Argentina: Don't Bank on an Export Boom

Why it's devaluation may not boost sales abroad

Andrea Grobocopatel knows the value of hard work. In 1912, her grandfather Bernardo arrived in Argentina penniless from Moldavia as part of a resettlement program for Eastern European Jews. Despite some initial hardships, the fertile pampas were generous, and Bernardo prospered in his adopted homeland. Today, Los Grobo Agropecuaria ranks among Argentina's leading agricultural enterprises, with annual sales of $60 million.

Yet nowadays Grobocopatel says she feels just as bewildered as her grandfather must have when he first set foot in Argentina. Since Jan. 6, when President Eduardo Duhalde scrapped the peso's decade-old peg to the U.S. dollar, Los Grobo hasn't sold a single grain of wheat, preferring to stockpile its 50,000-ton harvest in giant silos near the family farm, some 480 km outside Buenos Aires. Like most Argentine exporters, Grobocopatel, 37, is trying to sort through the confusion generated by the new dual exchange rate. It's fixed at 1.40 pesos to the dollar for exports, but the free floating rate hovers close to 2 pesos to the dollar for other transactions. Factor in fears of runaway inflation, limited access to dollars, and a 30%-plus increase in the cost of imports, and it's easy to understand why Grobocopatel is worried. "We don't know what's going to happen, but at least by holding on to our crop we've got something of real value," she says.

Economic textbooks claim that exporters should be among the first to benefit from a currency devaluation, as their products become more competitive in international markets. Yet while other nations such as Mexico and South Korea have used devaluation as a springboard to export their way out of recession, the trade advantages Argentina hopes to reap from such a move may be a long time coming. Despite a wealth of underutilized industrial capacity and record harvests for many crops, the government expects exports to grow just 4% this year, from an estimated $26.8 billion in 2001. That's well below the 9% annual average registered during the previous decade. And it's downright pitiful compared with the 18% a year Mexico managed in the five years following its 1994 peso devaluation, though companies there certainly benefited from special access to the U.S. market provided by the North American Free Trade Agreement.

Perhaps the biggest barrier to Argentina's export success is the insular mind-set of its businesses. While the country is blessed with abundant natural resources and a skilled workforce, companies traditionally have catered to the large middle class rather than scout out markets abroad. As a result, exports have never topped 9% of gross domestic product in the past decade, while in Chile they regularly exceed 25%. "No devaluation, however sizable, will help Argentina fulfill its export potential until more companies start seeing the world as their marketplace," says Jorge Campbell, who served as Secretary of International Economic Relations under former president Carlos Saúl Menem.

The new government's economic policies aren't helping much, either. Since taking office, Duhalde has burdened businesses with a series of complex regulations that harken back to an earlier protectionist era. Stifling bank controls and the dual exchange rate are boosting the cost of foreign-made supplies on which everyone from carmakers to soybean growers depend. Exporters also bristle at a new requirement that they sell the dollars they earn to the Central Bank at the official rate. With the free rate near 2 pesos, that amounts to a hefty 40% penalty. Oil producers, meanwhile, face a new 20% tax on exports.

Frequent policy shifts only add to the confusion. "It's impossible to plan ahead," says Eduardo Minardi, president of Bridgestone/Firestone Inc.'s local unit. If the uncertainty persists, it could snuff out the entrepreneurial spirit Argentina so desperately needs. Take the case of Emege, a 70-year-old manufacturer of gas heaters with $20 million in annual sales. Instead of standing by idly while a four-year recession ravaged its home market, Emege modernized its facilities and hired personnel to find new customers as far away as China and New Zealand. Yet it has suffered a 60% drop in foreign orders since December, as clients no longer trust that deals sealed months in advance will be honored. "Nobody believes in us as a country, so it's only reasonable that our word holds no value," says Enrique Cavallini, Emege's international business manager. Argentina's reputation, it seems, has wasted away even faster than the value of the peso.

By Joshua Goodman in Buenos Aires

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