Analysis of Argentina's Economy - Term Paper Example

• Executive Summary

The essay offers an analysis and examination of the current state of Argentina’s economy. The objective of the paper is to identify if the country has maintained its impressive recovery from the depression that it underwent in the early 2000s. The analysis of the country’s economic position was identified using the business cycle. The reinforcement of this position was done using data from various sources including the country’s national statistics bureau.

The essay discovers that the prevailing economic climate in the country is risky. The financial and monetary policies as well as the independence of the country’s central bank have been indicted in the situation that the country’s economy faces. Several recommendations have been made for purposes of improving the economic outlook of the country. These propositions include:

• Freeing of the economy as previous regimes had restricted it.
• Ensuring that the country’s central bank is independent hence free of political interference.
• The central bank ought to abandon the usage of idiosyncratic unorthodox policies to attempt and tame the county’s inflation.
• Eradication of corruption that has been blamed for the deteriorating condition of the country’s economy.

The report also offers certain pieces to the Argentine government and the country’s central bank regarding some of the fiscal and monetary policies that they can employ to reverse the economic course of the country. The recommendations and pieces of advice offered by this report were done after the examination and identification of the policies that have been suggested by the current government.

• Background Information on Argentina’s Economy

As the second largest nation in South America and the eighth largest nation in the world, the Argentine Republic is among the most significant global economy players. Autocratic regimes used to be the dominant feature of the country but that has since changed as the citizenry has embraced democratic leadership. Consequently, its economic outlook started to look bright with the introduction of democratically elected form of governance. The economic environment and investor confidence in the country had generally improved (De Gregorio 2015a, p. 3). In the last ten years, the country had pursued sweeping economic reforms that were intended to place Argentina on a different pedestal. The reforms that were undertaken by the country’s ruling party culminated to an economy that is more open. Also, the State had undergone tremendous reform with the dominance of privatizations being particularly prominent. The productivity of the country had peaked as a result of the State-inspired reforms (Reinhart 2015, p. 2). The reforms were also responsible for the increased export business in the country. However, like most Latin American countries, the impact of the reforms did not last for long. The country has since suffered two major recessions in the year 1996 and the year 1998. The share that Argentine held in the Latin American economy was subsequently negatively impacted in the latter years of the 1990s.

In the year 2003, the country started to rebound due to the emphasis on external exports and expansionary economic policies. The trajectory of the economy had largely been characterized by an upward trend since then. Five million jobs have been fashioned since the economic upturn with the government encouraging domestic consumption and making investments in social programmes. According to statistics, the economy nearly doubled between 2002 and 2011 with a growth of 9% for five respective years (Slater 2015). The percentage of real wages rose from its low of 2003 by about 73% from that point in time till 2013. Therefore, the socio-economic welfare of Argentines has generally improved.

According to a 2014 statistics, the country imported $71.40 billion worth of goods. Of this, soy and soy products accounted for around 27% of the exports. These were followed by motor vehicles and parts at around 12%. Cereals and vegetable products followed closely at 7.8%. Government statistics reveal that the Argentina’s export business is majorly driven by agricultural exports, with studies indicating that they account for a fifth of the export business that Argentina does (Jimenez 2016, p. 13). In the same year, Argentina did import business that was worth $62.25 billion. Machinery and other capital goods stood at 25% of the imports whilst lubricants and fuel as well as transport equipment accounted for 25%. The comparison between the import and export businesses conducted by Argentina clearly accentuates the fact that its economic policies are focused on making it an export economy (Jimenez 2016, p. 13). The major economic partners of Argentina include Brazil, the European Union, China, the United States of America, Bolivia, and Chile in that respect.

The banking sector also plays a crucial role in the economy of Argentina. The development of this sector was centered on the public sector banks but the focus has since shifted to the private sector. In the year 2012, the deposits that were made to the Argentine banks exceeded the $250 billion mark in its history (Gordin 2016, p. 4). This is a further illustration of the fundamental part that the banking sector plays in the growth and development of the Argentine economy. In the current dispensation, the private sector is represented by over 65% of the Argentine banks, which hold more than 60% of the total deposits that are made in the country’s banks. The banks have maintained comparatively tighter lending rates while their lending capacity has improved by 40% annually since it peaked in the year 2004 (Gordin 2016, p. 6). The prime rate in Argentina has since 2010 hovered around the 17% mark. Therefore, there is sufficient evidence to indicate that the Argentine economy is doing well.

• The Current Position of Argentina in the Business Cycle

In current circumstances, Argentina’s economy is at the risk stage of the economic cycle. According to economic experts, the Argentina economy expanded by 0.5% in the second quarter of the financial year 2015 over the first quarter. Until 2015, the Instituto Nacional de Estadísticay Censos (INDEC) has reported that the economic growth of Argentina has averaged 0.8% (Wylde 2016, p. 6). The country’s economic growth hit the 12.50% mark in the year 2010, marking it as the all time high in the economic growth of Argentina. In the year 2015, the growth was relatively higher than anticipated by economic analysts. Indeed, the figures that were posted were unanticipated in all the previous forecasts by the government. Nevertheless, the introduction of new policies by the current administration has made analysts to project that the growth is going to be subdued (Van Gunten 2016, p. 20). In the year 2016, analysts have predicted that the economy is going to contract by 0.3% relative to 2015 figures. The deceleration in growth in Argentina’s economy will be attributable to the fact that it will be adjusting to the articulated policies by the country’s new administration.

However, the introduction of these policies still does not guarantee that the country will get out of the current cycle. According to economists, the Argentine economy, just like all other Latin America economies, is influenced by volatilities (Godin 2016, p. 2). The country is also still in debt that it accrued as a consequence of its 2001 debt default. They were bailed out by America business hedge funds who are asking to be paid their $1.5 billion debt in full. According to the country’s finance minister, the country’s external debt currently stands at a whopping $10 billion (Godin 2016, p. 7). The inflation rate has also increased to about 30% in the country while the above economic growth represents an overall increase of 0%, a phenomenon that has afflicted the country in the past three years. In addition, external factors such as tanking of Soy bean prices, its major export, have contributed to the fears that Argentina may soon fall into recession (Alberola et al. 2016, p. 2). Therefore, Argentina’s economy is at the risk of falling to recession majorly as a consequence of the troublesome debt that it is trying to repay as well as certain external factors.

• Economic Issues Affecting Argentina’s Economy

The stagnation of Argentina’s economy is influence by a confluence of numerous factors. Rampant corrupt practices that aid the evasion of taxes by the business community have made the business environment untenable for external investors. According to statistics, the evasion of income tax in Argentina is around 60% whilst the evasion of value added tax is in the region of 40% (De Gregorio 2015b, p. 15). As such, Argentina, similar to other nations that experience widespread tax evasions, is characterized by “noncompliance equilibrium” whereby cheating produces a domino-effect on everyone in the economy.

In addition, the economic patronage that is practiced by the governments in the country has resulted to the current imbroglio in so far as the economic stagnation is concerned. The country was predominantly an autocratic state in the 90s. Their mode of doing business was and still is distinctly third world whereby the ruling government keeps on changing policies to suit their ideologies (Gomez 2015, p. 7). Murillo posits that “According to the World Bank’s Doing Business Report, Argentina holds number 115 out of all the country’s in the world. In another report dubbed as the Heritage Foundation's Index of Economic Freedom, the country was ranked as 130th due to an absence of uniformity in the enforcement of tax laws in the country” (p. 56). As a matter of fact, the enforcement of economic laws, and the existence of the said laws, continues to change relative to the government in power. Moreover, the rules can be bend anytime considering that there is sufficient money to exchange hands. The Transparency International has ranked the country at position 105th, making it more corrupt compared to predominantly corrupt countries like Egypt.

The devaluation of the pesos has also led to the current stagnation in the economic growth of Argentina. The falling of prices for Argentina’s fundamental exports such as agricultural products, metal and energy has led to lower prices of commodities in Argentina (Mavrokordatos & Stascinsky 2015. p. 77). As a result, the amount generated from export revenues has significantly fallen leading to the current situation. On top of that, Argentina is experiencing large account deficits as a result of its 2001 international debt default (Mavrokordatos & Stascinsky 2015, p. 80). The larger trade deficit has ensured that there is less domestic demand so as to compensate for the negative growth that the country is experiencing in the export revenues.

Statistics by INDEC have revealed that the current inflation rates in Argentina stand at the rate of 30% mark (Christensen & Tarran 2015, p. 2). This is caused by the weakening of the pesos. The central bank of the country has been accused of being slow to react to the situation. Subsequently, analysts contend that the bank is currently behind the curve as it took long to introduce policies that could have stemmed the slide of the pesos. The soaring inflation has consequently reduced the consumption power of the local economy leading to Argentina’s current position at the economic growth cycle. According to news outlets, the government is currently embroiled in a scandal involving the bombing of Asociacion Mutual Israelita Argentina in Buenos Aires in 1994 (Christensen & Tarran 2015, p. 5). Critics postulate that the Iranian government was involved in the tragedy but the Argentine government covered it up. The veracity of the serious allegations notwithstanding, the government of Argentina may be deterred from instituting recovery measures from the current economic state.

4.0 Critical Overview of Argentina Government’s Fiscal Policy

The formulation of fiscal policies in Argentina has always been arbitrary. The ballooning public debt that the country owes to bondholders stands at $10 billion (Fink & Scholl 2016 p. 179). According to financial experts, the debt was allowed to reach this point due to the existing fiscal policies that were instituted by the regime of President Cristina Fernandez. The government of Argentina has placed high prices on the country’s export products so as to fund generous public expenditure. The country faces one of the world’s largest inflation rates and its foreign reserves are precariously low (Reinhart 2015, p. 33). The election of President Mauricio Macri has seen the government creating free market measures that are intended to attract investors into the country’s economy.

The election of President Macri has seen his administration introduce fiscal policies that reduces government expenditures on subsidies in the country. Government spending on matters such as power will significantly reduce as per the new policy (Fink & Scholl 2016, p. 181). However, the effect of this will only be felt in the second half of the year 2016. Moreover, the measure to reduce the expenditure by the Argentina government may not produce the desired effect as the government may still need to offset huge debts that are owed to various institutions. In addition, the government has increased taxes on export products. While this was intended to ensure that government generates more revenues, the repercussions could be different as they will be abreast with the rising inflation.

President Macri’s regime has also lifted the restrictions that were imposed on the peso by former President Christina Fernandez. The lifting of the currency control of the peso has led to its devaluation against the dollar (Slater 2015). Immediately after lifting the controls, the value of the peso fell by almost 25%. However, it has since stabilized. As a consequence, Argentina assets have received positive recommendations from several banks. Additionally, the administration has also formulated measures that will enable the government to reduce its external debts. Indeed, the longstanding dispute between Argentina and its creditors has seen the credibility of the country suffer overseas (Fink & Scholl, A., 2016, p. 183). In order to do this, fiscal reforms will have to be undertaken in such a way that the government uses debt financing and not seignior age to offset the debts. The intention of this fiscal move by the government is to check the soaring inflation in the country. The fact that the country’s multi-year default will come to an end due to this deficit will culminate to single year increased expenditure in the year 2016, with the expenditure stabilizing afterwards.

Moreover, the devaluation of the peso will see the growth of real tax revenue stagnate as new revenues will only be generated by Value-Added-Taxes as well as income taxes. The administration has further eliminated taxes from agricultural exports with the exclusion of soy where the taxes were reduced to 30% from the previous rate of 35% (Gomez 2015). This reduction is going to result to reduced corporate taxes although agricultural firms will register improved profits. In addition, the government has reduced taxes that will be levied on repatriations from abroad (Mavrokordatos & Stascinsky 2015, p. 83). According to studies, the country’s populace stores nearly 100% of its GDP overseas. These individuals have been yearning for the devaluation of the peso as well as tax holiday for them to bring the money to Argentina. The reduction of taxation of this money to 5% will see a gradual trickle of the money back to Argentina’s economy, which is a positive for the generation of revenues for the government.

Therefore, the current government has adopted the expansionism approach to tackle the issue of economic stagnation that has engulfed the country for the past three years (Fink & Scholl 2016, p. 186). The introduction of the expansionism fiscal policy will attempt to extricate the country from the populist approaches that have perpetually left the country on the brink of disaster. While the country will register some improvements in the long-run, the introduction of these policies will not produce the desired effects in the short-term. Indeed, companies have already predicted that the expansionist fiscal policies have already resulted to a deficit of between 6% and 7% (Van Gunten 2016, p. 3). There will be a much brighter outlook in the future as the policies start to take shape. The current government has introduced policies that portend the end of economic populism in a country that is deeply associated with populism.

• Critical Overview of Argentina’s Central Bank’s Monetary Stance

In the year 2014, the Central Bank of Argentina shifted its monetary stance to the anti-inflammatory policy. The appointment of a new Central Bank governor in the year 2010 led the Central Bank of Argentina’s stance to change from a normal anchor policy to one that is fully passive (Murillo 2016, p. 56). In the new stance, the monetary policies have been given the leeway to accommodate to fiscal demands alongside private sector credit, price expectations, and the funding gap of the country’s treasury. Analysts argue that the newly adopted passive policy implies that directionality will move from output and current prices to short-term policy rates as well as money supply.

The inflation targeting provisions of the current policy is orthodox in the sense that the policy rate is founded on anticipated economic activity as well as inflation, securing the prevailing inflation and impacting output. In the bank’s mindset, external shocks, oligopoly power, and supply factors are the only phenomena that drive inflation (Wylde 2016, p. 15). From the perspective of this stance, the utilization of monetary base or the interest rates in the role of anchors are unproductive and can only result to unwanted output contraction.

The usage of the current passive approach has ensured that the prevailing price rates, the speed of circulation and the economic activity form the basis of creating monetary policy. The stance has seen the usage of certain fiscal policies to check the rates of interest and fortify investor confidence in the economy (Agnello et al. 2016, p. 20). Varied restrictions have been enforced to regulate the circulation velocity and demand for money, as well as rigidly regulating the tariffs that are placed on public services. The stance only appeared to give the economy a small respite as its long-term effects are still unknown.

According to the logic that is being perpetuated by the central Bank of Argentina, the fiscal policy plays an important role in ensuring that the country’s economy recovers from its current malaise (Jimenez 2016, p. 13). The existence of nominal equilibrium that lacks the taming of funding needs from Argentina’s BCRA is going to inescapably submit to monetary expansions that are caused by inflation. Taking into account monetary policies and wage negotiations can only result to a temporary reprieve from inflation.

The independence of the Central Bank of Argentina is also questionable. The former President single-handedly fired and picked its governor in the year 2012 simply because he could not agree with her way of repaying the country’s foreign debts (Thomas & Cachanosky 2015, p. 10). Whilst the country’s Congress intervened and, in conjunction with the president, chose another governor, the independence of the bank had already been dented. As a matter of fact, analysts posit that the bank is under the influence of the political class and that the monetary policies that they make will always reflect the political will of the ruling class and not the reality of the country’s economy.

• Conclusion

The central bank of Argentina needs to create policies that are not idiosyncratic if it wants to successfully combat the country’s current economic situation. While targeting inflation is fundamental to reducing the country’s gloomy economic outlook, using the passive approach will not produce the desired results (Mavrokordatos & Stascinsky 2015, p. 89). Globally, and according to a study by the World Bank, the usage of money supply and interest rates is a more effective way of reducing inflation in a given country (Gordin 2016, p. 17). The restrictions that the country has imposed on the circulation of money as well as its demand will only increase the rate of inflation in the long run as other factors come into play. Therefore, the bank should reconsider its approach to taming inflation in Argentina.

With regards to policies, the Argentine government is articulating policies that do not target the issues that are at the core of the matter. Evidently, the country’s government ought to create laws that will curb the rampant corrupt practices in the country (De Gregorio 2015a, p. 20). Strengthening of the judiciary and affirming its freedom should have been one of the most important investments by the government. Secondly, the government ought to effectively resolve remnants of the 2012 economic issues that are always holding the country’s economic position back (Apella 2016, p. 74). The government should encourage investment in the country’s infrastructure by creating policies that permit private companies to enjoy user fee and toll-free concessions. Therefore, more policies still need to be implemented to effectively arrest the current situation that Argentina’s economy is experiencing.