to fulfill its promise of imposing a tighter monetary policy and also introducing various tax reforms. IMF has also suggested financial reforms. Privatizing public banks could also be of help to the government (Global Trade Negotiations Home Page). Being a member country Argentina also had to present time to time reports giving information on its progress towards economic development. IMF has been satisfied with Argentinean efforts but still raises questions over the reports presented by the government on Consumer Price Index. It has asked the country to give more specific and better reports for areas concerned with GDP and CPI of the country. IMF has also promised to lend some technical support to Argentina for constructing a new national CPI (Medeiros, 2011). Currently Argentina’s CPI goes upto 9.7% a year. However reports are there that economists have vastly underestimated the actual inflation. Most economists have argued that annual inflation in actual is higher at least by 20%. Such high inflation rate is a combination of faulty monetary policies and ever rising expenditure on part of the government. Prices have never increased at this rate in Argentina in the past 4 years. The current has seen a wage hike of around 28% whereas manufacturers are planning to cut down costs of production. Price has increased for healthcare products as well as food and beverages industry (Turner). Such an instance of CPI can be presented from the figure below: Figure 4: Line diagram showing Argentina’s rising trend of CPI for the period 2005-10 Source: Data: The World Bank Group From the diagram an ever rising trend in CPI has been found over the years. The base year 2005 has been taken as 100. World Bank has collected data from various statistical agencies and national survey organizations. According to such a data per capita gross national income amounted to $8,500 and the country’s GDP has been $368,711,957,358 in 2010. Argentina has suffered from a high percentage of external debt shocks which amounted to 40.1% (Data: The World Bank Group). According to the World Bank data the country has recovered from negative inflation in 2001 and reached as high as 26% in 2002 (Data: The World Bank Group). Currently the country is facing the problem of persistent double digit inflation. The figure below shows inflation rate in Argentina for the years 2001-2010: Figure 5: Line diagram showing inflation rate in Argentina for 2001-10 Source: Data: The World Bank Group The line diagram reveals that recovering from negative inflation the country is now facing the problem of double digit inflation which was 11% in the year 2010. The study of inflation rate can be enhanced by taking the help of GDP deflator as shown in the figure below: Figure 6: GDP deflator demonstrating the inflation scenario in Argentina for the period 2005-09 Source: Data: The World Bank Group The problem of double digit inflation is also lowering down the process of growth .This is evident as we look upon the line diagram below. Figure 7: Line diagram showing the percentage of annual growth for the years 2001-09 Source: Data: The World Bank Group The growth history of Argentina presented by this line diagram for the years 2001-09 is unsatisfactory. Although the country has successfully recovered from negative growth still the annual growth has been on the lower side. Persistent inflation may be one of the reasons for this. External debt trap may also have distorted growth. Conclusion Argentina as a country of Latin America has undergone a lot of political turmoil and economic disasters. This has increased poverty and inequality of the country despite its temporary recovery from the 2001-02 crises. Currently the country is facing the problems of double digit inflation and high CPI which is having detrimental effects on growth. Without a significant solution for the problem of inflation the country might move towards economic slowdown. However some financial and technical assistance from developmental organizations like IMF, World Bank tends to improve the economic scenario in the near future. As part of policy implications the paper suggests inflationary and poverty measures that needs to be taken urgently and better quality of inflation reports so as to improve the economic condition of the country. APPENDIX Table 2: Export of goods to Latin America Source: Latin America-EU-economic indicators, trade and investment References 1 CIA World Fact Book 2010, New York : Skyhorse Publishing, 2009 2 Sullivan, Mark P, Argentina: Political and Economic Conditions and Relations, CRS Report For Congress, 2006. November 28 2011 from http://www.fas.org/sgp/crs/row/RS21113.pdf 3 Saxton, Jim (R-NJ), Argentina’s Economic Crisis: Causes and Cures, 2003. November 28 2011 from http://www.hacer.org/pdf/Schuler.pdf 4 Global Trade Negotiations Home Page, n.d. November 28 2011 from http://www.cid.harvard.edu/cidtrade/gov/argentinagov.html 5 Data: The World Bank Group, 2011. November 28 2011 from http://databank.worldbank.org/ddp/html-jsp/QuickViewReport.jsp?RowAxis=WDI_Ctry~&ColAxis=WDI_Time~&PageAxis=WDI_Series~&PageAxisCaption=Series~&RowAxisCaption=Country~&ColAxisCaption=Time~&NEW_REPORT_SCALE=1&NEW_REPORT_PRECISION=0&newReport=yes&IS_REPORT_IN_REFRESH_MODE=true&IS_CODE_REQUIRED=0&COMMA_SEP=fales 6 Medeiros, Carlos, Statement By IMF On Technical Assistance Mission To Argentina, 2011. November 28 2011 from http://www.imf.org/external/np/sec/pr/2011/pr11131.htm 7 Argentina: Financial Position in the Fund, 2011. November 28 2011 from http://www.imf.org/external/np/fin/tad/exfin2.aspx?memberKey1=30&date1key=2011-11-28 8 Aiolfi, Marco, Catao, Luis and Timmermann, Allan, Common Factors in Latin America’s Business Cycles, IMF Working Paper,(2006) 6.49, November 28 2011 from http://www.imf.org/external/pubs/ft/wp/2006/wp0649.pdf 9 Turner, Taos, DATA SNAP: Argentina's July CPI Up 0.8% On Month; Up 9.7% On Year, 2011. November 28 2011 from http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201108151528dowjonesdjonline000174&title=data-snapargentinas-july-cpi-up-08on-monthup-97on-year 10 Gasparini, Leonardo, Monitoring the Socio-Economic Conditions in Argentina, 2007. November 28 2011 from http://www.depeco.econo.unlp.edu.ar/cedlas/monitoreo/pdfs/argentina.pdf 11 Gasparini, Leonardo, Poverty and Inequality in Argentina: Methodological Issues and a Literature Review, Monitoring the Socio-Economic Conditions in Argentina, Chile, Paraguay and Uruguay CEDLAS-The World Bank, 2004, November 28 2011 from http://www.depeco.econo.unlp.edu.ar/cedlas/monitoreo/pdfs/review_argentina.pdf 12 Latin America-EU-economic indicators, trade and investment, 2011. November 28 2011 from http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Latin_America-EU_-_economic_indicators,_trade_and_investment Read More