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July 26, 2014

ANOTHER VIEW

Saturday, October 19, 2013

Revisiting the Argentina-Australia comparison

President Cristina Fernández de Kirchner waves to supporters in one of her last appearances before being hospitalized.
By Miguel Braun
For The Herald

The development gap can be significantly reduced in the next 10 to 20 years

Knowingly or not, when some weeks ago President Cristina Fernández de Kirchner decided to compare Argentina to Australia, she was treading on charted ground. Indeed, comparing Argentina to Australia (and Canada) has been more or less traditional in the realm of economic history and political science. Australia has been a natural counterpoint to Argentina because these countries had some interesting points in common in the past but a divergent development. However far away we are today, Argentina can significantly narrow the development gap in the next 10-20 years.

What were the similarities between Argentina and Australia? First of all, a similar endowment factor: bountiful natural resources and a scarce population somewhat reverted through massive immigration; second, temperate climates and the geographical handicap of being far away from their main markets; lastly, an important period (roughly, from 1890 through 1930) in which GDP per capita was relatively similar.

In a relatively recent book (¿Por qué Argentina no fue Australia?), Gerchunoff and Fajgelbaum describe a first period of convergence from 1884 through 1930, and a period of divergence from 1930 through 2002. According to these authors, Australia had the advantages of a closer relationship with Great Britain from 1930 to the Second World War, and the proximity to up-and-coming Japan after it. A second reason for divergence is the fact that, although both countries suffered from poor terms of trade, Australia compensated low prices with bigger volume as it discovered new mineral and petroleum deposits. Lastly, Argentina’s main exports (food) entailed a distributive conflict that Australia’s (minerals) did not. This conflict and its external deficit (its dependence on capital goods imports) led to Argentina’s classic stop-go pattern of development in the 20th century, while Australia grew much more smoothly. The authors thus point at economic and political geography as the main reasons for divergence.

Whatever the reasons, it is clear that Argentina is today very far from Australia in development. Purchasing power per capita in Australia is three times that of Argentina. In more general terms, Australia ranks second in the United Nations Human Development Index (HDI); Argentina is 45th in the 186-country index. In more strict economic terms, both countries have similar unemployment levels but Australia has a much more economically active population (54% to Argentina’s 46%) and a smaller proportion of those employed work in the public sector (16% in Australia to 19% in Argentina). In 2012, Australia received five times more foreign direct investment than Argentina, and in 2011 it had exports of US$321.3 billion to Argentina’s US$98 billion. Part of this is explained by higher labour productivity across industries.

One of the areas in which differences are especially noteworthy and relevant is the financial sector. Domestic credit in Argentina is only 18.5% of GDP and a whopping 123.3% in Australia. Capital markets are not relevant in Argentina: market capitalization of publicly traded companies is only 7.3% of GDP in Argentina and 84.6% in Australia. The financial sector and capital markets are a particularly important area because credit leverages opportunities and growth by transforming savings into investment.

More relevant than any specific sector is that Australia achieved sustained growth without significant ups and downs from 1950 through 2011. Quite the contrary, Argentine growth was characterized by periods of growth followed by crises and stagnation.

Australia transformed its natural resources into a model of sustainable development. In that regard, given the similarities with Argentina in factor endowment, it can be an interesting lesson for thinking up an alternative development model for Argentina.

The awakening of China and India in the world economy reverted the divergence between Argentina and Australia which started around 1930 and grew in strength around 1975. Argentina has a new opportunity to gain some of the ground it has lost in terms of development. Favourable terms of trade, the discovery of huge deposits of shale gas and oil, and a productive structure much more linked to services mean a huge new opportunity.

To take advantage of these opportunities the next government of Argentina has a two-tiered agenda: in the short run, the country must reduce inflation, free its exchange rate, eliminate arbitrary government interventions in international trade and re-establish normal relations with the international financial community. In the medium term, Argentina must foster profitability by reducing transport costs, lowering the tax burden and making credit accessible for businesses, all of which could make hundreds of small firms and entire sectors globally competitive.

Managing this change is not without its difficulties. A mining boom such as Australia’s could present a problem known as “Dutch disease”: the exchange rate appreciation such a boom entails could hamper the competitiveness of other industries. A change in government in 2015 will most probably lead to the inflow of dollars and an increase in investment and production in the mining and oil and gas sectors. In this context, the exchange rate will inevitably tend to appreciate, because a mining boom generally leads to an income effect which produces a higher demand for domestic goods and services. The best way to manage this exchange rate shock is through macro-economic programmes generating fiscal surpluses to offset the excess of investment over savings in the private sector. A policy of fiscal surpluses and relatively low interest rates could help mitigate exchange rate appreciation.

A second point to be taken into account concerns the services sector. Argentina has an important unresolved issue in its service sector productivity. This sector is very important in terms of employment and has very low productivity. In Australia services account for 77.4% of added value, 16.6% of exports, 86.3% of employment, and 43.4% of investments. In Australia services play an important role in international trade. Service exports grew at an annual rate of 4% since 2006, and education and professional services lead in this regard as they cater to the growing countries of Asia. Argentina has started to play this same role to the emerging countries of South America but it certainly has a lot of ground for improvement in education, tourism, health, and in creative industries such as art, design, etc.

In the mining sector Argentina has a lot to learn from Australia, which has managed its growth apparently without significant environmental woes. Mining in Australia accounts for 11.3% of added value, 48.5% of exports, 2.4% of employment and 41.6% of investment. It can, thus, become a source for dollars and taxes which could fuel other sectors and opportunities.

Argentina can also learn from Australia in the modernization of its agribusiness, in particular in sectors such as sugarcane, yerba mate, fruit and other regional products.

The future holds important opportunities and challenges for Argentina. To continue letting opportunities go is inadmissible, especially when the social cost for the poorer sectors of Argentina is taken into account. The country does not need too much creativity: on the other side of the globe lies a clear example of how to turn natural resources into sustainable growth.

* Miguel Braun is executive director of Fundación Pensar, the think tank of Buenos Aires Mayor Mauricio Macri.

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