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Argentina - Economy

Why is Argentina perpetually subject to crises? The country of 43.4 million people has a literacy rate of over 98 percent, enormous natural resources, a vibrant export-oriented agricultural sector and a diversified industrial base. Yet it has defaulted on sovereign debt eight times, experienced a massive economic depression from 1998 to 2002 and weathered repeated monetary crises. The country has gone through boom periods as well. It rebounded from its most recent crisis in 2002 - which resulted in an $82 billion (72 billion euros) sovereign debt default - with six years of growth at an average of 8.5 percent.

At the time of the Great War, Argentina was one of the worlds richest countries, with an income per person higher than France, Germany, or Sweden. Today it is a poor country. Argentina has experienced long-term economic growth, but it has been sluggish.

For six years, the administrations of Cristina Fernndez de Kirchner and Mauricio Macri faced the deepening global economic crisis and a public-sector debt accumulated since the 1980s through austerity, ballooning interest rates to attract financial capital at the expense of industry and cuts in social spending. Since late April 2018, these conditions burst into a flight of capital and a precipitous fall in the value of the peso, with all accumulated consequences being placed on the shoulders of the working class.

By January 2019, Argentina's economy was at rock bottom. President Mauricio Macri had failed to reduce the country's vast budget deficit and boost competitiveness. The increase in interest rates in the US saw many investors withdraw capital from emerging economies - another blow to Argentina. Although it's had financial aid from the IMF, inflation is still soaring. To qualify for a 50-billion-dollar IMF rescue package, the country has to raise taxes and cut social programs.

The Argentine peso continued to slide to trade at 30.82 against the U.S. dollar on 22 August 2018, marking a new record low after South America's second largest economy was severely hit by the Turkish lira's devaluation, Central Bank of Argentina data showed. The peso had become the world's worst performing currency with its value depreciating around 40 percent so far this year, while accumulated inflation has hit 19.6 percent. The losses were partly attributed to fears of a possible financial crisis in Turkey. Argentina's large fiscal deficits and high debt load have also impacted the currency. To stabilize the peso, the government had taken several measures, including raising interest rates and issuing treasury bills with yields in foreign currency.

Argentina faced obstacles to growth in a number of other areas. The obstacles are well known inside and outside Argentina, and all have been the subject of extensive study.

  • Rule of law. Safeguards against takings of private property by the government are weak. The judicial system has a reputation for inefficiency and corruption. Violent crime became a big problem when the recession became a depression.
  • Tax strategy. Combining tax cuts with tax simplification and greater efficiency by the tax bureaucracy, Argentina could bring much of the underground economy above ground. It could change from a country that imposes high tax rates on a relatively narrow tax base to one that imposes lower rates on a broader base.
  • Federal-provincial financial relations. Federal revenue sharing weakens the link between the taxes provinces levy and the revenues they spend. The federal government had not been willing to get tough with provinces that are essentially bankrupt. As a result, the provinces face weak financial discipline.
  • Government spending. Spending on pensions and salaries of government employees, including superfluous employees, comprises a larger part of the budget than is desirable for a country at Argentinas level of economic development. Many expenditures lack transparency.
  • Labor. Inflexible labor laws contribute to a high unemployment rate. Employers must pay heavy severance charges to fire employees, so they are less likely than employers in the United States to take a chance on hiring employees who may not work out. Argentinas statistical agency estimates that 40 percent of wage earners work in the underground economy. (Many of these people have first or second jobs in the above-ground economy.)

As the world's largest producer of lithium, the second largest producer of borates, the third largest producer of silver, the fourth largest producer of copper and the fifth largest producer of gold, Argentina has the commodities China needs.

The Argentine shale gas formation, called Vaca Muerta (dead cow in English), was estimated to hold one of the most important gas resources outside the United States. The gigantic deposit in Neuquen Province in remote Patagonia contains 802 trillion cubic feet of technically recoverable gas. It also has the fourth largest shale oil reserves roughly 27 billion barrels of technically recoverable oil, buried three kilometers beneath the surface. An oil and gas exploration and development company owned by the Argentine fossil fuels producer Bulgheroni and the Chinese oil company CNOOC, announced a US$500 million investment to exploit Vaca Muertas 663 kilometers square oil shale zone in October 2013.

Argentina has resorted to controversial methods, namely hydraulic fracturing or fracking, which can boost energy exports but can also generate great environmental damage, such as water contamination. Fracking is a large-scale extraction technique that drills down deep into the earth to release the gas rocks contain. Water, sand and chemicals are injected into the rock at high pressure, which enables the gas to flow out of the well.

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