Argentina Economy

March 11, 2010Argentinaby EW World Economy Team

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Argentina has the third largest economy in Latin America and the fourth largest in the southern hemisphere. The nation's nominal gross domestic product (GDP) in 2014 was $540.2 billion, making it the 24th largest economy in the world. Nevertheless, Argentina is still an emerging market.

Argentina has a variety of natural resources, a well-educated population, and an export-oriented agricultural sector and diversified industrial base. Unfortunately, Argentina's economy tends to be prone to uneven performance and a disparity of income distribution across its population.

Argentina is a member of the G-20 and the World Trade Organization (WTO).

Economic History

Argentina was largely unpopulated throughout most of its history, and underdeveloped, even by ancient South American standards. The indigenous people were primarily hunter-gatherers, prior to the arrival of European explorers. Even after European influence, the area was primarily a backwater. Much of the local economy prior to 1880 consisted of salted meat, wool, leather, and hide production.

After 1880, the economy quickly grew on the back of livestock and grain thanks to British and French investments. For the following fifty years, Argentina would experience a rate of economic expansion almost unparalleled anywhere else in the world. It would also receive a massive influx of European immigrants. In fact, the economy of Argentina is one of the most widely researched thanks to its rapid expansion during the early 20th century, followed by its rapid contraction at the end of the century.

From 1880 to 1905, the Argentine economy grew by 7500 percent, averaging expansion of roughly eight percent per year in GDP. GDP per capita during this period rose from a mere 35 percent of the US average to 80 percent by 1905.

However, this rapid growth preceded a period of much more modest expansion until 1941. By 1941, Argentine per capita GDP had dropped to just 50 percent of America's. However, this income very unevenly distributed compared to America or Western Europe. Thus, when the Great Depression struck in America and created a global depression, Argentina's GDP fell by 25 percent and the nation experienced widespread poverty, hunger, and homelessness.

By 1930, Argentina was back on track for economic recovery and continued to expand during World War II. Because the war led to a scarcity of imported goods, prices rose, and Argentina posted export surpluses totaling a cumulative US $1.6 billion. Argentina used innovative self-financing programs and government loans to expand industrial capacity, allowing manufacturing to overtake agriculture in 1943. This also reduced the nation's reliance on imported goods to just 10 percent of its economy by 1950.

This was when Juan Perón took power. His administration nationalized the Central Bank, railways, and other strategic industries and services between 1945 and 1955. For the following 15 years, the economy offered promising growth. However, inflation first became a chronic problem during this period, averaging 26 percent from 1944 to 1974. While the economy expanded by about 500 percent during this period, its population only doubled. This helped contribute to much more even income distribution than in previous expansion periods.

Thanks to this even income distribution, Argentina developed one of the world's largest and most notable middle classes in Latin America. It also had strong unionization and relatively high working conditions. However, this ended as the result of a military dictatorship that seized control of the nation from 1976 to 1983. The dictatorship advanced a corrupt, anti-labor policy of financial liberalization that swelled debt, stymied industrial development, and halted upward social mobility. These policies led to the bankruptcy of over 400,000 companies by 1982.

While subsequent regimes attempted to undue this damage, these measures were largely unsuccessful. Poor investments, tax evasion, and capital flight led to a financial crisis that largely undid much of the growth the nation had experienced earlier in the 20th Century. The nation experienced severe stagflation from 1975 to 1990, including hyperinflation between 1989 and 1990.

In 1991, the government linked the value of the Argentine Peso to the US Dollar, limited the printing of new currency, liberalized trade, deregulated industry, and allowed privatization of formerly nationalized enterprises. This caused inflation to drop to single digits and GDP grew by a third in just four years. Unfortunately, pre-existing debts and poor management largely offset this growth, and the economy began a slow collapse that lasted from 1995 to 2001.

By 2002, a nation that had once come within 20 percent of America's per capita GDP found itself unable to pay its debts, shedding GDP at a rate of 20 percent in four years, experiencing 25 percent unemployment, and a peso that had depreciated by 70 percent.

From this unfavorable position, Argentina began its recovery in 2003. This expansion has steadily grown since 2003 and created more than five million jobs. The government has also expanded social programs and re-nationalized several enterprises privatized during the 1990s. Newly re-nationalized enterprises include the postal service, Buenos Aires water utilities, the railways, energy companies, and others. Thanks to these measures, the Argentine economy grew by an average of 7.1 percent between 2002 and 2011, and wages rose by about 72 percent through 2013.

Current Economic Situation

The global recession had an adverse effect on the nation's economy, slowing growth to virtually nil in 2009. However, high economic growth resumed in 2010, and GDP expanded by around nine percent that year. Growth has moderated since 2012, but remains positive.

Argentina's government bond market uses a unique system that links rates to GDP. Thus, investors, both foreign and domestic, saw unparalleled levels of return during the rapid expansion between 2010 and 2012. However, Argentina's prior defaults led to a bond swapping arrangement that was accepted by about 93 percent of those affected. The remaining seven percent have engaged in protracted legal disputes with the nation and have attempted to seize Argentine assets abroad to satisfy the debts. While the original bond swap would have contemplated returns of about 30 cents on the dollar, Argentina has paid about 90 percent of its defaulted debts according to estimates by Morgan Stanley.

Argentina remains one of the world's largest agricultural producing countries, although agriculture only accounts for about nine percent of the nation's GDP and one-fifth of its exports. Mining and other natural resources account for about four percent of the GDP. On the other hand, manufacturing accounted for about 15 percent of GDP and services accounted for about 60 percent.

Argentina has a fairly well developed infrastructure. However, it suffers from decades of high inflation and unreliable government economic reporting.

Economic Forecast

Although Argentina continues to face challenging conditions, its economy has stabilized considerably. Consumer confidence is up in hopes of substantial economic improvement that may occur after elections in October. Argentina had experienced slight contraction in recent quarters, but analysts believe total contraction for 2015 will amount to only about 0.1 percent. On the heels of the October election, economists predict Argentina will experience two percent growth in 2016.