Argentina benefits from rich natural resources, a highly literate population, an export-oriented agricultural sector, and a diversified industrial base. Over the past decade, however, the country has suffered problems of inflation, external debt, capital flight, and budget deficits. Growth in 2000 was a negative 0.8%, as both domestic and foreign investors remained skeptical of the government's ability to pay debts and maintain the peso's fixed exchange rate with the US dollar. The economic situation worsened in 2001 with the widening of spreads on Argentine bonds, massive withdrawals from the banks, and a further decline in consumer and investor confidence. Government efforts to achieve a "zero deficit," to stabilize the banking system, and to restore economic growth proved inadequate in the face of the mounting economic problems. The peso's peg to the dollar was abandoned in January 2002, and the peso was floated in February; the exchange rate plunged and real GDP fell by 10.9% in 2002, but by mid-year the economy had stabilized, albeit at a lower level. GDP expanded by about 8% per year from 2003 to 2005. Growth is being led by a revival in domestic demand, solid exports, and favorable external conditions. The government boosted spending ahead of the October 2005 midterm congressional elections, but strong revenue performance will allow Argentina to exceed its primary budget surplus target for this year of 3.2 percent of GDP. Inflation has been rising steadily and is expected to reach 11.8 percent this year.

Historic overview

Emergence into the world economy

Prior to the mid-1800s, Argentina was seen as a backwater region of the world. Around 1870 the Argentine economy began to experience swift growth through the exportation of its livestock commodities. This marked the beginning of a significant period of economic expansion. Between 1870 and 1914, the Argentine economy sustained an average rate of growth equal to 5% a year. In fact, by 1913, the country's per capita income had reached those levels held by France and Germany.

The development of land

Since its independence, Argentina, being the eighth largest country in the world, has held an advantage in this factor of production. In the 19th century the rural economy was almost entirely devoted to farming and livestock raising. Over the course of history each of these two sectors experienced periods of growth and contraction in their markets, though farming at first faced much poorer returns.

As a more labor-intensive activity farming was hard pressed to find a good supply of workers prior to 1870. Since livestock raising is particularly capital-intensive, it faired well vis-ид-vis the farming sector in the event of labor shortages and quickly spread across the country. Moreover, during periods of falling prices for their products ranchers were able to maintain positive returns, proving their resilience in a volatile market, adding to the success of livestock raising in Argentina in the first half of the 19th century.

After the 1860s the arable sector boomed and tracts of lands once devoted to livestock raising were replaced with cereal crops. Much of this was made possible through an ease in the supply of labor.

The development of the labor market

Immigration was central to Argentina's development. Prior to the 1860s, there was relatively little migration into the country; the population in 1869 was little more than 1.7 million and, due to the sparse population, vast tracts of land remained unutilized. Labour shortages became widespread, resulting in the growth of real wages and, consequently, an increasing gap between the wage rates of Argentina and Europe, particularly those of Italy and Spain. This facilitated the mass immigration that was sustained every year until World War I (except in 1890, when the Argentine economy collapsed). While half the immigrants chose to stay in the city of Buenos Aires, their addition to the country's labour market as a whole helped alleviate the labor shortage. Subsequent internal migrations by both natives and foreigners helped to secure an efficient labor market.

This mending of the labor problem facilitated economic development. While real wages may have fallen for a time, immigrants, as an important factor of production, were able to help diversify the Argentine's commodity markets. Previously, the capital-intensive live-stock raising/pastoral sector had dominated production. Now, with the rise in labour supply, the arable sector saw development. As a result, Argentina's commodity market ceased to specialize in any one product. For the most part, this helped fortify the country against relatively minor world-market shocks (though certainly not internal, social or political disturbances), contributing to the overall, successful level of development the country experienced between 1870 and 1920.

The development of capital markets

Like immigration, foreign investment played a central role in Argentina's economic development. Prior to World War I, it could be said that Argentina's capital investment was foreign capital investment. Not only did foreign labor flock to the Argentina in droves, but foreign assets as well. In all considerations, Argentina was not a typical case for foreign investment, and hence it did not become a typical Latin American country. At the same time, however, it did not produce the characteristics of a typical developed country.

By far, Britain contributed the most funds of any foreign state to the Argentine, as it did for many other Latin American states. For Argentina's government, beginning in the 1870s, most investment was captured in foreign bonds. Private companies, however, collected most of their capital through direct foreign investment. Undoubtedly, Argentina stood alone in the absolute size of foreign fiscal contributions. Around 1914, its public external debt stood at $784 million, with a further $3.217 billion in direct foreign investment (DFI) (Bulmer-Thomas, 2003: 102). Much of the DFI from Great Britain flowed into Argentina's railways and the country's meat-packing industry, sectors of the economy in which local investment was severely limited relative due to the start-up costs of the firm. In contrast, the agricultural sector received virtually no foreign investment, and comparatively little domestic credit as well.

The most important aspect of foreign investment was its share in Argentina's capital stock relative to the size of domestic contributions. In the 1880s, foreign capital was pouring into the country; some estimates of which put Argentina's current account deficit at 30 percent of its GDP, an unprecedented ratio. It is important to note, though, that while foreign investments arrived in large amounts, its percentage of total investment and hence its influence on economic development was so great because domestic investment and savings were so little.

End of export-led growth

For the most part, Argentine economic growth before 1914 was achieved through exports to Europe. First beef and hides, then cereals and eventually some processed goods like beef jerky were sent off to Europe, which with a booming population found itself increasingly in need of imported foodstuffs. In return, Great Britain, France and Germany invested in the development of Argentina. For the most part, foreign funds were placed in sectors that were oriented toward exports; railways in particular were built with foreign capital. While many Argentines saw their booming export sector as central to the development of a national market, for the most part the country's economy remained deeply dependent on the performance of the international economy.

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