Week 2, Group Blog, Argentina´s Economic Sustainability

Buenos Aires Travel Blog

 › entry 13 of 17 › view all entries

Written by: Nicole Tocci, Divya Kalb and Rachel Benkeser

Although Argentina’s economy has rebounded since 2003, economic growth is not
sustainable in the next five years.  â€śStability begins at home” (Stark), and because of Argentina’s dependence on raw exports, its decreased capital investments, President Kirchner’s increasingly expensive welfare system, and most importantly, the establishment of a moral hazard in Argentina, the nation does not have the necessary internal stability for continued economic growth.

Since Argentina defaulted and restructured its debt, there has been renewed investment in the country.  Presently, the amount of foreign investments entering Argentina from abroad is nearly that of Brazil and Uruguay.  Since 2001, the nation, which was once one of the largest sovereign debt defaulters in history, has experienced a period of growth and fiscal responsibility (After Argentina).

However, despite the positive forecast by some, Argentina still harbors many barriers to economic stability.  Many economists praise the devaluation of the peso, which has had tremendous effects on Argentina’s agricultural sector.  The nation’s soy, crude oil, beef, and other raw materials have become very competitive in the global market because of devaluation.  However, the success of agriculture has created a dependency on raw materials, and as a result, the nation still remains at the mercy of commodity prices.

In 1991, Domingo Cavallo´s convertibility plan – which pegged the peso to the dollar – was hailed as the solution to hyperinflation in Argentina.  However, with an overvalued peso, Argentina’s markets had little incentive for competition, and exports suffered as a result.  To ensure that Argentina continues to compete internationally, the nation must begin to produce finished goods rather than concentrate so heavily on agriculture.

The second problem facing Argentina involves renewed investments of capital stocks. Economists believe that sustained economic growth is maintained if approximately 14% of GDP is continuously reinvested.  During the 1990s, there was a surge of investments, almost 20%, but this rise simply compensated for decades of virtually no investment. Today, however, President Kirchner and his finance minister, Roberto Lavagna, believe that Argentina can continue to grow, on average of 4% per year, with decreased foreign investments entering the country.  Additionally, while trying to create a more independent nation, Argentina is breaking contacts with investment firms in Spain, France and the
US. This decreased investment has the potential to hamper future economic growth.

Another challenge facing Argentina’s economic stability is Kirchner´s increasingly expensive welfare system.  Roughly 2.5 million heads of households receive family subsidies of approximately $50 US.  This is an expensive system that results in a payment of almost $1.5 billion each month. By providing minimal welfare assistance to many of Argentina’s needy, Kirchner is spending billions of dollars on Peronist services rather than reinvesting the money into Argentina’s economy.  In addition, Kirchner wants to create a
government pension system.  However, Argentina’s current leader must remember that he is not presiding over financial times similar to those of Juan Peron. The Argentina of today is precariously reinventing itself after an economic crisis while Peron’s Argentina of the 1940s was in the midst of an economic boom.  Thus, if Kirchner wants Argentina to continue its strong economic growth, he needs to spend less on public works and invest the money to create jobs for millions of unemployed Argentineans (Argentina has seen the past).

The most important reason why Argentina is not likely to maintain its economic stability is because of the notion of the moral hazard.  Among other players, the IMF pushed Argentina to speed up its process of liberalization, and it always stood nearby to “bail out” the country in case of a crisis.  Hence, the 2001 default is fading away even though Argentina’s default left millions in poverty.  Foreign investors blamed the Argentine government and the IMF. Argentine politicians blamed each other, foreign investors, and the IMF while the IMF blamed politicians and the market.  The Argentinean public blamed
everyone.  Still, while Argentina never recognized its debts, the nation continues to criticize and place blame (After Argentina).

Some economists, however, point to the positive aspects of Argentina’s economy.  For example, the tremendous increase in GDP, especially in 2005, points towards economic stability.  However, it must be noted that the country experienced an economic crisis in 2001, at which point economic growth was inevitable because it was the sole option (After Argentina).  Others point to an increase in Argentina’s exports.  However, most of the country’s exports are coming from agriculture and other raw materials, such as crude oil, which are entirely dependent upon commodity futures (Argentina seen the past).  For
example, if at any time, the soybean industry crashes, a large part of Argentina’s export industry will have no other recourse.  Also, agriculture and raw materials are not labor intensive, and thus, it does not aid in reducing the country’s 12% unemployment rate (Bowman lecture).  Still others point to Argentina’s devaluation as the key to its future success.  However, currency cannot solely ensure market success.  It is true that because the
peso was overvalued, loans were cheaper.  Argentina did not lack capital; it lacked and continues to lack adequate control of capital flow.  For example, Chile controls their capital inflow to prevent excessive openness of their capital account.  This gives the nation some type of monetary control, and at present, Argentina lacks a similar policy.  With no control of capital, it is likely that Argentina will continue to borrow capital means well beyond its capacity (Stark).  Finally, most people point to the increased political stability in Argentina. Regardless of that stability, it is a solid consensus that Kirchner must reduce his spending to continue Argentina’s economic success (Argentina sees its past).

Hence, Argentina will not be able to maintain economic growth on its current path due to not only it’s intense reliance on commodity exports, but also due to it’s inability or unwillingness to adjust to a fresh economic system that is now necessary post 2001. Without a growth in technology and industry, combined with a change in governmental spending to foster such growth, not only will economic growth not continue but Argentina will be sure to feel a damaging effect as others take the reigns.

Works Cited

“After Argentina”, September 2005. (

“Argentina Has Seen the Past, and it Works (For Now)”, (http://gtel.gatech.edu:2259/pbei-2/aei/ala/fam68/fam68.pdf).


Schwartz. “How to Avoid International Financial Crisis”. (http://gtel.gatech.edu:2259/conf/cto01/cto01schwartz.html).

Stark. (


“What Bond Markets Can Learn From Argentina”, (http://gtel.gatech.edu:2259/wps/iie011/iie011.pdf).


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