Beneath Argentina's growth, economic fault lines simmer

• A version of this post ran on the author's blog, cuba.foreignpolicyblogs.com. The views expressed are the author's own.

To the untrained eye, Argentina’s economic future might seem bullish. Under current President Cristina Fernández de Kirchner, an average annual growth rate of 7 percent has been impressive, and is lower than that of only one other government in Argentine history. Positive external forces have been working in the nation’s favor in recent years: new agricultural technology has allowed increases in production and output; the rise of China and India have simultaneously fueled demand for its agricultural products and commodities; and most significantly, since 2003-4, high prices for these products have improved Argentina’s terms of trade. Brazil has become Argentina’s top trading partner, and that relationship will continue to be fruitful for Argentina as Brazil’s prosperity boosts its own.

Closer examination, however, reveals troublesome fault lines: bolstered by global demand and commodities prices, Argentina has been growing at a high rate in spite of poor economic policies. Years of expansionary fiscal policies by both President Fernández de Kirchner and her husband, Nestor Kirchner (her predecessor), have increased a bill of subsidies for Argentines to greater than 5 percent of the country’s GDP. The high levels of government spending and of subsidies have indeed fueled growth, but along other measures, the administration’s economic policies have created fundamental instability. Inflation is high, foreign investment in the country is shrinking, and the Argentine stock market has steadily declined during President Fernández de Kirchner’s tenure. Indeed, some Argentine economists predict that the country is on the brink of another crisis, and could actually enter a recession or a period of zero growth as soon as this year.

I joined a Pacific Council on International Policy delegation in Buenos Aires and Santiago this spring in an effort to better understand the economic and political trajectory of each country, and to analyze their respective global roles. Argentina and Chile share the third largest international border in the world, but the two Southern Cone nations differ greatly in their economic, political, and international realities. Indeed, Argentina’s challenges were particularly striking when seen next to the Chilean model.

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