Argentina’s economy is abnormal and these five graphs prove it

Argentina’s next president will take office in the midst of a financial emergency, something common in one of the most dysfunctional economies in the world.

Voters will go to the polls this Sunday, at a time when the country is expected to enter recession for the sixth time in a decade and inflation exceeds 140%.

They face two radically opposing proposals: the continuity of Economy Minister Sergio Massa, who promises to curb fiscal spending without ending long-standing social rights, or the radical promises of Javier Milei, who says he will adopt the US dollar as Argentine currency as an alternative to the peso.

Neither alternative is likely to quickly resolve Argentina’s economic problems, as their roots lie in decades of mismanagement.

Throughout its recent history, Argentine governments have oscillated between policies, unable to apply a coherent approach, and most investors have fled. The result is that the country, once one of the richest in the region, has an increasingly unique economy, and not in a good way.

“Argentina is an outlier and has been for a long time”says Martin Castellano, head of Latin American studies at the Institute of International Finance. While other Latin American countries have carefully built strong economic institutions, Argentina has tilted toward volatility and stagnation.

With central bank reserves in the red and the peso overvalued at the official exchange rate, whoever wins the election will likely devalue the currency while trying to clean up public finances. “It is an inevitable adjustment that will cause another recession next year”says Castellano.

Below, we present six graphs that illustrate the deep and evident problem that Latin America’s third-largest economy is going through:

From richest to poorest

Once one of the richest countries in Latin America, activity has stagnated after facing multiple economic crises in recent decades. Per capita income grew more slowly than most of its peers, increasing on average about 1% annually since 1960. In the same period, neighbors Chile and Brazil multiplied their incomes by at least two, according to Bank data. World.

High inflation only makes things worse, since 40% of Argentines live in poverty and 9% in extreme poverty, according to official data. That is also likely to jeopardize the country’s ability to prosper for future generations, with more than half of children up to 14 years old living in poverty.

Losing the battle against inflation

Several Latin American countries suffered episodes of high inflation or even hyperinflation during the 1980s and early 1990s. Most of them managed to control price pressures by adopting inflation targeting regimes, allowing their currencies to float, and developing local currency debt markets.

This is not the case of Argentina. Following the end of currency convertibility in 2002, the country’s central bank has increasingly financed the public deficit by printing money. As a result, the annual inflation rate reached 143% in October, and is expected to close the year above 180%.

Recession Champion

Argentina has a long history of drastic economic swings, the result of weak and inconsistent policies that stand out even in a volatile neighborhood. A 2018 study by the World Bank found that between 1950 and 2016, the nation spent about a third of the time in recession, more than any country in the world except the Democratic Republic of the Congo.

The economy is expected to contract again this year, according to the International Monetary Fund and analysts surveyed by Bloomberg. If these projections come true, the economy will have contracted in almost half the years since 1980.

Credit desert

In most countries, the flow of bank credit to households and businesses is crucial to driving economic growth. But in Argentina, years of high interest rates and inflation have been a hurdle for both lenders and borrowers.

What’s more, private banks lend primarily to an increasingly voracious government, leaving very little for individuals and businesses. The result is that Argentina has one of the lowest levels of household credit in the world, according to data from the Bank for International Settlements. Likewise, credit to businesses is only a fraction of the levels seen in neighbors Brazil and Chile.

The weight sinks

The Argentine peso has lost almost 100% of its nominal value in the last two decades, and this year it has once again recorded one of the worst spot returns among the main emerging economies. “They missed the opportunity to move to a flexible exchange rate regime and it was never done right”says Castellano.

No foreign capital

Amid all the volatility, it’s no surprise that Argentina has lagged behind its peers in attracting international money. In recent years, foreign direct investment has been much lower than in Brazil or Mexico, the only two largest Latin American economies.

Argentina has a large internal market, but companies that want to exploit it face risks such as nationalization or the inability to send profits to their headquarters. Importers and exporters also find it difficult to sell their products due to a byzantine system of capital controls.

As for short-term funds, the country experienced a wave of capital inflows under the pro-market government of Mauricio Macri between 2015 and 2019, but most of the speculative money left again when Macri staged another economic collapse.