Argentina: Stable to Positive

The Economist has a long and useful piece on Argentina. Things seem much better than they might have been, although the creditors are still not getting paid. A lot of the positive push seems to come from Agricultural sales to China. Maybe Marcelo will have something for us later.

AS THE southern summer begins, Argentina's economy is showing signs of life after the battering it received in 2001-02. Shops are looking forward to their best Christmas in three years and tourism is booming. Even in the less glamorous neighbourhoods of Buenos Aires long-shuttered businesses are starting to re-open. Out in the pampas, farmers are buying new tractors and trucks, and market towns are buzzing with life.

For Roberto Lavagna, the economy minister, this is vindication. When he took the job, in April 2002, the economy was floundering, apparently at risk of hyperinflation, after a disorderly devaluation in a dollarised society, the largest debt default in history, and a deep depression. A year ago, the consensus on Wall Street was that the economy would grow a mere 2% this year while inflation would run at 20-25%. In fact, inflation is likely to end the year at 3% and GDP to expand by 7% (see chart). Next year's outlook is similar. The problems may come later.

Three things have helped the appearance of recovery along. One is simply the depth of the hole into which the economy fell. Even if growth continues at its current brisk rate, GDP will not return to its 1998 level until 2005. Unemployment is down from its peak of 21.5% last year, but is still at 15.6%. One Argentine in two now lives in poverty. Every week, militant groups of unemployed stage street protests.

Second, macroeconomic policy has been more effective than critics admit. Booming tax revenues have enabled the government to hit fiscal targets agreed with the IMF in September, though these do not allow Argentina to resume servicing most of its debts. Monetary policy has provided enough liquidity while keeping inflation at bay. Devaluation, plus the adoption of a floating exchange rate, combined with strong world demand, have stimulated exports.

Third, the government has focused on boosting domestic consumption at the expense of the demands of foreign creditors, banks, and privatised utilities. This is controversial, but has arguably made economic sense.