Argentina Economy - Analysis Project - Research Paper Example

Argentina Economy – Analysis Project Introduction Argentina economy is the third biggest economy in Latin America, with high standards of living and per capita income. Argentina is an upper middle-income economy and exhibits the characteristics of a strong foundation for future market size expansion, and increments in foreign direct investment. It also exhibits an augment in the percentage of high technology exports as a share of the entire manufactured products. Argentina gains from rich natural resources, high literacy rates of its population, an agricultural sector which is export oriented, and a diversified industrial base. Traditionally, Argentine economy had been agriculture based, but in the recent years, service and industrial sectors have grown in importance (Paolera & Taylor 88).1 Prior to the 1880s, the country relied on the salted meat, leather, hide, and wool industries for the larger component of its foreign trade and the generation of local income and earnings. Over the years, the country has experienced economic expansion in the various sectors. Argentina is among the international principal producers of agricultural commodities. The country is amongst the top producers and exporters of fruits and vegetables, maize, soybeans, honey, wheat and sorghum among others. In 2010, the agriculture sector accounted for 9 percent of the Gross Domestic Product (Paolera & Taylor 90).2 The2 manufacturing sector of the economy accounts for 19 percent of the country’s economy. The manufacturing and agriculture sectors of the economy are well integrated; more than half of the country’s industrial exports are agricultural in nature. The exploitation of the mineral resources has been growing; currently, they contribute approximately 4 percent of GDP (Paolera & Taylor 97). The service sector contributes up to 60 percent of the GDP, making it the leading contributor of the entire GDP. Argentina service sector is well diversified, which entails well established financial, social, transport, communication, insurance, real estate, tourism and corporate services. Even though the country was one of the global wealthiest nations 100 years ago, in the 20th century, the state experienced poor economic conditions. From 2000, the country experienced persistent economic crises, relentless current account and fiscal deficits, high inflation rates, escalating external debt, and capital outflows. A severe economic depression, escalating external and public indebtedness, and bank run culminated in 2001 were the most serious social, political and economic crisis in the Argentina turbulent history. In December 2001, interim President Adolfo Rodriguez SAA declared a default on the government’s external debt, which was the biggest in history. President Rodriguez resigned a few days after taking office (Baer & Fleisher 8).3 In early 2002, Rodriguez’s successor, Eduardo Duhalde, declared an end to the peso’s 10 years long 1-to-1 peg to the U.S. dollar. During this year, there was deterioration of the economy with real GDP being 18 percent lower compared to that of 1998 and almost 60 percent of the Argentines were living under the poverty line. After six years, the economy started to grow with an average real GDP annual growth rate of 8.5 percent. The economy took advantage of previously inactive labor and industrial capacity, a bold debt restructuring and diminished debt burden, excellent global financial conditions, and expansionary fiscal and monetary policies. Also, the economy experienced high rates of inflation (Baer & Fleisher 10).3 However, in early 2007, President Nestor Kirchner’s administration responded to the inflation through price restraints on businesses and export taxes and controls. In late 2007, Cristina Kirchner succeeded her husband as President, and the rapid growth of the economy of previous years started to slow down sharply in 2008. This was as a result of government policies, which reduced exports and the global economy fell into recession. The economy has recovered sturdily from the global economic recession. In 2010, the GDP – purchasing power parity was $596 billion, real GDP growth rate was 7.5 percent, population under the poverty line was 30 percent, and the labor force in urban areas were 16.4 million. The inflation rate was 7.8 percent, and the inflation rate was 22 percent (Baer & Fleisher 13).4 Characteristics of Argentina Constitutional Foundation The Constitution, drafted 1853, is still in force along with the constituent amendments in it. The constitution sets boundaries to values and legality within the Argentina society. The constitution is a fundamental turning point in the Argentina history of democracy. The constitution is the supreme law of the entire legal system of Argentina. The effectiveness of the constitution largely relies on the formulation of its own guarantees. Constitutional guarantees refer to a vital idea that politics must be constitutionally appropriate. Therefore, constitutional guarantees reject the idea that the constitution may be politically adapted according to the interests of the members of parliament. The range of constitutional guarantees exhibits that they refer to the extent of action of public powers especially the Legislative and Executive powers (Baer & Fleisher 20).4 The Constitution instituted a Federal Republic where the Congress, the Executive, and the Judiciary are the primary institutions. As a result of historical reasons, provincial governors preserved significant authority. The series of institutional authority begins with the president and carries on with the governorship. The president has extensive powers, and the Constitution offers a system of checks and balances through the Supreme Court and the Congress, but these institutions have been ineffective. Governors represent a more influence to the presidential authority than the Judiciary and the Congress. Therefore, they are the decisive players in policymaking process and national politics. Argentina electoral regulations have cultivated a feeble and nonprofessional Congress (Vial 30).5 Daseking6 observes that most of the members of Congress have neither the incentives nor the expertise to initiate influential legislation to manage public administration. Electoral rules transfer authority away from the Congress and state parties toward principal political patrons. This curbs legislators’ political scopes, which influences the incentives of the rest of the polity (Daseking 18). The Judiciary has worked feebly, and in various cases, its functions have been simply politicized. There have been various reforming efforts, but it remains ill-organized. The incapability of the Courts to enforce the laws and the Constitution tends to reduce the value of the statutory policy making. Institutional characteristics of Argentina and the history of political volatility have been vital determinants of the workings of the government and influence the policy making process. Public policies are the results of inter-temporal interactions among politicians. The fundamental institutional traits of a state comprise the structure within which those exchanges are accomplished. Argentina has not been able to formulate policies, which are credible, adaptable and stable. The policy making process inherits structural characteristics, which fosters a political-economic balance where the interactions between the private agents and public sector are dominated by short term considerations and ideological instability. Public policies affect Argentina economic system leading to cyclical dynamics of the economic process (Daseking 20).7 Characteristics of Argentina Income Security During 1990s, Argentina implemented a policy of reducing social institutions expenditure. The social institutions expenditure pledged to sustain and contribute a certain degree of social-economic security via an extensive system of social security on the labor security basis. Studies have shown that, in Argentina, there is deterioration in levels of income of employees. There are some characteristics of labor income in Argentina. First, there are high short-term variations in wages. Secondly, there is widespread discontent with labor income and an extremely high temperament to work longer in order to boost income. Thirdly, there are few expectations of enhancing personal and family income. Fourthly, there is low confidence concerning the likelihood of obtaining a sufficient income at the retirement age. Fifth, there is high criticism on fairness of opportunities. Sixth, there is high demand for policies aimed at promoting redistribution of income. Lastly, there is broad acceptance of policies, which grant minimum allowances as a mean of countering poverty (Legge 18).8 The level of income security is determined by the monetary income of individuals. The monetary value depends on the purchasing power, which should be sufficient to ensure an individual has a decent level of life. Therefore, the level of income security may be assessed by relating the household income to the monetary value of the reference basket. Over the past years, Argentina has experienced a substantial boost in the number of individuals and households with levels of income below the poverty and indigence lines. The escalating relative inadequacy of individuals’ incomes has resulted to general condition of dissatisfaction concerning labor returns (Legge 20).9 10 Historically, Argentina had a wage policy, which included a statutory minimum wage as a significant component to be treated as a referential level for the entire economy. However, the policy has gradually become obsolete due to lack of periodical updating and the boost of nonregistered labor contacts (Vial 32). There have been downward changes of nominal wages as firms respond to changes in profitability of their businesses. A survey conducted in 2003 shows that, low income levels encourage responses that favor the extension of working hours, provided that extra working hour will increase their incomes. Also, there is low individual saving to cater for future consumption. Argentina needs public policies, which aim to promote and maintain stable economic growth and address issues of income distribution. Characteristics of Argentina Labor Market Flexibility During the last decades, various nations in Latin America initiated structural reforms of the public policies and markets. Argentina is one of the countries that conducted most of its reforms from 1991 to 2001. In 2007, the country exhibited an impressive growth, which started after the maxi-devaluation and the state debt default at the start of 2002. In 1990s, the combined impact of structural reforms, economy internationalization, and the deregulation of labor generated various channels to facilitate labor market segmentation, labor force disqualification, underemployment, unemployment and other labor market pathologies. This have resulted to an increase in number of individuals who have fallen out of decent, full work and labor cost that has sharply decreased (Daseking 22).11 The 1990s macroeconomic environment and the structural reforms affected the Argentina labor market. The new macroeconomic settings initiated by President Menem administration and the associated volatility of the economy caused radical adjustments in the labor market. Policies and institutional developments and adjustments are executed for political motives than economic motives. The commitment of the government to full employment is a vital element in explaining the labor market situation. President Menem administration did not have such a commitment. The government imposed profound reforms with the belief that high labor costs were the principal cause of economic difficulties of the country. Various measures were imposed on labor relations flexibility in the formal sector. There was the establishment of different forms of promotional employment and part time jobs (Daseking 25).11 There was the removal of other rigidities of the labor regulations. There was the introduction of collective bargaining agreements, which allowed employees to negotiate working terms and conditions. Other changes in the labor market comprised wage adjustment on productivity basis rather than on cost of living basis. Argentina is characterized by a highly literate population; this implies a highly competent workforce (Vial 35).12 The 1990s labor market adjustments played a positive role in enhancing the current labor market flexibility in Argentina. The reforms lead to development of capital-labor negotiations. The negotiations are based on two criteria; one associated with past productivity and the other to boosts in future productivity. When negotiations refer to past soft innovations of Argentina, organizations include reduction of the number of workers and additional working hours. When negotiations refer to the future, concerns shift to innovations and technology advances. Characteristics of Argentina Corporate Governance Corporate governance is the interaction among various participants including board of directors, shareholders, and corporation management in shaping the current and future performance of a company. It is a method by which corporations are directed and managed to fulfill shareholder desires. Although Argentina is a part of the global economy, it has its unique corporate governance characteristics. Argentinean publicly traded corporations tend to have a high level of ownership concentration and even some of the largest public corporations have families controlling the company. Active majority shareholders may be beneficial for governance through ensuring vigorous oversight of the management. These shareholders may also provide a ready source of monetary support. However, majority shareholders may also act in manners that are not in the smaller shareholders interests (Solomon 200).13 Several large Argentinean corporations operate as cluster of diversified corporations with a common ownership and control. Also, it is common for the earnings of some group corporations serve as a source of cash to finance the growth of enterprises within the group, which requires an enormous amount of capital. These groups developed as effective ways of funding capital intensive ventures. However, studies on corporate governance consider that this may harm the efficiency of capital markets and well managed legal systems. The rising internalization of industry and finance in Latin America (including Argentina) has contributed to a reduction in the number of corporations listed in domestic capital markets since corporations have delisted and gone private (Solomon 205).13 Historically, listed companies have exhibited extremely poor standards of corporate governance in Argentina. Since the 1990s, numerous changes have taken place, which has affected in a positive manner the corporate governance standards in Argentina. These changes include transformed access to foreign capital flows, the privatization of public utilities, and the growth of the domestic capital markets. There were also the developments of the institutional investment industry, the growing significance of foreign capital in the nonfinancial and financial sectors and listings of local companies in foreign markets. These adjustments led to various governance guidelines for listed companies, which were motivated by global best standards and practices (Solomon 207).14 Characteristics of Argentina Structure of Capital Markets 15The Argentina capital market is regulated and governed by National Securities Commission, Argentina. The National Securities Commission was created in 1967 by the Argentine Securities Law No. 17,811. The mission of the commission is to control and regulate the participants in the capital markets, authenticating that the transactions conform to the objectives and principles of the Argentine Securities Law among other regulations. The following are the functions of National Securities Commission, Argentina. First, the Commission authorizes the public offer of stocks and lays down the requirements issuers must fulfill to keep in force the authorization. Secondly, it advises the government on how to approve those firms applying to become stock exchanges (Obstfeld & Taylor 75). Thirdly, it maintains and updates the list of broker dealers and agents registered with the capital markets. Fourthly, it approves the capital markets and stock exchanges’ bylaws associated with the public offer of securities. Fifthly, it administers and controls the compliance of regulations and legislation regarding public offers of securities. Sixthly, it administers and controls companies, which make a public offering of their stocks from a company’s law point of view. The 1990s economic reforms in Argentina affected the structure of the capital markets. The reforms allowed foreign capital flows and corporations in the financial and nonfinancial sectors increasingly recognized the importance of foreign capital (Obstfeld & Taylor 80).16 The reforms also led to growth of domestic capital markets and local firms were listing their securities in the foreign capital markets. The structure of ownership and corporate governance of companies in Argentina affect the capital markets. Most Argentinean corporations operate as groups of diversified corporations with common ownership and control. This structure of ownership and governance may harm the efficiency of capital markets. The economic and political significance of these groups and their effect with significant financial sector players may crowd out small-sized and medium-sized companies, access to the public and private capital markets. This can also stunt access to domestic and global capital markets (Solomon 225).17 Conclusion As an upper middle-income country, Argentina demonstrates the features of a strong foundation for future market size growth, increases in foreign direct investment, and an augment in the percentage of high technology exports as a share of the entire manufactured products. Argentina gains from high literacy rates of its population, rich natural resources, an agricultural sector which is export oriented, and a diversified industrial base. The country experienced periods of high economic growth and high productivity and periods of high economic stagnation. The Argentina Constitution affects the operations of the economy through the three arms of administration. Institutional features of Argentina and the history of political unpredictability have been fundamental determinants of the workings of the government and influence the policy making process. Public policies are the results of inter-temporal interactions among politicians. There is deterioration in levels of income of employees in Argentina. The level of income security is determined by the monetary income of individuals. The monetary value depends on the purchasing power, which should be sufficient to ensure an individual has a decent level of life. Argentina is characterized by highly literate and competent workforce. These 1990s labor market adjustments played a positive role in ensuring the current labor market flexibility in Argentina. Argentina has its unique corporate governance traits. Argentinean publicly traded firms tend to have a high level of ownership concentration and even some of the biggest public companies have families controlling the company. The Argentina capital market is regulated and governed by National Securities Commission, Argentina. The 1990s economic reforms in Argentina affected the arrangement of the capital markets. The reforms allowed foreign capital flows and other adjustments in the capital markets. Works Cited Baer, Werner & Fleischer, David. The Economies of Argentina and Brazil: A Comparative Perspective. Northampton: Edward Elgar Publishing, 2011. Print. Daseking, Christina. Lessons from the Crisis in Argentina. Washington: International Monetary Fund, 2004. Print. Legge, Stefan. Effects of Minimum Wage Policy on Poverty in Argentina. Harburg: Diplomica Verlag, 2009. Print. Obstfeld, Maurice & Taylor, Alan. Global Capital Markets: Integration, Crisis, and Growth. Cambridge: Cambridge University Press, 2005. Print. Paolera, Gerardo & Taylor, Alan. A New Economic History of Argentina. Cambridge: Cambridge University Press, 2003. Print. Solomon, Jill. Corporate Governance and Accountability. New York: John Wiley & Sons, 2011. Print. Vial, Joaquin. The Latin American Competitiveness Report, 2001-2002. Oxford: Oxford University Press, 2002. Print. Read More