Mounting Inflation in Argentina Threatens Business Environment - Research Paper Example

Introduction: The aim of the paper is to understand the concept of hyperinflation quoting definitions from various sources and substantiate to explain the term in total. The paper will further detail the effects of hyperinflation on the macroeconomic conditions of a country by choosing a country so affected. The country so chosen to explain and analyze a macroeconomic scenario during hyperinflation is Argentina. Argentina, because it is a country that tops the list in hyperinflation during the 20th century. The country has had periods of hyperinflation and controlled inflation and recoups after these bouts. This is explained with relevant data and pictorial graphs in order to bring out a clear understanding of the concept. Hyperinflation in any country is the result of careless monetary policies and the balance of imports and exports, and the mismatch of demand and supply factors. A country that slips into a period of hyperinflation experiences a rough economy in addition to heavy economic downturn and in the end resulting in currency devaluation. Body: The London South East Limited defines Hyperinflation as "Rapid inflation, where prices increase so fast that money largely loses its convenience as a medium of exchange." The Investopedia says "There is no precise numerical definition to hyperinflation. This is a situation where price increases are so out of control that the concept of inflation is meaningless. According to the banking dictionary Hyperinflation is explained as an "Economic condition characterized by rapidly rising prices of freely traded goods, and declining purchasing power, threatening economic stability and ability to repay External Debt the term usually is applied when consumer prices are rising at rates in excess of 50% per month, particularly in developing countries. While we do have many definitions and perceptions about hyperinflation let us first understand the term Inflation. In an article published by the department of Economics Wilfred Laurier University of Canada, "Inflation is generally defined as a sustained increase in the cost of living. While there exist a myriad of indicators of the cost of living in most countries, inflation is usually thought of in terms of a consumer price index (CPI)." Moreover is further explains inflation as "An understanding of inflation and its causes is vital since continuous increases in some indicator of the cost of living implies a concomitant fall in the purchasing power of money. In other words, a given quantity of currency is able to command fewer quantities of goods and services as prices rise."(Pierre 2000) Finally inflation is the rise in the consumer prices and the percentage of this rise if exceeds over 50% a month is hyperinflation. Most of the hyperinflationary conditions have risen across the Globe after the Second World War. Brazil and Argentina had an average monthly increase of 68.6% and 66% respectively. However, economists commonly agree that Germany's economy was the worst affected due to Hyperinflationary conditions during the Second World War. The recent Global financial meltdown has given rise to many questions about hyperinflation across the Globe and how long it would last and whether this would give rise to another Great Depression 2. In an article by Global Research, the International forecaster of Bob Chapman predicted Inflation rates; US at 12.5% ,China 8.5% The Gulf an average of 12% ,Russia at 14%, India at 8%, Indonesia 12%, Brazil at 5%, Chile 8.3%, and Argentina at 23%.(Lendman 2008) The figures are just a global forecast of which Argentina the highest note that Brazil has managed to emerge out of its hyperinflationary condition and is well on the road to recovery. History of Argentina's Inflation: Just to give glimpse of the Argentine Inflation picture. Hyperinflation picture rather news from the Argentine post the average annual inflation rate in Argentina between 1965 and 1989 was 284%, according to a 1992 research paper archived by the National Bureau of Economic Research. According to this paper by Nobel Prize-winning economist Gary Becker, inflation surpassed 1,000% in both 1989 and 1990. And here is a Reuter's story from 1984: "Inflation in Argentina, already the highest in the world, reached a record of 433.7 percent in 1983, the National Statistics Institute said today. The previous record was 347 percent in 1976." (Argentine post 2008) Though Argentina has come a long way on its inflation rates it sure has not recouped the way Brazil or other European countries have managed to tie down inflation rates and stabilize economy. The graph below represents the inflation chart for the last few years in Argentina. Source : Euro Monitor International The pictorial representation above is an indicator of the violent upward and downward trend of the inflation during the years 2001- 2004. These frequent fluctuations in the consumer price of goods and services upset the business cycle and lead to the stagnation of business, wealth creation and devalue the currency. The hyperinflation in a country can get into a vicious circle affecting the macroeconomic numbers of the country for example the Growth rate or the GDP %. Below is the graphical representation of the GDP rates between the years 1998 and 2007 Source : UN Online Statistics Division The above graphical representation speaks for itself. During the years 1980 to 2007 Argentina has undergone terrible macroeconomic fluctuations resulting in absolute instability or impermanent growth in all sectors of the economy. Labour particularly in Argentina has undergone a huge change. By the end of the year 2008 according to the World fact book Argentina is ranked 64th in unemployment rate at 8.9%. From a 14.7 % in 2000 it reached a stabilizing 10.6 and 10.2 % in 2005 and 2006. However, it touched incredibly low levels of 7.6% by the end of 2007. In a report by the Inter American bank in the year 1997 the labour scenario was "Up to the end of the 1980s, unemployment did not seem to be a particularly critical problem in Argentina. In spite of dramatic recessions, high inflation, and general economic disarray, adjustments in the labour market were reflected more in real wage flexibility than in variations in the rate of growth of employment or in unemployment. This panorama changed drastically in the early 1990s: unemployment increased dramatically and by 1993 spells of unemployment longer than 6 months accounted for 40 percent of total unemployment (from 26 percent in 1987)."(Morley & Marquez 1997.) During the years of undue inflation crisis in Argentina the BBC online reported the following: "Argentine prices have risen 20% so far this year following the devaluation of the country's currency the peso, officials have said. For some goods, the price rises have been even greater. The prices of fresh eggs and vegetable oils, as well as the prices of computers and televisions, have risen between 100% and 200%, according to a survey by the Argentine business chamber CAME. A 70% fall in the value of the peso since the 11-year peg to the US dollar was ended in January has sent the prices of imported goods soaring. This has boosted demand for home-grown products, sending these prices higher too. Had it not been for a price freeze on public utilities, the official inflation rate would have been even higher. After four years of recession, the country suffers from almost 20% unemployment and flat wages, so the Argentine people can ill afford a return to hyper-inflation."(BBC 2003) Though the official Argentina reports stated a 8.5% inflation in the year 2007 the actual inflation touched a 22%. In 2008 again the official figures from Argentina raise objections leaving it at 23.3%. The Euromonitor International Discussed the overall impact of this inflation in the year 2007 which gives us ample insights into the macroeconomic effects that Argentina will have in the forth coming years they are:- 1. The government trying to cap wage increases at 15% in an effort to curb inflationary pressures. Concerns that rise in inflation more than reported will encourage unions to press for higher salary increases in order to maintain consumer purchasing power. 2. If wage increases do not keep pace with inflation, it results in the reduction of consumer purchasing power; 3. Rising prices will lead investors to fear the imposition of price freezes on export goods, leading to a decrease net profit. FDI is vital to underpin Argentina's economic recovery and increase ability to meet current levels of domestic demand. In 2006 FDI declined, to US$3.3 billion, after recovering to US$4.7 billion after the US$1.7 billion registered in 2003 after the economic crisis. Conclusion: The growing inflation figures create distrust in investors and bar the Foreign Direct Investment (FDI) into the country. Rising inflation will result in a very uncertain business environment and makes operating in Argentina Expensive. Moreover the uncertainty of the Government's commitment to economic stability and orthodox management are a disincentive to investment. Hyperinflation initiates long term imbalances in the economy crippling business activity and future economic growth a rise in consumer prices will lead to high expectation of wages and businesses will cut costs leading to unemployment and reduction in supply further leading to increased demand and rise in the Consumer prices again. Only careful formulation and implementation of monetary policies can help economies emerge and progress. References: Hogsdon Ann 2007. 'Mounting Inflation in Argentina threatens business environment' Euro Monitor International Available at http://www.euromonitor.com/Mounting_inflation_in_Argentina_threatens_business_environment Accessed on 12 March 2009. 2002. 'Argentina Inflation Soars' BBC News Available at: http://news.bbc.co.uk/2/hi/business/1970198.stm Accessed on 11 March 2009. 2008. 'Hyperinflation Definition' The London South East Available at: http://www.lse.co.uk/financeglossary.aspsearchTerm=&iArticleID=1915&definition=hyperinflation Accessed on 12 March 2009. Siklos L. Pierre 2000. 'Inflation Definition and performance' Inflation and Hyperinflation. Wilfred Laurier University Pg.1 Available at http://info.wlu.ca/wwwsbe/faculty/psiklos/papers/oup.PDF Accessed on 13 March 2009. Lendman Stephen 2008. 'Potential Future Hyperinflation' Centre for Research on Globalization. Available at: http://www.globalresearch.ca/index.phpcontext=va&aid=9256 Accessed on 13 March 2009. 2008. 'Argentina Inflation Trivia' The Argentine Post Available at: http://www.argentinepost.com/2008/10/argentine-inflation-trivia.html Accessed on 12 March 2009. 2008. GDP at current prices Argentina. United Nations Statistical divisions Available at: http://data.un.org/Data.aspxq=gdp+argentina&d=SNAAMA&f=grID%3A101%3BcurrID%3AUSD%3BpcFlag%3A1%3BcrID%3A32 Accessed on 11 March 2009. Read More