Is There a Silver Lining for Argentina’s Economy?

At the turn of the 20^th Century, Argentina’s rapidly developing economy had effectively established itself as one of the most prosperous economies in the entire world. With access to a diverse array of natural resources, relatively little exposure to the international conflicts of the era, and a well-educated workforce, many economists once believed that Argentina was in a position to eventually outperform the United States.

However, the 20^th Century was one that was plagued with multiple waves of revolution, foreign interference, and extreme economic turbulence. Frequent regime changes and stagflation have also been frequent sources of conflict. Though Argentina still maintains a GDP per capita that is well above the global average (nominally 53^rd in the world), there is no denying that they have not been able to live up to their once promising potential.

Despite receiving a $50 billion assistance package sponsored by the International Monetary Fund (IMF) earlier this month, there still remains a great deal of uncertainty regarding Argentina’s economic future. This article will briefly review the turbulent history leading up to the status quo and discuss possible future outcomes that Argentina may endure.

A History of Volatility

Argentina’s economic history is one that has been marked by numerous incredible periods of growth followed by severe periods of economic recession. Starting around 1880, Argentina’s agriculture and the beef-centric economy began to experience several decades of foreign investment as well as multiple waves of immigration. Between 1880 and 1905, the economy was able to grow at an astounding rate of roughly 8% per year.

Even considering relatively large levels of income inequality and the global turbulence caused by the Great Depression, mid-century Argentina still enjoyed a GDP per capita level similar to those in Western Europe. However, shortly following World War II, the populist administration of Juan Perón would trigger multiple waves of economic complications. Though nationalizing a wide variety of industries—such as railroads, banks, and numerous others—may have helped accelerate their development, Perón’s aggressive actions would help contribute to the nation’s average inflation rate of 26% between the years 1944 and 1974.

The primary benefit of Perón’s approach to policy making was that Argentina was able to develop a sizable middle class with a firm commitment to the rights of union members. But eventually, as an extension of the Cold War, a military dictatorship seeking to privatize the nation’s industries would gain power starting in 1976. Combined with stagflation, corruption, and the actions of the neoliberals who would eventually replace the dictatorship, Argentina experienced an incredible amount of economic turbulence between the late 1970s and early 2000s.

Though the nation was able to ultimately move from 10.9% GDP shrinkage in 2002 to 8.8% GDP growth in 2003, recent years have witnessed new waves of economic uncertainty. The goal of the loan from the IMF was to create levels of stability similar to those that were experienced between 2003 and 2008.

Uncertainty in the Status Quo

Currently, the continued economic uncertainty in Argentina is caused by a wide range of contributing factors. The country has once again been experiencing average annual inflation rates greater than 25% and the Central Bank of Argentina recently decided (May 2018) to raise the interest rate on pesos from 27.25% to 40%–notably the highest interest rate of any centralized currency in the world.

In an effort to make the nation’s economy more competitive (striving to outperform Brazil, Mexico, and China), Argentina recently decided to accept a $50 billion loan from the IMF. This loan may help the country to stabilize many of its debts in the short-term, though the nation’s incredible rate of currency deflation still remains a universal concern.

President Mauricio Macri was undeniably voted in during a time of great economic uncertainty and complications. As the first President of Argentina since 1916 who doesn’t identify as a Peronist or a radical, Macri’s approach to economics offered many of his voters the possibility of change. However, in the context of the current global economic climate, it seems that many of Macri’s policies may be creating a new set of issues, rather than effectively solving the problems he inherited.

While Macri’s “gradualist” approach to the economic policy may suggest the possibility of economic stability and predictability, it may also prolong the process of bringing the country’s high levels of inflation back down to acceptable levels. On the other hand, the fact that the administration decided to remove all forms of exchange controls before the economy had a chance to stabilize may deter foreign investors from considering Argentina to be a legitimate investing option.

Looking Towards the Future

As the history of Argentina’s economy and the turbulence in the status quo strongly suggest, the future of what was once the pride of the New World is something that will certainly be quite messy. There is no clear nor easy solution that will be able to effectively resolve the country’s economic woes overnight. Every decision the Macri administration could possibly make—even if they choose to exercise a greater degree of discipline—will involve a significant number of opportunity costs.

However, there may be a few reasons that Argentinians can be generally optimistic. Despite a century of economic mismanagement and volatility, the material conditions for a globally dominant economy have not gone away. Argentina is still one of the largest nations in the world and has more available natural resources per capita than many others of its size. Argentina is still in a very temperate climate zone, has one of the world’s most important cities (Buenos Aires), and has a generally diversified economy. Lastly, Argentina has done relatively well at avoiding international conflicts (save for the Falkland Islands and a few others), which may help encourage an eventual increase in foreign direct investment. With the right and responsible economic leadership, Argentina has all it takes to become a stable economic nation. Otherwise, Argentina is on a mid rollercoaster ride.

The economic difficulties of Argentina are certainly far from being over with. However, Macri’s position as a non-radical, non-Peronist alternative suggests that future change in a positive might still be possible. The primary problems in the status quo are high levels of inflation and high degrees of economic uncertainty. If these problems can be resolved in a clear, well-orchestrated manner, then the economic potential that this beautiful nation still possesses may someday come to full fruition.