Economists Analyze Argentina's Economic Expansion at 5 Years

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April 10, 2007

Economists Analyze Argentina's Economic Expansion at 5 Years

For Immediate Release: April 10, 2007

Contact: Dan Beeton, 202-293-5380 x104

Washington, DC: Ahead of the annual Spring Meetings of the International Monetary Fund (IMF) and World Bank in Washington, D.C. (April 14-15), a report by two economists offers a comprehensive look at how Argentina managed a remarkable economic recovery from its collapse in 2001. Argentina's economic expansion is five years old this month.

“For those who are interested in how Argentina's remarkable recovery happened, and what can be learned from the country's recent experience, this paper provides the details,” said economist Mark Weisbrot, Co-Director of the Center for Economic and Policy Research.

The report, “Argentina’s Monetary and Exchange Rate Policies after the Convertibility Regime Collapse,” is written by economists Roberto Frenkel and Martin Rapetti, and jointly published by the Center for Economic and Policy Research (CEPR) of Washington, D.C., and the Political Economy Research Institute (PERI) at the University of Massachusetts.

Most economists and other commentators expected the recovery to be short-lived, e.g., four years ago, one year into the recovery, the IMF's Research Director called Argentina's growth “a hiatus at the moment from its long economic fall.” Argentina has now completed five years of the fastest economic growth in the Western Hemisphere, with GDP increasing by 47 percent and more than nine million people pulled over the poverty line. The IMF was deeply involved in Argentina during the years prior to its collapse, and provided no net assistance during the recovery.

The authors show how the Argentine government's policy of targeting a stable and competitive real exchange rate was crucial to the country's economic recovery. They also analyze the various sources of aggregate demand and government revenue in different phases of the expansion. In addition to the crucial role of the exchange rate, the authors look at other policies -- such as an export tax, capital controls, and the default on much of the country's sovereign debt – which were met with disapproval by many economists and other commentators but played an important role in the recovery.

The paper helps dispel certain myths about Argentina's expansion – for example, that it has been driven simply by favorable external circumstances. It also provides an overview of the policies that led to the prior economic collapse.

Drawing on Argentina's successful recovery but also a more general macroeconomic analysis, the authors also argue that targeting a stable and competitive exchange rate can be viable and manageable as part of an overall strategy to promote growth and employment while containing inflation.