Argentina: Just Plain Hot

The scorching heat in Buenos Aires makes for an interesting background to the torrential pace of economic activity. The Argentine economy is soaring, growing 8.5% y/y in 2007. The heady pace of growth pushed tax revenues 33% y/y higher, reaching almost $70 billion. Automobile production reached record levels, making it one of the leading car producers in the region. In 2007, the Argentine automobile sector produced 545,000 units, the highest ever, and exported 316,000 units. The rapid pace of growth and the prevalent use of price controls exacerbated Argentina’s inflationary pressures. The official inflation rate in 2007 was about 8.5%, but most economists believe that the actual range was in the 16% to 18% range. There was hope that President Cristina Kirchner would move beyond the prevalent use of controls. However, it looks to be more of the same. Instead of liberalizing energy prices, the government decided to conserve energy use by dimming the lights in the city, as well as buying $30 million of low wattage light bulbs that will be distributed free. The new measures had no effect, and there were more shortages. Argentina suffered a massive blackout on New Year’s Eve, leading to impromptu protests—known as cazerolazos. The electricity utilities were finally forced to import electricity from Brazil in order stem a wider collapse.

Unfortunately, the bottle necks are not confined to the electricity sector. The torrid pace of economic growth is also straining gasoline and diesel resources. The government was recently forced to suspend the export of fuel in order to offset the rapid rise in prices. Petrol lines began sprouting across Argentina—creating a black market for gasoline and diesel with higher prices. A similar situation is happening to wheat and milk prices. Government price controls are limiting production. More and more farmers are switching to soybeans and out of dairy and cattle, where they do have to deal with price controls and endless meddling. The government seems to be in an endless spiral of introducing new controls, only to make the situation worse. There was hope that the new administration would resolve the problems, but the recently-elected president is more interested in enjoying her new mansion in Calafate, and the First Mate is busy playing political intrigue on the global stage.

Fortunately, booming grain prices are keeping the economy afloat. Argentina enjoys tremendous advantages in transportation and fiscal regimes, and it is starting to move ahead in the global grain market. Massive investment in the soybean processing sector, made Argentina the third largest crusher in the world (155,000 tons per day), versus China (220,000 tons per day) and the U.S. (170,000). Brazil is in fourth place–at 140,000 tons per day. Although tariffs on soybean exports are onerous, the favorable domestic tax regime allows Argentine producers to establish economies of scale and production schemes that integrate the country. This is an immense advantage over Brazil, where transportation costs are sky high and each state has its own independent tax regime. The vast network of rivers, roads and railroads are allowing Argentine farmers to penetrate deep into the hinterland. Farms are sprouting up across the northern reaches of the country—in Salta, Tucuman and Formosa. It is also developing a highly competitive biofuel industry in order to take advantage of some of the sugar growing regions in the tropics. This is garnering attention from abroad. Swarms of Chinese businessmen are coming to Buenos Aires. Malaysian Airline has direct service from KL, and Indian firms invested a total of $800 million in 2007. Argentina exported $1 billion to India last year, and embarkations should rise to $2.2 billion by the end of the decade. All of this is creating an economic powerhouse on the southern tip of South America. Unfortunately, the situation could be better if the government did not pursue such interventionist policies.

2 Responses to "Argentina: Just Plain Hot"

  1. Argenwatch   January 17, 2008 at 9:20 am

    There’s a big contradiction in this article. On the one hand, low diesel prices due to government controls are decried – and with reason. On the other, it is clear that those very same artifically low diesel prices are responsible for Argentina’s “immense advantage over Brazil, where transportation costs are sky high”.So, what should Argentina do? Align internal fuel prices with the international market and lose its “immense advantage”? Or keep subsidies and price controls?

  2. Nicolas Magud
    Nicolas Magud   January 22, 2008 at 2:24 pm

    I have just published a piece on fiscal policy on my blog (in Spanish) that I believe could be interesting for those not only looking at the current situation in Argentina, but the future dynamics. It looks at the possible fiscal policies in anticipation of the current financial events.It can be found at: http://laeconomiaargentina.blogspot.com/Best,Nicolas