Economic Stability of Argentina in the Path of Globalization and Its Stand in the World Economy - Case Study Example

Introduction: The aim of the paper is to track and compare the economic stability of Argentina, in the path of Globalization and its stand in the world economy. The paper will analyze, compare trends and economic data from primary sources in order to substantiate the statement. In order to understand the level of integration of Argentina, the paper will examine economic variables and its dynamics in two different periods. The first period being the years 1980-1990 and the second the last five years. When we say economic variables the variables are classified the following heads: Long run economic growth: This includes the levels of income and poverty, the main engines of growth, capital and labour. Secondly, aspects of research and development for progress and sustained economic growth, and lastly the investment and development of institutions and infrastructure. Business cycles: A brief study on the current and previous business cycles. Recessions and booms in relation to the frequency, duration and severity. Trade: The trade policy of the country during the periods and the tariffs, trade blocks and the multilateral and regional trade arrangements. Labour markets: The labour and workforce in the country the unemployment rate which is a primary indicator of the economic growth and disposable income of the country. The details of the real wage rate, and the prospects of off shoring and out sourcing business activities in the country. The exchange rate and monetary policy: The interest and exchange rate of country which determines the money supply in the economy plays a vital role and is the blood of every economy. The role of the central bank and the monetary policy followed in the two periods and the involvement of large global economic institutions like the IMF and World Bank which bails out several troubled economies. The above mentioned variables when discussed will provide a wholesome and comprehensive view of the Argentinean economy and the impacts of globalization. Going forward the paper will continue to substantiate and compare data and trends under the above mentioned headings. In order to understand the difference in the economic situation in the two periods it is important to adjudge the scenario by using one single parameter to compare and at the same time one that relates all other economic aspects. A country’s growth economically is always measured in its GDP per head and the first variable will compare the GDP per head at current prices in the two different periods. Body: Long run economic growth: Find below charts for two periods 1980-1990 and 2003-2007. The charts are a comparative study and the figures have been taken from the UN statistics online. Source:United Nations Statistical Online Source:United Nations Statistical Online The above charts speak volumes of the trend in the GDP growth during the two periods. The stagnant and slow growth during the 80’s and the slump in the late 80’s and a ‘V’ shaped upsurge in the early 90’s indicate that most of the economic growth only happened only at the dawn of 1990. Looking at the graph of the years 2003- 2007 that show an even progress and a continuous upward trend indicates a sustainable growth at an encouraging pace. However, the country is still not there yet as the current global recession has put an end to this. The Argentinean economy that was heavily dependent on the US economy has seen more than turmoil right from the beginning of the sub prime crisis in the US. The Real GDP performance of Argentina in 2008 is the lowest since 2003 at 6.1% the same being 8.8% in 2003. The robust growth in GDP has led to the investment in infrastructure and in May 2008 the public works secretary was quoted saying that Argentina is expected to double its infrastructure to US$25 billion in the next four years. During the early 80’s the Argentina received funding from UNDP to strengthen the National Directorate of Airworthiness. The UNDP provided US$656295 and the government spent an amount of US$1389600. This did go a long way in improving the airbase and aviation industry of Argentina. Business cycles in Argentina: A business cycle which is the predictive activity of economic has four stages the Contraction, Trough, Expansion and Peak. A slow down in the pace of economic activity is a contraction and a slump is a trough, the expansion is the acceleration of economic activity and the highest level of economic achievement is the peak after which the cycle begins again. Argentina has seen many such elongated periods of contractions. In the early 80’s the slow economic pace which slipped into a trough in the late 80’s regained momentum and accelerated during the early 1990’s and well into the rest of the 90’s. However from the late 90’s and the beginning of 2000 the economy in Argentina took a severe downturn which became a recession and lasted for 3 years. According to the NBER ‘Recession is a period when a country posts two consecutive quarters of negative growth’. Below is a graph that represents the swing in the business cycle by the reflection of GDP growth rates during the years 1998 to 2007. The graph indicates the periods of negative growth economic acceleration and peak during the years. This severe recession in the years 1999-2003 has damaged the economy of Argentina in more than one way. Source: Central bank Argentina Trade: According to the WTO review for trade with Argentina it states that “since its previous review in 1999, Argentina has adopted a number of measures to streamline customs procedures, such as eliminating preshipment inspection and lowering the simple average most-favoured-nation (MFN) tariff by just over three percentage points to 10.4 per cent. Agricultural products (WTO definition) receive slightly lower average tariff protection (9.9 per cent) than non-agricultural products (10.5 per cent). All tariff lines are subject to ad valorem duties except the 8 per cent of lines that since 2000 have been subject to compound rates (ad valorem plus minimum specific import duties). Moreover, it also states “Argentina has notified the WTO that it does not maintain any State-owned enterprise as defined in Article XVII of the GATT 1994.1 State participation in the economy was sharply reduced in the 1990s as a result of a very wide-ranging privatization programme which redefined the States role in the economy from economic agent to that of regulator. Ninety per cent of State-owned firms were sold to the private sector for the equivalent of over US$20 billion in a three-year period (1991-1994), and most of the remaining public enterprises were privatized later in the same decade. Privatization generated efficiency gains in the services provided by privatized enterprises, but also increased concentration of ownership in certain areas. Some analysts claim that although productivity increased, cost reductions were not fully passed on to the consumer through lower utility rates, but generated income which the State appropriated through the tax system. As at May 2006, the State maintained a stake in 17 enterprises in sectors such as energy, transport and finance. The MEP Finance Secretariat performs management functions in enterprises in which the State has a holding. In 2005 the operating surplus arising from these firms amounted to Arg$142 million (about US$48 million). The above policy of the WTO that mentions about the privatization policy of Argentina which has led the slump in economic activity during the late 1999 and early 2000’s. It is here that Globalization became a huge failure and deep periods of recession began. It is significant that the periods of recession have not risen from globalization alone. Globalization was a success in Argentina until 1999 the irrelevant macroeconomic policies, carefree and corrupt governance of the then President Menem, and the loss of faith in individuals in banks led to this economic misery of the country. Labour: 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.) The Minimum wage in the year 1980 was at US$169 a month and in fact extremely high and it fell significantly to US$47.5 a month in the year 1990 and rose to US$ 200 a month in the year 1995. Now for the year ended 2007 the minimum wage per month is US$ 264. Argentina has taken close to fifteen years to increase its wage rate by US$64. The labour force by occupation in 1985 was Agriculture -12%, Industry 31%, and services -57%.By the end of 2007 Argentina had 16.1 million as labour force with 1% in Agriculture, 23% in industry and 76% in services. This is more than a paradigm shift in occupation. In other words the recent population are no longer doing what there forefathers did for an occupation, agriculture which the very back- bone of the economy. Perhaps the most negative aspect of Globalization is the dying agriculture industry. This lopsided distribution of occupation should change to bring about permanent change in the economy and put Argentina on a self – sufficient path. However, Argentina today is a hub of outsourcing activity a large number of the eligible working population choose the services industry and by the year 2004 Argentina was the fastest growing offshore – outsourcing call centre market. The present population of 36.2 million in Argentina are the best educated compared to the rest of the Latin American states. Exchange rates Monetary Policy: The exchange rate and the monetary policy have been through a rough ride for most of the years between 1980 and 2002. The regression from 1998-2003 were caused due to a reckless monetary policy. To know more about the macroeconomic policies that governed Argentina let us go through this article which gives us rich insights about the economic conditions of the country over the years. This is a speech delivered by an Economics professor of the Chicago University Anil Kashyap “It is impossible to understand the current crisis in Argentina without understanding the last twenty years of Argentinas economy and government finances. Argentina suffered from large budget deficits and severe fiscal mismanagement throughout the 1980s. According to Kashyap, "the fundamental problem in Argentina, which is still there, is that Argentineans like to eat more than theyre able to pay for." Instead of cutting spending or raising taxes, the Argentine government opted to print money to pay for its extravagant spending initiatives. The result? Bouts of hyperinflation that nearly reached 200% monthly in July 1990.” (Kaashyap 2002)This is an indication of the spending pattern in the country coupled with an irresponsible monetary policy of the government. He further adds “At that time, Carlos Menem was elected as the president of Argentina, with a slogan of "vote for me – I wont deceive you". However, once he was sworn in, he reneged on most of his campaign promises and launched a radical series of economic reforms. He opened Argentina to foreign trade, reduced the role of the state, and loosened price and wage controls, cut government spending, raised taxes, and privatized many state-owned industries. He also limited the rampant money-creation by pegging the Argentine peso to the dollar”(Kaashyap 2002) This is the time during early privatization and a careful comeback on the macroeconomic policy by the pegging of the peso to the peso to stabilize hyperinflation. This led to the economic growth of averaging at 6% between 1992 and 1994. During this time there was widespread unemployment as privatization led to the layoff of unnecessary workers raising the unemployment rate from 6 to 12% and it peaked to an 18% in 1995. “Looking at the crisis further At the heart of the problem, said Kashyap, were Argentinas co-participation rules – a system whereby both Argentina and her provinces shared tax revenue with each other. Eventually, the provinces got very lax on their own tax collections, since they could rely on transfer payments from the central government to finance spending.”(Kaashyap 2002) The role of the IMF amidst the crisis is phenomenal the bailout for the country was astounding. The more money they put into the economy the more it vanished here is what Professor Kashyap had to say “In early 2000, faced with an increasing deficit and lagging growth, Argentina announced a plan to collect more revenues from the self-employed. "If you know anything about self-employed people, especially in Argentina, theres no way youre going to be able to get these people to pay their taxes, A December 2000 bailout from the IMF did little to help matters, as Argentinas government refused to cut spending. Argentina qualified for a second IMF bailout, the second largest in IMF history at $6 billion, by using creative "Enron-like" accounting techniques. They pulled forward tax revenue and delayed payments to government workers – temporary tactics that did little to change the fundamental problem.” Without the necessary change in government spending patterns, Argentina could not avoid the financial crisis of late 2001. Argentina finally defaulted on its national debt, and dropped the dollar peg on its peso. This resulted in huge financial losses for Argentineans with bank accounts, leading to widespread civil unrest and political instability.(Kaashyap 2002) Conclusion : What we have seen so far is the continuous swinging of the Argentinean economy right from the 1980’s till 2008 .The country has been expecting periods of flourish and drought in the money supply. The IMF bailout serves as temporary stimulator unable to make any permanent Impact. Clearly the problem is not Globalization if the Unemployment peaked at 18% in 1995 due to widespread layoff from state owned businesses it should have sorted out by offering sops for private enterprises or encouragement of small businesses to generate more entrepreneurs in the agriculture and the industrial sector. Looking at the current economic condition Argentina reports a GDP of 7.1 % for the fiscal 2008. It is forecasted that the GDP will decline to 1.3% in 2009 and 1.6% in 2010. There is an absolute lack of clarity on the calculation of the Inflation figures leading to hyperinflation before the government could realize and get a grip of the situation. According to an article published in the journal of Export development Canada “The government is relying more and more on foreign exchange reserves to defend the value of the currency. The peso has depreciated 13.5% since its July 2008 peak. Even though the foreign exchange reserves account for about seven months of imports, they have gone down to USD 46.9bn from USD 50.5bn in March 2008. We expect the Central bank will continue intervening to defend the value of the currency over the next two years.” Argentina as a country was looked more stabilized in the early 80’s rather now. The GDP graphs depicted in the paper show an upward trend in the last 5 years with an imbalance in the economy heavily dependent on foreign investment and foreign exchange a lopsided growth which is sure to take a plunge in this rising global financial crisis. In the 80’s the country though had issues macroeconomic policies and was on a sure footed self sufficient mode to growth. The reason is a country which is predominantly agricultural cannot its priorities shifted towards the services sector. Although Argentina has corrected its mistakes of the past in terms of macroeconomic fiscal and monetary policies it is making new mistakes in its macroeconomic policies on the road to recovery. Works cited: Scott, S. 2002 .Chicago GSB. What Happened in Argentina [Online] Available at : http://media.www.chibus.com/media/storage/paper408/news/2002/05/28/Worldview/What-Happened.In.Argentina-254118-page3.shtml Accessed on 24 February 2009. 2008. United Nations Statistical divisions. GDP at current prices Argentina. [Online] Available at: http://data.un.org/Data.aspx?q=gdp+argentina&d=SNAAMA&f=grID%3A101%3BcurrID%3AUSD%3BpcFlag%3A1%3BcrID%3A32 Accessed on 25 February 2009. 2009. Report Buyer. Argentina Infrastructure report Q4 2008. [online] Available at : http://www.reportbuyer.com/countries/south_america/argentina/argentina_infrastructure_report_q4_2008.html Accessed on 24 February 2009. 1980. New large scale assistance projects announced ICAO News release PIO 4/80 pg 2. Redrado M. 2008 Central bank of Argentina. The Monetary and financial policy response to current turbulence [Online] Available athttps://www6.miami.edu/hemispheric-policy/RedradoPresentation.pdf Accessed on 25 February 2009. 2009. Statistisches Bundesamt. Country Profile Argentina [Online] Available at : http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Publikationen/SpecializedPublications/Countryprofiles/Content75/Argentina,property=file.pdf Accessed on 26 February 2009. M Marquez Gustavo & Morley A. Samuel. 1997. Inter American bank Poverty and Employment problem in Argentina [Online] Available at: http://www.iadb.org/sds/doc/pov97-103e.pdf Accessed on 26 February 2009. 2008 .International Monetary Fund. World Outlook database. 2006. Argentine technology Outsourcing group. Argentina Your technology outsourcing Destination. [Online] Available at : http://www.argtogroup.com/argentina_outsourcing.htm Accessed on 27 February 2009. Read More