Argentina Summary

Introduction

Argentina has finally begun its ascent out of the acute economic crisis that has kept its economy in a recession for five years. Even though the recovery is impressive, with exports increasing sharply and the economy growing at 8.4% in 2003, it is also tentative and fragile. [1] Economists worry that the recent upswing could be jeopardized by external shocks like changes in US interest rates, failure to increase investor confidence, and the high burden of debt overhang.[2] Since his election in 2003, President Nestor Kirchner has implemented a number of life-saving reforms for the Argentinean economy. But at the same time he has taken a hard line against IMF and US demands regarding debt restructuring and increasing free trade, aggravating already tense relationships with Argentina's two major financiers.[3]

The Crisis

In early 2002, the government had to un-peg the peso from the US dollar after 10 years of a one-to-one fixed exchange rate policy, creating a massive financial crisis and plunging half of the population beneath the poverty line.[4] The country remained swamped in a prolonged financial crisis that has also triggered financial turmoil throughout the South American Common Market (MERCOSUR) as Argentine exports to the MERCOSUR countries dropped by 26% in 2002. [5] Additionally the International Monetary Fund (IMF) has refused to extend further loans to Argentina since December 2001, when the country made the largest government default in history on the bulk of its $141 billion in foreign debt.[6]

Free-trade Agreements

Argentina's government considers both the Free Trade Area of the Americas (FTAA) and MERCOSUR to be complementary processes of hemispheric integration that are necessary not only for generating trade opportunities, but also for promoting development, contributing to regional peace and security, and strengthening the region's position internationally. However, Argentina has worked with Brazil to demand greater concessions from the US on agriculture subsidies and has threatened to oppose any agreement that forces Latin American countries to liberalize agriculture unilaterally. Since the US has continued to refuse to negotiate on its large farm subsidies, Argentina and Brazil have insisted on a pared down version of the FTAA, dubbed FTAA Light. This 'light' version takes agriculture off the negotiating table completely, allowing Latin American countries to defend their agriculture sectors from the damaging effects of US subsidies.[7]

Argentineans who oppose the FTAA have protested the negotiations, arguing that Argentina will lose out in an arrangement with countries that are larger and are more economically developed.[8] Those in favor of the FTAA defend the negotiations by arguing that Argentina's medium-sized economy will stand to best compete in a trading environment of stable rules and efficient dispute-resolution mechanisms, which should allay fears of discretionary or arbitrary actions on the part of larger countries.[9] Furthermore, Argentina could see a remarkable increase in agriculture exports due to market access gained in the FTAA.[10] Argentina is also engaged in talks with the EU and Mexico as part of Mercosur trade negotiations.[11]

Argentina and the IMF

Argentina defaulted on payments to the World Bank and the Inter-American Development Bank in 2002, but the IMF rolled over loan payments coming due from the country for most of the year. The first loan of US$1 billion was due on 17 January 2003. Because of the Fund's rules, it would only extend the deal if Argentina satisfied a number of conditions such as running a fiscal surplus, privatizing utilities and banks, and making payments on the interest it has accumulated on the $15 billion it owes the fund.[12] However, President Kirchner refused these stringent terms, arguing he could not sign an agreement he knew he could not comply with. Going against historical precedent, the IMF backed off its demands and created a more lenient agreement for a short-term loan program that would prevent the country from going into default and provide the country with just enough money to meet its debt payments to multilateral lenders. This deal would preserve Argentina's last resource of foreign support and buy time for the country to continue its fragile recovery. Under the current agreement, President Kirchner is still committed to fiscal austerity, tax reform, tight monetary policy, capital controls, privatizing public banks and utilities, and financial reform - except without any strict timelines or numerical targets that the IMF had previously proposed.[13]

Agriculture

As a member of the Cairns Group, Argentina is one of 17 countries pushing for the liberalization of agriculture laws by demanding elimination of export subsidies, maximum possible reductions in trade-distorting domestic support, as well as improved market access for all agricultural and food products. Argentina is the world's fourth-biggest exporter of food, and with a population of only 36 million, it produces enough food to feed nearly 300 million people.[14] The protracted recession, however, has left roughly half of the population below the poverty line and nearly one in four unemployed. The country faced an inflation rate of 41% in 2002, and the government is now seeking to stem increases in prices of basic food products, particularly milk and bread, through an increase in the tax on exports and by other fiscal measures.[15]

Recently, Argentina's biggest prospect for growth has been in its agriculture sector. With the burgeoning consumer market in China, there has been a booming demand for the food commodities that are major export products for Argentina.[16] For example, the soybean industry has expanded considerably, becoming Argentina's top export. Each year, Argentina exports $10 billion in soybeans, and the government gets $2 billion in export taxes. However, the growing dependence on one commodity has economists worrying if Argentina will suffer as many other monoculture economies have. Fluctuations in global prices have a devastating effect in countries that put all their resources into just one cash crop. Furthermore, environmentalists are concerned that soybean cultivation will have a negative impact for the environment because of deforestation and depletion of soil nutrients.[17]

Regional Instability

Following the economic instability that Mercosur countries experienced immediately after the Argentinean crisis, public attitudes toward free trade and democracy have faltered. A UN survey found that 55% of Latin Americans support an authoritarian regime over a democratic one if it could resolve their economic woes. If Latin America continues to suffer from intense economic crises, it could put democracy in a perilous position across the hemisphere.[18]

Conclusion

While Argentina has managed to lift itself out of the deep depression it was in for the past five years, it is far from fully recovered. On-going deals with the IMF, commercial banks, and other sources of financing will be critical in reducing the burden of debt that Argentina faces despite its rapid economic growth. Free trade agreements and nurturing its agriculture sector may help it sustain such high levels of growth. However, external shocks such as higher US interest rates or faltering global commodity prices still have the potential to slow the nascent growth.

Last updated May 2004

[1]"Argentina's trade surplus rises sharply in 2002." Xinhua News Agency, Buenos Aires. 31 December 2002.
[2] Thomson, Adam. Argentina: Rising fast from the lower depths of crisis. Financial Times, Mar 28, 2004.
[3] Foreign Policy in Focus, Alan Cibilis, "Argentina's IMF Agreement: The Dawn of a New Era?" October 10, 2003.
[4] NYU Gateway on Argentinean Crisis
[5] Anthony Faiola, "Economic Crisis Swells in S. America; Argentina's Neighbors Swept Up in Turmoil as Some Investors Flee," The Washington Post, August 1, 2002.
[6] Daniel Helft, "Argentina to present debt rescheduling by June," Bloomberg, April 27, 2004.
[7] 'The hypothesis of a light FTAA,' Gazeta Mercantil Online (Brazil), October 20, 2003.
[8] Bill Cormier, "Protestors decry FTAA in Argentina," Associated Press, November 21, 2003. Also FTAA negotiations encounter hurdle, BRIDGES World Trade News, February 12, 2002.
[9] Ann Saccomano, "Free, but with a price; Free Trade Area of the Americas must navigate internal politics of 34 nations," Journal of Commerce, December 9, 2002.
[10] Luiz A. Cypriano, Erly C. Teixeira, Impacts of FTAA and MercoEuro on agribusiness in the Mercosur countries, Revista de Economia e Sociologia Rural, Spring 2004-05-06.
[11] Graham Gori, "Mexico Plays a North-South Divide," The New York Times, July 16, 2002. And Todd Benson, "Europe and South America Near Trade Accord," The New York Times, April 20, 2004.
[12] Foreign Policy in Focus, Alan Cibilis, "Argentina's IMF Agreement: The Dawn of a New Era?" October 10, 2003.
[13] Foreign Policy in Focus, Alan Cibilis, "Argentina's IMF Agreement: The Dawn of a New Era?" October 10, 2003.
[14] Argentina: hunger in the country of food Pravda Online, September 2, 2002.
[15] National Statistics and Census Institute (INDEC). Reported 6 January 2003.
[16] Reed Lindsay, "Soya beans rescue Argentina, but many fear the long-term cost; Economists warn against concentrating agricultural production on one crop," South China Morning Post, April 19, 2004
[17] Reed Lindsay, "Can soybeans save beef-eaters' economy?" The Toronto Star, April 18, 2004
[18] , UN News, April 21, 2004.