Growing Almost as Fast as China: The Promises and Risks of Argentina’s Historic Economic Growth

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Researched by Industrial Info Resources (Houston, Texas). According to the Argentinean National Institute of Statistics and Census, INDEC, the economy of Argentina made great macroeconomic progress in 2005, exemplified by a total GDP growth of 9.1%. This growth was led by construction activities, the financial sector, transport, and industry. Moreover, according to official declarations, Argentina’s historical economic growth in 2005 may lead to a full-year GDP expansion of 7% for 2006.

Individual consumption (including an increase in tax payments) is the most important factor contributing to last year’s growth, which was moderately higher than the growth rate recorded in 2004. Construction experienced an annual increase of 22.97% (which is greater than 2004), and was responsible for 3% of the total macroeconomic growth in 2005.

Due to increasing domestic demand and exports, industrial production showed significant growth of 7.7%. Employment grew 6.7%, which continued an outstanding recovery from the economic crisis of 2001. Unfortunately, a precarious labor market and increased social inequality have also accompanied recent growth. According to Argentina’s president, Nestor Kirchner, the past three years of economic growth have been among the strongest in 100 years. “These are signs of a new beginning. Our economy is on a course of uninterrupted growth. This is historic fact, our growth rates are some of the highest in the world’’. Fortunately for Mr. Kirchner, 2005 was not an anomaly, as the Argentinean economy racked up 9% GDP growth in 2004 and 8.8% growth in 2003. Argentina’s historically high economic growth in 2005 is one of the highest in the world, only slightly behind China and India.

Levels of public debt and government spending, measured as percentages of GDP, vary widely between Argentina, Brazil, Chile and Mexico, despite the fact that all four countries face common pressures. Major challenges include the need to keep public indebtedness at sustainable levels and to improve the cost-effectiveness of government spending, including spending on social safety nets for the poor and vulnerable. Another challenge is to ensure that public investment in infrastructure is both maintained at a high level and is responsive to changing needs.

According to an OECD report in 2006, Latin America’s biggest economies have made considerable progress in putting their public finances in order, but much still needs to be done to increase the flexibility and improve the quality of government spending.

The Financial Risk of Rapid Growth: Inflation

Even though there has been a great economic performance in 2005, Argentina’s government should consider certain risk factors causing considerable concern to economists. Currently, the most important factor is the steady increase in price level. According to the Consumer Price Index, for 2005 there was an accumulated increase of 12.3%, doubling the 6.1% posted in 2004.

According to several financial analysts, Argentina’s government should try to control inflation and increase investments in 2006 so as to prevent serious problems in industrial areas. Argentina’s president Nestor Kirchner said on March 1, 2006 that he will not reduce the peso-dollar exchange rate to freeze prices (mainly of food), which would be an easy and quick, though controversial, solution to the problem of inflation.

Encouragingly, on February 5, 2006 INDEC, declared that the consumer price index rose by only 0.4% in February, far lower than most predictions, for a total 11.5% rise since February of last year. February’s was the lowest increase in inflation since August of last year. According to Javier Alvaredo, director of MVA-Macroeconomia, “the figure is interesting and it smashes the forecasts made throughout the year predicting that inflation would be up to 15%. February’s inflation went below even the most optimistic expectations.” Alvaredo’s new inflation forecast for 2006 is an increase of 11%.

Argentina’s Government and private economists agree that February’s unexpectedly low increase in prices was due mainly to successful price agreements signed by the Government and the private sector throughout February 2006.

In regard to the public sector, tax collection reached $40 million in 2005, increasing 21.3% when compared with the previous year.

The key facts for Argentina’s government in 2005 were: renegotiation of the public debt at the beginning of the year, financial and budget surpluses, peso-dollar exchange rate stability, and the growth of economic activity. The control of the rate of inflation is the major economic objective for Argentina’s government. Currently, this phenomenon is causing growing concern to the private sector, however, in that the government is trying to curb inflation by reaching price agreements. The effectiveness of these tactics is in doubt among analysts.

Brazil

According to Brazil’s Government, in 2005 GDP grew by 2.3% amid high interest rates used to keep inflation at bay. According to Brazil’s IBGE Census Bureau, the growth rate was less than half of the 4.9% posted in 2004. Last year’s GDP growth was led by mineral extraction, which grew 10.9%. Industry increased 2.5% and services expanded 2% from 2004. According to the Buenos Aires Herald Newspaper, agriculture rose just 0.8%, the poorest performance since 1997.

This reduced growth rate may be bad news for Brazilian President Luiz Inácio Lula Da Silva, who may run for a second four-year term in October. However, economists expect growth to pick up this year, leading to a full-year GDP expansion of between 3.5% and 4% in 2006.

China

According to CIA reports, China ended 2005 as the second-largest economy in the world, after the United States, although in per capita terms China is still a lower middle-income country and 150 million Chinese fall below international poverty lines.

The government has struggled to sustain adequate job growth, reduce corruption, and constrain environmental damage and social strife related to the economy's rapid transformation.

Moreover, in regards to the deterioration in the environment, the Central Committee of the Chinese Communist Party in October 2005 approved the draft Five-Year Plan and the National People's Congress is expected to give final approval in March 2006. The plan calls for a 20% reduction in energy consumption per unit of GDP by 2010 and an estimated 45% increase in GDP by 2010. The plan states that conserving resources and protecting the environment are basic goals, but it lacks details on the policies and reforms necessary to achieve these goals.

According to China’s President Hu Jintao, China will have to bring about quick changes in its economic expansion to ensure global competition and stable economic development, considering its population, resources, and environment. Moreover, the Chinese leader highlighted that China should keep working on key points such as its innovative capacity, improvement of its industrial technology levels, and adherence to energy saving and environmental protection policies. Experts also pointed out some prominent problems in China, such as the supply of coal, electric power and oil, the shortage of capital in some enterprises, and deep-rooted structural problems.

Investments

A substantial increase in investments is essential to sustain high levels of economic growth, whether it is in China, Argentina, or Brazil. Investments in capital assets to increase installed capacity are especially important. Besides, this allows greater boosts in production.

Investment in Argentina has not been stable throughout the years. Since 1990, in an environment of price stability, free market economic policies, deregulation, and privatizations, investment and production showed important growth. Between 1993 and 1998 investment grew at an annual rate of 6.16% while production grew at 4.03%.

As a result of Argentina’s 1998 deep recession and the economic crisis, there was a substantial decrease in investments. Even though currently investments are beginning to increase significantly, many things remain to be done.

Even though in Argentina investments are still in a recovery process, it is of utmost importance for the country to consolidate this tendency. Besides, there is a need to improve the macroeconomic and social environment of national and international companies, ensuring basic conditions of good and promising investments.

For more than two decades, China has invested 40% of its total production. This number reached 45% in 2004. The 30 countries within the Organization for Economic Cooperation and Development (OECD) devote more than 20% of total production to investments. Governments across the OECD have responded by setting goals and shifting the emphasis of government management and budgeting away from how much money to spend towards what is actually being achieved – in other words, a more results-oriented approach. The basic idea underlying performance-oriented budgeting and management is to shift the emphasis away from controlling inputs and towards achieving results.

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