One hundred years ago, Argentina was one of the world’s richest countries. Buenos Aires, like Melbourne, had one of the highest per capita incomes in the world, based on the wealth of commodities that it could export to the world. The phrase ‘rich as an Argentine’ came into common usage. But today, the contrast between the fortunes of Argentina and Australia could not be greater.

On 25 May new President Néstor Kirchner took charge of an Argentina only gradually regaining confidence following prolonged recession and marked instability in political governance. Economic activity and growth have resumed, enabling the government to meet fiscal targets for the first quarter of the year, while relations with the International Monetary Fund have improved. The new President provides an opportunity for something of a fresh start, and The Economist predicts 4.3% growth in 2003.

What went wrong? While Argentina does have a history of boom and bust, the most recent crisis concerns ‘the three Ds’: dollarisation, devaluation and default.

Firstly, there’s dollarisation. To combat hyperinflation in the early 1990s, the then President, Peronist Carlos Menem, pegged the Argentine peso to the US dollar. Unfortunately for Argentina, the strength of the US currency over the course of the decade left Argentina with an uncompetitive economy.

Secondly, there’s devaluation. The dollarisation policy had to come to an end, but devaluation was an unpopular measure for the many Argentines (businesses and households) that held their debts and mortgages in US dollars while earning income in pesos. Political and economic instability ensued, with bank restrictions, austerity measures, and eventually the third ‘D’, the largest government debt default in history.

The good news
Despite the uncertainty and instability, reforms introduced may improve Argentina’s medium-term viability. Devaluation has made Argentine exports more competitive after many years of dollarisation. It has also prompted a mini-tourism boom as Chileans, Brazilians, Uruguayans and Mexican visitors take advantage of cheap holiday deals.

Thirdly, there are benefits for some Australian companies who stick it out through the crisis. DFAT notes export and investment opportunities for Australia in the renovation of Argentine industry, and the overhaul of communications, transport and public utilities. Similar changes are under way in most areas of primary production, a sector of particular expertise for Australia. Other sectors with promise are environmental management, agribusiness, construction and building materials and high-tech machinery.

Austrade Buenos Aires
Telephone: +54 11 4777 6590
Fax: +54 11 4777 6591
Email: info@austrade.gov.au
Website: www.austrade.gov.au