Financial crises in Mexico, Asia, Russia, Brazil. Projected defaults. Capital flight and control mechanisms on checking account withdrawals. Presidential resignations.
In January 2002, Argentina devalued its currency after a 10-year convertibility regime, which established a fixed peso/dollar parity. It's not easy to summarize the saga that Argentina's economy has undergone in the recent past until reaching today's apparent stability.
In advance of Argenplas 2006, held March 20-24, economist Martín Rapetti spoke about the complex financial normalization policy in place since 2002 in Argentina. The country has adopted an export-oriented exchange rate as one of its pillars. Rapetti is a research assistant at the Buenos Aires-based Center for the Study of State and Society (CEDES)
Q. How is Argentina doing from a macroeconomic perspective?
Rapetti: If we look at the causes of the crises Argentina has experienced over the past 30 years, we will see that the debt crisis [1982] occurred due to a major increase in external debt coupled with a relevant fiscal deficit. The 1998 and 2001 crises were due to the same factors, that is, fiscal deficit and external deficit that generated capital flight.
In the past few years, Argentina went from an economy with severe macroeconomic problems - which were high inflation levels, public deficit and external deficit - to a robust economy. The hyperinflation problem was corrected in the 1990s and, after extinction of the convertibility regime, so was public deficit and external deficit. The government has just paid off its debt with the [International Monetary Fund], using its reserves.
Q. What are the vulnerabilities in Argentina's economy today?
Rapetti: The concern that has taken on importance this past year is again inflation. In 2002 [with the devalued peso], the annual inflation rate amounted to 45 percent. In 2003 it dropped to 3 percent, while in 2004 it increased to 6 percent and last year to 12 percent. So, what we see is that inflation is doubling.
On the other hand, it is necessary to take into account that the economy is growing at a very fast pace. In 2002, [gross domestic product] fell 11 percent and, since then, has grown practically 9 percent every year, which parallels with the growth rates observed in China. This obviously generates pressure in terms of prices, salaries and demand in different sectors.
All this is typical of an economy in expansion. But in a country like Argentina, where inflation has not yet been completely forgotten, specialists tend to say: `There's no problem in a person having one or two glasses of wine during a meal, but if this person is a recovered alcoholic, it could be very dangerous.' In summary, 12 percent inflation is not all that bad, but one must be careful so that indexation mechanisms don't begin to emerge.
Q. How can the situation be controlled?
Rapetti: In countries like Brazil, interest rates would be increased. However, interest rates have not been a key variable, since credit only represents 10 percent of Argentina's GDP. What the government has done is to sit down with certain production sectors to reach an agreement to not raise prices. This began toward the end of 2005 and, so far, has been somewhat successful.
Just recently, everyone was guessing that we were going to have a 15 percent or 16 percent annual inflation rate, but with these agreements, the forecast dropped to around 11 percent. However, there is a general idea that the government's strategy is a bit limited, since it's very difficult to control prices in a market economy. It is possible to do more creative things. The strategy could focus on controlling demand by increasing interest rates and also reducing government expenses. Different interest rates could help stimulate loans for investing in production, as well as restrain consumption levels, so that in a few years the problem of excess demand can be solved through increased supply.
Q. How has employment evolved?
Rapetti: The peso valorization during the convertibility regime made locally made goods relatively expensive in comparison to imports. This generated considerable demand for capital goods and led to the development of certain industries that were more capital-intensive as opposed to labor-oriented. Now, the opposite is occurring. The competitive exchange rate favors activities that are labor-intensive.
We changed the method of measuring unemployment in 2002. According to this new methodology, unemployment amounted to 24-25 percent at the peak of the crisis. Today, unemployment is at around 10 percent. ... My forecast is that it should drop from the current 10 percent to approximately 7-8 percent next year, but this is not a scientific calculation, just a rough estimate.
Q: Is the general climate one of optimism or apprehension?
Rapetti: The evolution in Argentina's economy these past few years has a very positive balance. It is the country with the highest growth in Latin America. A lot of people believe we have a historical opportunity [to] enter a period of sustainable development.
I believe the atmosphere leans more toward optimism, even though it's hard to talk about optimism when having such a debilitated social situation. In 2002, a generalized loss in income occurred, and roughly 50 percent of the population dropped below the poverty line, which translates to being incapable of meeting essential food and nonfood needs. This index has improved [having dropped to 33.8 percent], but it is still difficult to speak optimistically. On the other hand, one cannot deny that the economy has improved significantly.
Q: How much will Argentina's economy grow this year?
Rapetti: I believe the economy will grow around 7 percent, which is a conservative average, and next year, even with an eventual economic slowdown scenario, it should grow anywhere between 5 percent and 6 percent. Adding things up, we have an economy that will have grown close to 50 percent in just five years.
