Argentina's Economic Development - Case Study Example

Country Study ARGENTINA Argentina the second largest country in Latin America is a federal country of 23 states and an autonomous city. It is surrounded by Paraguay, Bolivia, Brazil, Uruguay and Chile. Its area of 2766890 Square Kilometer (CIA FACT BOOK) makes it the eighth largest nation of the world and with an estimated (July 2009) population of 40,913,584 (CIA FACT BOOK) it is the third largest country in Latin America, while standing 30th in the world in terms of population. Argentina experiences a positive net migration and illegal immigration is a recent headache of the Argentine Government. Argentine population is not homogeneous rather displays an impressive ethnic mix owing to its origin to the colonial settlers. Though now they reckon themselves as a whole as Europeans and constitute the larger portion of the population (86%). In respect of country of origin 60% of Argentine population is Italian, 8% Mestizo, 4% Arab or East Indian and 1.6% Amerindians. Ashkenazi Jews, East Asian people and Mapuche (along with other indigenous people) constitutes a sensitive and vulnerable minority community. This adds to the diversity of Argentine population. (Cahoon) Though earning its freedom long back in 1810 from Ferdinand VII of Spain, it was only after 1870 that Argentina emerged as a Modern Nation following the inflow of foreign investment and immigration of European settlers who substantially contributed to the modernization of its agriculture, society and the economy. Long Term Economic Growth Considering the long-term economic growth Argentina has experienced the zenith of success and nadir of failure. In 1913 it was the worlds 10th wealthiest nation, however in 1998 stood at 30th place. A 50 years time span starting from 1930 to 1980 is considered to be the declining period of Argentine economy. An ever increasing debt burden, dubious monetary system, an uneven playing field in terms of international trade, corruption in bureaucracy combined with a weak law and order system contributed to this dwindling situation and the middle class Argentines are the worst sufferers. Even after this specific period in 1981 and in 2002 it was them who have received the lions share of economic turmoil. Since the late 1980s, the orientation of the economic policies in Argentina witnessed a drastic shift in its adoption patterns. With the advent of globalization, the Convertibility Law was proceeding towards establishing different policy mixes regarding various monetary and fiscal decisions like adopting a more open trade policy, exchange and financial liberalization, privatization, normalization of global financial relationships, deregulation, restoring the access levels into the international markets along with structural adjustment of the two basic disciplines as the centerpiece of the major policy decisions. These alterations in the economic framework of the nation resulted in a marked variations in its economic performance. Argentina stands second in terms of Human Development Index in Latin America. The Nation also occupies the second spot in terms of per capita GDP (in terms of purchasing power parity) among Latin American countries. The nominal GDP per capita places Argentina in 30th spot in the world but in terms of PPP it stands 23rd. The World Bank considers Argentina as a secondary emerging market and it shares an important place among G-20 major Nations. In recent times amidst a global financial crisis Argentina is experiencing a comparatively slower economic growth. (Human Development Reports; Human Development Reports, Human development Index; HKTDC) Engine of Growth Rich in Natural resources, Argentina is led by an outward looking agricultural sector, and a comparatively diversified industrial sector. Manufacturing sector is the single largest sector of Argentina and is well tied up with the agricultural sector and constitutes two thirds of total exports. The country is extremely enriched in human capital with a literacy rate near 97.2%. A rate of employment of 76% in tertiary sector portraits the fact that Argentine economy is led by service sector as well. The contribution to GDP by service sector is 56.7% (CIA WORLD FACT BOOK). However service sector can not flourish with sustainability without a proper Industrial base and a rate of industrial growth at 6.8% clearly depicts the harmony between the tertiary and the secondary sector. The importance of natural resources in Argentine economy can be learned from the fact that the country exports 339,900 billion barrel of crude oil per day and that earns valuable foreign exchange for the nation. (CIA FACT BOOK) Though, less in magnitude but the nation still exports 2.6 billion cubic meter of natural gas. Finally the agricultural sector exports unprocessed agriculture goods and constitutes one fifth of total exportable in value terms. For Argentina it can be unambiguously stated that its engine of growth is not a particular industry or sector rather a harmony and cooperation among all the sectors. However in this era of globalization its booming service sector has a potential to become an engine of growth. Tourism as well is quite booming in Argentina, in 2006 international tourism contributed around US$3.4 billion in foreign exchange reserve of the country. Research and Development The research and development activities in Argentina are concerned with medicine, nuclear physics, biotechnology, nanotechnology, and several fields related directly or indirectly to the country's economic and socio economic aspects. The heart of the research and development in Argentina lies with National Research Council set by the Nobel Laureate Bernardo Houssay. The research and development in Argentina receives ample boost from its extremely enriched workforce. The nation has its own satellite program and was the first to map the genome of a living being. Argentina provides many other nations with nuclear reactors and INVAP a publicly owned nuclear energy company is pioneer in this field. Its nuclear power station design has fallen into fourth generation. In Argentina research and development as a percentage of GDP has increased from 0.46% in 2005 to 0.49% in 2006. In terms of man power almost 895 million people is engaged in research and development in year 2006, a 73 million increase over 2005. It is widely accepted that the figure of internet users and mobile users indicates the level of technology familiarity of a nation; a more than 100% mobile user (indicating an individual owning more than one mobile) and a 23.6% internet user clearly points to the fact that Argentina as a nation is extremely technology savvy. However even accepting these facts brain drain is a continuous problem for the nation, which deserves adequate response from the government specially in terms of increasing the research and development expenditure as a percentage of GDP. (Statistisches Bundesamt) Business Cycle Argentine economy was experiencing an economic boom or upswing from 1880 to1929. The main reason behind this was an export oriented agricultural sector. In this period owing to in migration and a declining mortality rate due to improvement of medical science the Argentine population increased by five times and the economy grew by 15 times making it the 10th largest economy of the world.(Lewis) However recession soon started eroding the economy with the advent of Great Depression of 1930 (Watkins). The recovery process after Great depression was slow as the country moved into conservative rule and embraced protectionist policies. Its neutral stature during the second Great War failed to secure its economy and soon it became the oasis of war criminals. United States of America arguably the most influential country in the world after the war was over protested through economic boycott against Argentina’s over indulgence in criminal activities and status as a last refuge of war criminals. Baseless economic policies, often erratic in nature thrown the country, into series of stagflation during two separate cycles, one running from 1949-52 and the other from 1959-63. Though this was followed by a decade that witnessed substantial industrialization but the country slept from its economic hey days. The situation aggravated under the dictatorship that followed the decade and it moved further deep into recession from1976 to 1983 (Argentina – Economic Development). Factors like interest payment on foreign debt, evasion of taxation and capital flight led to a balance of payment crisis and Argentina moved into a stagflation that kept its stronghold on the economy for 15 years from 1975 to 1990. The deteriorating economic situation was hard to overcome and till 2001 all the policies (a combination of pegging peso against dollar, trade liberalization, deregulation and privatization) made to ease the bottleneck failed to generate any substantial boost and the country remained stagnant. Though inflation fell and GDP increased 33% in four years but system failure combined with external shock actually eroded the economy even more and in 2001 it finally fall prey to that long lasting economic imbalance. In 2001 and 2002 Argentine economy touched its nadir, the sharpest decline ever after 1930. The economy came back into boom in 2003 owing to the expansionary policies and export oriented strategies. Since then the economy has maintained an average annual growth rate of 9% till 2007 and 7% in 2008, (Statistisches Bundesamt; CIA FACT BOOK) there by experiencing an economic boom, the upward slope of business cycle. Trade Argentina moved from a restricted trade set up to a free trade set up and both of them had their own drawbacks, generating mainly from implementation failure and lack of proper forth sight. At present Argentina is a member of MERCOSUR. Argentina mainly exports soybeans and derivatives, petroleum and gas vehicles, corn and wheat. Among the import commodities machinery, motor vehicles, petroleum and natural gas, organic chemicals, plastics are important. Brazil is its largest trading partner with a share of 18.8% of its export (2007) and 32.8% of its import (2007). China, USA, Chile, Spain, Germany and Mexico are its other main trading partners. Food waste and animal fodder (11.1%) is its largest export commodities, closely followed by mineral fuels, mineral oils and products (10.9%). Machinery and Mechanical appliances (16.8%) are the main import commodities of Argentina. Vehicle and parts (15.6%), electrical machinery appliances (13%) are other major importable commodities. In 2007 total export value was US$55780 billion and Import value was US$44707 that left a trade balance of US$ 11073 billion. (Statistisches Bundesamt) Labor Market As mentioned earlier the country is extremely enriched in human resources. A staggering number of 1500000 college students are there in the Argentine University system, which is highest in terms of share of total population among all other Latin American Countries and one of the propelling factors behind the boost of tertiary sector in the country. 2008 estimation reveals the total labor force to be at 16.27 million; however it contains only urban areas. A more complete statistical survey estimates the labor force to be over 18 million in 2006. Following the 2008 estimate only 1% of labor force belongs to the agricultural sector, 23% to the industrial sector and 76% to the service sector. The rate of unemployment in urban area was 7.8% in September 2008 (CIA FACT BOOK). The country as a whole had an unemployment rate of 10.2% in 2006 and comparing to the previous years data, rate of unemployment is in a decline that indicates sufficient amount of job creation. Male participation rate in labor force is significantly higher than that of woman. Average per hour wage was US$2.93 in 2006 and average working hour in 2005 was 44.3 hours per week. (Statistisches Bundesamt) At the wake of global financial crisis the Kirchner administration has taken up a public works program worth US$21 billion. It is expected that this public works program will increase the number of public sector jobs from a figure of 362000 to 770000. (Funding Argentina's “New Deal”) Exchange rate regimes At the background of 1989 currency crisis, Carlos Menem the newly elected president of Argentina at the advice of Domingo Cavallo pegged pesos against dollar. “In 1991, to tame its tendency to finance public spending by printing pesos, Argentina introduced convertibility of its peso into dollars at a fixed one-to-one exchange rate.” (Becker, 26) This shift from a floating exchange rate regime to fixed exchange rate regime was unsuccessful and soon it was realized that this fixed exchange rate of pesos against dollar can only be maintained by injecting abnormal level of dollar into the economy or the market. By then the country was under immense pressure of foreign debt quite similar to its prior experience. A series of international financial crisis combined with this inflated value of pesos resulted in further distress and in early January 2002 Argentina collapsed to the pressure and became an international defaulter. This brought to an end to the eleven year tie up between pesos and dollar. Pesos received a sharp depreciation against dollar. However this devaluation actually benefited the country and pesos has strengthened its position against dollar since then until the recent years. Position of Argentina’s foreign exchange reserve has also improved. The Argentine Central Bank and Monetary Policy The Central Bank of Argentina has limited responsibilities, especially after the removal of convertibility law. Its role has been restricted to accumulation of foreign reserves in order to control the exchange rate of pesos. The Argentine Central Bank depends on open market operation in order to keep the value of pesos against dollar at the desired level. It buys excess dollar from the market generated through large trade surplus. Occasionally it also sells some dollar in the market to keep the balance. In recent times its action was highly criticized regarding its inability to curb the inflation to the optimum. IMF and World Bank Since Argentina is experiencing positive growth rate for quite some time and endured through economic upheavals, it has initiated applause from IMF and The World Bank. The country assistant program or CAS of World Bank is providing assistance in the reorientation process of Argentina. CAS is a special package of investment and analytical program that emphasize on sustained growth and equity, social inclusion and improved governance. Strengthening the infrastructure sector, improving the health, encouraging the creation of a social security net through income transfer program and strengthening the public sector might be considered as special areas where the World Bank is extending its helping hands towards the Argentine government. The World bank has extended around US$ 1900 loan and grant to Argentina to fund projects like PROSAP II ,  Program to Promote Productive Innovation , Plan Nacer , Provincial Road Infrastructure , Proinder, Heads of Household Transition , Rural Education Improvement Project (PROMER), Institutional Strengthening of ANSES ,  Urban Flood Prevention and Drainage , National Urban Solid Waste Management ,  Buenos Aires Infrastructure. (Argentina Country Brief) Furthermore Argentina has repaid all outstanding obligations of IMF. (Economic Prospects and Policy Issues) Income and Poverty Argentina is classified as an upper middle income country. At it most dismal situation that is in 2002, 60% of Argentine population was below poverty level, (Argentina Country Brief) the situation has improved there after. The urban poverty rate has fallen to 18% almost one third of 2002 level; however it is still higher than the 1976 level and there by deserves further improvement. Inequality in income distribution is a marked feature of Argentina, though at present income distribution is far less skewed than 2002 but still much above than the level of comfort. With the advent and embracement of globalization this inequality is expected to rise unless a well planned progressive taxation system is initiated. Works Cited 1. Argentina – Economic Development, 2009, retrieved on April 18, 2009 from: http://www.nationsencyclopedia.com/Americas/Argentina-ECONOMIC-DEVELOPMENT.html 2. Argentina Country Brief, The World Bank, 2009, retrieved on April 18, 2009 from: http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/LACEXT/ARGENTINAEXTN/0,,contentMDK:20187088~pagePK:141137~piPK:141127~theSitePK:316024,00.html 3. Becker, Gary S. Business Week. (Industrial/technology edition). New York: February 11, (2002), Iss. 3769; 26, retrieved on April 18, 2009 from: http://home.uchicago.edu/~gbecker/Businessweek/BW/2002/02_11_2002.pdf 4. Cahoon, Ben, Argentina, World Statesmen, retrieved on April 18, 2009 from: https://www.cia.gov/library/publications/the-world-factbook/geos/ar.html 5. CIA FACT BOOK, Argentina, 2009, retrieved on April 18, 2009 from: https://www.cia.gov/library/publications/the-world-factbook/geos/ar.html 6. Economic Prospects and Policy Issues, IMF, 2006, Retrieved on April 18, 2009 from: http://www.imf.org/external/pubs/ft/weo/2006/01/pdf/c1.pdf 7. Funding Argentina's “New Deal”, Economist, 2008, retrieved on April 18, 2009 from: http://www.economist.com/agenda/displaystory.cfm?story_id=12725187 8. HKTDC, Argentina, 2008, RETRIEVED ON April 18, 2009 from: http://emerging.hktdc.com/content.aspx?data=emergingmkt_content_en&contentid=174018&w_sid=194&w_pid=1403&w_nid=13598&w_cid=1&w_idt=1900-01-01 9. Human Development Reports, Argentina, 2008, retrieved on April 18, 2009 from: https://www.cia.gov/library/publications/the-world-factbook/geos/ar.html 10. Human Development Reports, Human development Index, 2008, retrieved on April 18, 2009 from: https://www.cia.gov/library/publications/the-world-factbook/geos/ar.html 11. Lewis, Paul H. The Crisis of Argentine Capitalism, University of North Carolina Press, 1990 12. Statistisches Bundesamt, Country Profile: G-20 advanced industrial and emerging countries, Argentina, 2009, retrieved on April 18, 2009 from: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Publikationen/SpecializedPublications/Countryprofiles/Content75/Argentina,property=file.pdf 13. Watkins, Thayer, Argentine Political Economic History, SAN JOSÉ STATE UNIVERSITY, ECONOMICS DEPARTMENT, retrieved on April 18, 2009 from: http://www.sjsu.edu/faculty/watkins/argent1.htm Read More