Argentina’s Recent Growth Episode

On September 14 Argentina growth data for the 2nd quarter of 2007 was released, showing again a strong performance: 8.7% yoy. Since 2003 Argentina has been growing at an annual average growth close to 9%. If you add the quarters in 2002 since growth started and the data for 2007 it has been about five years of growth at those very high rates. This performance appears remarkable, both looking at Argentina’s history, and in comparison with other countries during the same period.

Argentina’s history

Compared to Argentina’s own history, this is the first time in more than half a century (based on IMF data that starts in 1950) that Argentina has had 4 or more consecutive years of GDP growth per capita above 5% (see Chart). Notice also that is high growth with very low volatility, while other growth episodes display far higher volatility (including the last comparable 4-year growth episode of 1991-1994, which, on average had about the same growth rate than the current one).

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Two other points to be noticed are the following (see Table below): *Investment contributed more in this growth episode than in any of the previous ones (since the 1960s) lasting at least four years (IMF data for the 1950s does not have a disaggregation of components to perform the same calculations; the 1996-1998 growth period, a 3-year cycle, is also included as a reference). *Both the trade balance and the current account of the balance of payments were still showing important surpluses in 2006, the 4th year of the growth episode, and this continues to be the case in 2007. On the other hand, in all the previous growth events, by the last year of the cycle, and usually far earlier, the trade balance and the current account showed strong deficits.

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For many decades the trade balance and growth in Argentina have shown a negative correlation: if the economy accelerated the trade balance turned negative, which, eventually, forced a recessive adjustment, in what was called “the stop-go growth cycle.” (see Chart below; the regression line does not include the 2003-2006 observations; the noticeable outlier on the upper left is the hyperinflationary recession of 1989, when the sharp decline in activity led to a very large trade balance).

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Out of the more than 30 annual observations in this Chart, there are only 5 in which the economy grew at more than 5% AND there was also a trade surplus over 5% of the GDP; 4 of those 5 observations correspond to the period 2003-2006.

While during the 1960s and 1970s, with the capital account mostly closed, the literature on “stop-go” growth patterns focused on the recurrent trade deficits when the economy accelerated. More recently, the work on “sudden stops,” in the context of open capital accounts, highlighted the risks linked to high current account deficits and the possible reversals in capital flows. During the last 4 years in Argentina, the double external surpluses have anchored the functioning of the economy (and, of course, the current account surplus is necessary to reduce external indebtedness).

Comparing current Argentina’s growth

Argentina’s growth rate during the last four years is also remarkable when compared to other countries in the same period (see next Table).

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Except for China, Argentina’s average growth during 2003-2006 has been above -in some cases significantly so- most comparable countries, including those usually considered as the star performers among emerging countries, both in LAC, Asia and Europe.

Of course, the interesting questions are why has been Argentina growing so fast; and whether that growth is “sustainable” or not. I leave this for a next blog. But let me anticipate that no, the price of soybeans is not the reason for the high growth, and that the answer to the second question depends on what growth rate you have in mind when talking about sustainability.

64 Responses to "Argentina’s Recent Growth Episode"

  1. mark turner   September 19, 2007 at 9:48 am

    Eugenio,  Nice note. The trade balance chart is eye-catching.  I don’t want to anticipate your next post too much, but Prat-Gay said last week that a 6% growth rate would be sustainable. Said rate would also allow the gov’t to control inflation tendencies. You agree?

  2. Vitoria Saddi   September 19, 2007 at 11:39 am

    Eugenio, On a q/q seasonally adjusted basis, GDP expanded by 2.1%. As you know all segments posted a similar behavior to that witnessed in Q1’07: private consumption increased by 8.7% y/y, public consumption by 6.9%, investment by 13.1%, exports by 8.1% and imports by 19.6%. Two things to note here: private consumption, which increased 2.5% q/q sa, continues to outpace GDP growth, potentially putting further pressure on inflation. Second, while investment remains the most dynamic component, its rate of growth on a y/y is slowing. Questions: 1)Don’t you think that the incidence of energy crisis tends to slow investment? 2)What are the chances that increase in consumption to continue w/o pressuring inflation? I assume inflation figures will be adjusted after the election, right?

  3. Martin Bern   September 19, 2007 at 3:38 pm

    Do you think that Argentina can grow like Chile? How do you see the holdout issue? What about the inflation and production data?

  4. Eugenio Díaz Bonilla   September 20, 2007 at 1:25 pm

    Thank you very much Mark, Vitoria, and Martin for your comments Now I am traveling. I will try to comment on your points when I come back to Washington. Best

  5. Guest   September 21, 2007 at 8:23 am

    Excellent discussion. Look forward to your analysis of the sustainability of this growth. I worry about supply side constraint to it, especially in the energy sector.

  6. Allen Shaw   September 28, 2007 at 10:56 am

    This is an interesting article. I would suggest to analyze the sustainability in terms of (a) decomposition of GDP growth into labor, capital, and TFP and (b) cyclical rebound versus the shift on trend growth. From (a) and (b), one can calculate investment requirement given a reasonable assumption on the TFP growth to achieve the 9% growth.