Is this a moment of hope for Argentina? Cynics would say that they’ve heard that before. In days gone by, some really believed it, put down their money, and lived to really regret it. Argentina has long been feted as an economy with enormous potential. This goes back before the turn of the last century. In the late 1800s, both Canada and Argentina were identified as the next up-and-comers in the world. Canada made it to the G7, but Argentina never got close. That potential still remains, though. Are current changes enough to turn promise into paydirt?
The Fernandez years were like many others in Argentina’s modern history: mismanagement and misguided policies that set the country back years, and further sullied its reputation with credit rating agencies and investors. Wearied by economic waywardness, the population voted for change last year, putting Mauricio Macri into power with a promise of significant reform and a return to economic discipline. Any such move in Argentina generates foreign interest for one key reason: business around the world is well aware of the potential of this often turbulent land. Is the current regime really going to shed the policy approaches that have often isolated Argentina?
Such policies always punish an economy – perhaps no moreso than in our highly integrated, globalized world. Trouble is, they never seem that way until the damage really sets in – and even when it does, countries can meander for years along a path that takes them further and further from the economic reality around them. Argentina is not the only one; there is a long list of countries that, from time to time, enroll themselves on this list. While this is a great shame for the economy and for the citizens that bear the brunt of the fallout, all is not lost. Behind all the mismanagement is an economy that, for the most part, never loses its core endowments: people, natural resources and other comparative advantages like location and ingenuity. The combination of these defines an economy’s true potential, a frontier that is very reachable provided a country has policies in place that enable, not disable, fundamental growth.
Every country has a long-term growth path that is determined by the way its key factors of production come together to produce goods and services across the economy. The three pillars of any economy are its labour force, its capital stock (actual buildings, machinery and infrastructure), and finally the technical efficiency with which these two interact to make things – commonly known as productivity. The growth of these elements, added together, define the potential growth of every economy on the planet.
What do the numbers look like for Argentina? Three per cent seems like a generally accepted marker, split almost evenly between labour force and labour productivity growth. Match this up against recent actual performance, and it’s clear that there’s a sizeable gap between where Argentina is, and where it could be. Rough estimates put the gap at about 17 per cent. Alter policies to accommodate the growth potential, and it means Argentina could see very strong growth for a number of years. But suppose we grew the economy at this three per cent rate from 1980 to the present? Underperformance over that long period suggests that Argentina could have a GDP gap of as much as 45 per cent. The growth needed to close this gap would be double digit for a long, long time. If so, the opening of this market could be one of the big events of our current economic episode.
Similarities between the Canadian and Argentine economies make a case for a very symbiotic relationship. Capabilities in the energy, mining, and agriculture sectors are a start. Well-educated, cosmopolitan populations in both places are a further enabler. Long-standing business ties are yet another plus for a reinvigorated relationship. Diplomatic relations are also critical. Significantly, Canada’s Prime Minister is in Argentina this week to meet with President Macri and discuss Canada-Argentina relations. If the market is really opening up – and if Argentina can convince the rest of the world that policy changes are not just for now, but for the long term – the growth potential for the country and for those interacting with it are very promising.
The bottom line?
Argentina is reforming its economic policies. If permanent, this will be a powerhouse economy with a vast storehouse of potential.