1 argentina: emerging from the greatest crisis dr. horacio d. casabé

1

ARGENTINA: EMERGING FROM THE GREATEST

CRISIS

Dr. Horacio D. Casabé

2

BasicInformation

Country ARGENTINA

CapitalBUENOS AIRES

Surface2.766.890

Km2

Climate TEMPERATE

Population 36,6 mill.

Literacy rate 96%GDP Income per capita200120022005

U$S165 BILL

U$S 7.500U$s 2.900U$s 4.500

Average life expectancy

70 YEARS OLD

Cattle Stock 53 mill.

Sheep Stock 14 mill.

Other Stock 5 mill.

Shepherding surface 50 %

Cultivable surface 15%

3

THE SINGLE THOUGHT (NOW WE KNOW THAT...)

THE WASHINGTON’S CONSENSUS WAS NOT INFALLIBLE

ONE MUST CONSIDER THE INDIVIDUAL CHARACTER OF EACH COUNTRY

DANI RODRIK (Professor of International Political Economy – John F. Kennedy School of Government – HARVARD UNIVERSITY

4

THE REASONS OF THE CRISIS

•THE FIX EXCHANGE RATE (FIX PEG)

•CONSTANT INTERNATIONAL TRADE DEFICITS (11 BILL – 2.5%)

•STRONG INCREASE OF PUBLIC SPENDING (100% IN 10 YEARS)

•CONSTANT FISCAL DEFICITS (GD 6%)

•TWINS DEFICITS

Continue

5

THE REASONS OF THE CRISIS

•CONSTANT GROWTH OF PUBLIC DEBT (FROM 60 BILL IN 1991 TO 170 BILL IN 2001)

•FRAGILITY TO FACE EXTERNAL CRISES (MEXICO, RUSSIA, SOUTHEST ASIA, BRAZIL, ETC.)

•MASSIVE PRIVATIZATIONS WITHOUT GOVERNMENT CONTROL (LOSS OF SOVEREIGN RISK – RODRIK)

Continue

6

THE REASONS OF THE CRISIS

•REGRESSIVE TAX SYSTEM – INSUFFICIENT FISCAL PRESSURE – 16% O/GDP - INEFFICIENT ADMINSTRATION

•SOCIAL SECURITY BANKRUPTCY

•SUDDEN HALT OF INFLOW CAPITALS

7

THE CONVERTIBILITY (FIX PEG) AGGRAVATED THE STRUCTURAL PROBLEMS

•PRODUCTION

•LABOUR MARKET

•INCOME DISTRIBUTION

•INTERNATIONAL TRADE

•DEBT/GDP RELATIONSHIP

8

CONSEQUENCES OF THE CRISES

•SURGING COUNTRY RISK (6000 BASIC POINTS)

•STRONG GDP DECREASE (20% )

•WSP INFLATION 70% (5 months in 2002)

•SUDDEN FLIGHT OF CAPITALS (U$S 20.3 BILL = 7.6% GDP)

•STRONG PLUNGE OF FEDERAL RESERVE SAVINGS (FROM U$S 28 BILL IN 2000 TO U$S 12 BILL IN 2002)

Continue

9

CONSEQUENCES OF THE CRISES

•UNEMPLOYMENT RECORD 25% PLUS UNDEREMPLOYMENT 15%

•POVERTY REACHED 54% (EXTREME POVERTY 25%)

•FROZEN BANK ACCOUNTS

•VANISHING NATIONAL CURRENCY AND CREATION OF 14 STATE CURRENCIES (BONDS)

Continue

10

CONSEQUENCES OF THE CRISES

•EXTERNAL DEBT DEFAULT

•INTERNATIONAL FINANCING HALTED

•HYPER DEVALUATION (1 TO 4)

•SOCIAL CONFLICTS (RIOTS, PICKETING, STRIKES, VIOLENCE, ETC.)

•INSTITUTIONAL CRISIS (5 PRESIDENTS IN 15 DAYS)

11

THE ECONOMIC RECOVERY

A. TAKE ADVANTAGE OF DEVALUATION

B. EMERGENCY FISCAL POLICY

C. RE-NEGOTIATE EXTERNAL DEBT

D. FINANCIAL SYSTEM RECOVERY

E. ECONOMIC ACTIVITY RECOVERY

F. NEW INTERNATIONAL CONTEXT

12

A. ADVANTAGES OF DEVALUATION

•INCREASE OF EXPORTATIONS

•DECREASE IMPORTATIONS

•IMPORTATION SUBSTITUTION

PROCESS

•STRONG INTERNATIONAL TRADE

SUPERAVIT

13

INTERNATIONAL TRADEGLOBAL BALANCE

U$S BILL.  2002 2003 2004 2005

EXP. 25.6 29.9 34.6 40.0

IMP. 9.0 13.9 22.4 28.7

SUP. 16.6 16.0 12.2 11,3

14

EXPORTATIONS

15

INTERNATIONAL TRADE(BY SECTOR)

37%

33%

30%COMODITIES

FARM AND LIVEMANUFACTURES

INDUSTRIALMANUFACTURES

16

INTERNATIONAL TRADE PER REGION

19%

15%

17%

49%

MERCOSUR

NAFTA

E.U.

OTHERS

17

B. EMERGENCY FISCAL POLICY

•EXPORTATION TAX

•FINANCIAL ACTIVITIES TAX

•INCREASE INCOME TAX

COLLECTION

•FINANCIAL AID PLANS

•STRONG CONTROL OF PUBLIC

EXPENDITURES

•MULTILATERAL INSTITUTIONS PAY OFF

(IMF, WB, IDB)

18

TAX COLLECTION (ARGENTINE CURRENCY)

2005

19

C. RENEGOTIATION OF EXTERNAL DEBT

•STRONG DISCOUNT 65%

•ACCEPTANCE 76%

•BETTER PROFILE EXPIRIES

•INTERNAL DEBT PESIFICATION

•DIMINISH INTERESTS

•BETTER RELATIONSHIP DEBT OVER GDP FROM 120% TO 70%

20

EXTERNAL DEBT

21

D. FINANCIAL SYSTEM RECOVERY

•BANK DEPOSITS RECOVERY

•BANK SYSTEM IN NATIONAL

CURRENCY

•REAPPERANCE OF BANK LOANS

22

E. ECONOMIC ACTIVITY AND

EMPLOYMENT RECOVERY

•USE OF NEW TECHNOLOGY

•BENEFITED FROM IDLE CAPACITY (IND.CAP.

From 50% to 80%)

•INDUSTRIAL ACTIVITY INCREASE

•INDUSTRIAL CONSTRUCTION IMPROVEMENT

•PUBLIC WORKS

•NEW EMPLOYMENT AND MORE JOBS

2 MILL - 12% UNEMP. RATE

23

ECONOMIC ACTIVITY

50

60

70

80

90

100

110

120

130

2001 2002 2003 2004 2005

GENERAL Base 1993 = 100

CONSTRUCT.

Base 1997 = 100

INDUSTRY Base 1997 = 100

24

F. NEW INTERNATIONAL

CONTEXT

•LOW INTERESTS RATES

•COMMODITIES PRICES INCREASE

•SOY BEAN BOOM

•NEW PLAYERS (CHINA, INDIA,

BRAZIL, ETC.)

25

200.000

220.000

240.000

260.000

280.000

300.000

320.000

2001 2002 2003 2004 2005

+ 29%

GDP

26

WARNINGS AND PENDING PROBLEMS

•IMPROVE THE EXPORTATION PROFILE

•DEVELOP A USEFUL INDUSTRIAL MODEL

•ATTRACT LONG TERM FOREING INVESTMENTS

•CONTROL THE INFLATION PROCESS

•CONTAIN THE DISTRIBUTIVE BIDDING (Prices vs. Wages) Continue

27

INFLATION (RETAIL PRICES) %

SOURCE INDEC

28

WARNINGS AND PENDING PROBLEMS

•CONSOLIDATE THE FINANCIAL SYSTEM

•ARRANGE THE PUBLIC SERVICES TARIFFS

•MONITOR THE ENERGY CRISIS

•ACTIVE TAX SYSTEM

•REPLACE SUBSIDIZED EMPLOYMENT

•SOLVE THE BLACK LABOUR MARKET (4.8 mill = 46%)

Continue

29

LABOUR SITUATION 2005

30

WARNINGS AND PENDING PROBLEMS

•RENEGOCIATE THE EXCLUDED EXTERNAL DEBT

•IMPROVE HEALTH CARE, SOCIAL SECURITY AND EDUCATIONAL SYSTEMS

•IMPROVE THE INCOME RE-DISTRIBUTION 70’ 7/1 90’ 30/1 2005 31/1

31

SUMMARY CRUCIAL ISSUES

•PROMOTE STRUCTURAL REFORMS

•MACROECONOMIC STABILITY

•BUILD A COMPETITIVE AND FORESEEABLE COUNTRY

32

THE ARGENTINE CHALLENGE

TO CHANGE THE PARADIGM

•DURING THE 90’S ARGENTINA WAS BELIEVED TO BE AN OPPORTUNITY FOR THE WORLD

•DURING THE XXI CENTURY, THE WORLD MUST BE AN OPPORTUNITY FOR ARGENTINA

33

SOME WORLD ECONOMICS INDICATORS IN THE LAST 20

YEARS

• Trade: 6% per year

• Foreign investments: 7% per year

• International loans: 8% per year

• G.D.P. 3,5 per year

• Currency Trade: 25% per year

2004: + 3.000 billion

34

THANKS FOR EVERYTHING

casabe@latinfocus.com.ar