Argentina ended 2005 with an exceptionally positive economic situation, which offers enormous manoeuvring space for the current year as well as for an analysis of the medium-term prospects for the country.
Argentina has enjoyed growth of 9% for three consecutive years, twin surpluses of more than 4.4% in fiscal accounts and of 3% in the current account of the balance of payments. A record investment rate of about 24% of GDP in the last quarter and of more than 21% for the whole year has been achieved. Conversely, during the 1990s, the investment rate never reached 20% of GDP.
Intensive job creation in the private sector has created 2.7 million jobs since 2002 and poverty and extreme poverty levels – inherited as a result of the collapse of the convertibility regime, a currency board system pegging the peso to the dollar, and the subsequent economic fallout – have been sharply reduced.
There has been a substantial productivity increase in all economic sectors and record exports, particularly a recovery in exports of industrial products. Additionally, there was a successful restructuring of the largest sovereign debt in modern times, with a significant reduction in the net debt-to-GDP ratio and a schedule of disbursements that heavily reduced the burden of payments in the budget.
Controlling prices
In this context, the greatest challenge is to keep the rate of inflation within the maximum limits specified by the 2006 budget, which was adopted at the end of last year.
Internationally, the rate of 11% may seem quite high to those not fully informed. But this is not so, as it reflects relative price adjustments following the large-scale devaluation crisis of 2001, which observers consider to be Argentina’s worst for 150 years.
Unlike the courses of other major devaluations in countries such as Brazil, Mexico, Russia and Turkey, and even in previous cases in Argentina, during the first 36 months, the change in relative prices that usually takes place – with its effect on the rate of inflation after devaluation – failed to materialise.
Consequently, the changes took place in 2005 and are taking place in 2006. This explanation of the dynamic change in prices must be taken into account when talking about the data on current inflation, rather than having an excessively dramatic view of the issue.
However, risk exists if this phenomenon is not understood. As far as the orthodox ranks are concerned, ‘adjustment’ policies are required, but these may interrupt the growth process. From an economic perspective, that would be a mistake, and from a social and political perspective, a disaster.
Another risk is that a fight for the distribution of income, of prices and wages, may be triggered, involving productivity losses due to the conflicts, and that may push inflation upwards, even if only by three or four percentage points, above the forecast of 11%.
Last year, as economy minister, I began 2005 saying that we needed between 2% and 2.5% in additional investment. This goal was achieved, setting a record by Argentine standards.
This year, free from ministerial responsibility, and on the basis of the record level for 2005, I would choose the same goal: to increase investment by an additional 2% in order to ensure average medium-term growth of at least 5% a year.
Private and state
Of course, this goal requires a clear commitment to the full development of a market economy; limiting the participation of the state in those productive activities that can be undertaken by the private sector. However, a strong state presence in the provision of basic public services such as education, health and security is vital, as is intensive work to strengthen institutions, contracts, and clear and effective rules to govern them.
It also requires a strong Argentine presence in the region and particularly in Mercosur, the Southern Common Market. Argentina is a country determined to become integrated into trade liberalisation processes, as long as they involve a clear and calculable balance of costs and benefits. It is also a society with an enterprising spirit, determined to use its real and potential capacity to advance the production of agriculture-based and industrial goods with added value.The key challenge is not to miss this opportunity.
Roberto Lavagna was Argentina’s minister of economy (2002-2005) and has not denied that he may be a presidential candidate in 2007.
