Argentina's Turnabout: Neighbors, Take Note

With Latin American nations set to hold an economic summit beginning on Sept. 9, Argentina will very likely exert greater influence in guiding the region's future. Although its economy is second in size to Brazil's, Argentina has emerged as the region's leader in market reforms and inflation-fighting.

Most private economists project that Argentina's real gross domestic product is expanding by 5.5% to 6% in 1994, with growth at about 5% in 1995. And Argentina's inflation performance remains the best in Latin America, with prices rising about 4% this year and next.

Argentine industry had a small setback in July, when labor conflicts and fewer working days reduced output. So far in 1994, though, production has risen 5% from a year ago, led by autos, cement, and steel. Inflation also was disappointing in July. Higher beef and tourism prices pushed Argentine living costs up 0.9%. But prices probably increased 0.3% to 0.4% in August, or about 4% from a year ago. That's quite a contrast with the 5,000% rate of 1989.

The sharp inflation turnaround has been helped by the nation's heavy investment in productivity-enhancing equipment. Such spending doubled in both 1991 and 1992 and surged an added 33% in 1993, with growth continuing this year.

The government of President Carlos S. Menem, up for reelection in May, 1995, has actively promoted this cost-cutting "re-industrialization" by liberalizing trade, pegging the peso to the U.S. dollar, and privatizing government enterprises. The results have been impressive. Nominal capital investment as a percent of GDP has soared from 14% in 1990 to 19.5% in 1994, according to economists at Bear, Stearns & Co. (chart). And the rate should go above 20% in 1995.

Exports are benefiting from the productivity push. That's important now that the Mercosur trade group is dismantling tariffs and freeing up trade among Argentina, Brazil, Uruguay, and Paraguay, with Chile likely to join later. Argentina sold about 22% of its goods to the Mercosur nations in 1993.

As a further sign of Argentina's progress, in August, the government sold securities in its own currency. While that may be commonplace in most countries, it has been 20 years since Argentina had the economic or currency stability to attract investors on its own.

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