Rarely do you see a country where the mood among business people tells such a different story than the statistics. Now, in Argentina there are statistics are then there are damn lies--inflation figures are made up--but the broad contours of the economic performance of the last few years are not in dispute. Argentina has been growing at Asian rates, its investment rate has risen to levels not seen in decades, national saving is at record levels, and TFP growth has been stellar. By their own admission, Argentine businessmen are making more money now than they ever have in recent memory.
Yet business people are somber, bitter, and angry at the government. The general sense, even among those that supported Nestor Kirchner's policies, is that the government is frittering away a golden opportunity. Worse, the government has authoritarian--some would say thuggish--tendencies that portend ill for the future of Argentina's democracy.
What is going on?
First, the good news. Recent economic growth, unlike that of the 1990s, is of the good kind and it not just the result of high commodity prices. The investment boom of the last few years is supported by high saving, not by external borrowing as in the 1990s:
The difference is that recent growth has been fueled by a competitive currency, which increased the relative profitability and output of a wide range of tradables: agro-industries, manufacturing, and a wide range of services (from tourism to call centers). Unemployment and poverty rates have come down. Manufacturing employment has been growing after a long period of decline. The weak currency has stimulated the right kind of structural change--from lower productivity activities to higher-productivity tradables--which is the source of the economy-wide increases in TFP we have seen. This is a textbook illustration of the magic of sustained currency undervaluation.
To get a sense of the magnitude of Argentina's accomplishment, compare its recent record to that of Brazil, a distinctly worse performer:
So next time someone says Brazil is the tortoise that will eventually overtake the Argentinean hare, ask how this will be possible with saving and investment rates that are well below 20% and a productivity growth rate that is decidedly lower. (All data here come from the Economist Intelligence Unit, but I have cross-checked them against other sources where possible.)
Now the bad news. In a growing economy, the tendency for the real exchange rate is to appreciate--unless the economy can generate growing surpluses of saving over investment (as in China until recently). The result can be seen in Argentina's prices. While the peso is stable against the dollar in nominal terms, the overheated economy has generated inflationary pressures (over 20% annually at present) which are being grossly mismanaged. The answer to high inflation is a big fiscal surplus--much larger than what the government is managing at the present despite the huge windfall in commodity prices. Instead, the government has been resorting to ad hoc and temporary measures: price controls, export taxes, and intervention in currency markets. It has no coherent plan to deal with inflation and no strategy for sustaining competitiveness in the face of the real appreciation that will take place even in the best of circumstances.
Even worse is the growing disconnect between the government and the business community. In its approach to the private sector, the government is developing a reputation for being abusive, threatening, and intimidating. The Kirchners' strategy seems to be to play to their main political power base while assuming that growth will continue. But in the current environment it is difficult to imagine that the private sector will continue to invest as strongly as it has.
In the early 1990s, after years of mismanagement and hyperinflation, the binding constraint on Argentinean growth was lack of confidence in macroeconomic policies. The Convertibility Law was an ingenious short-cut for overcoming this constraint. But as circumstances changed and the binding constraint became lack of competitiveness instead, the Convertibility Law turned into a liability. It allowed no way to respond to the new constraint within the existing rules of the game. The post-2002 policies were in turn successful because they removed the competitiveness constraint. But the growing gulf between the private and public sectors has put lack of confidence and credibility once again front and center--now as the binding constraint on sustaining Argentina's growth.
And that is a pity, because there is a lot that is going right with the Argentine economy today. The underlying model is much more sound than anything in memory. There is nothing wrong with it that a larger fiscal surplus and a bit of dialog between the public and private sectors would not cure.