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| Paul Collier's 2007 book lays out four traps that the world's most struggling countries are caught in, and how they can rise out of the traps |
Argentina
is a democratic, so-called second-world country in southern South America. Though
throughout the last decade Argentina has suffered from economic woes,
government corruption, increasing rates of crime and decreased investor
interest, it still manages to house the highest quality of life of Latin
America. Argentina's resource wealth, high literacy rates, and varied exports
are among the factors that have allowed the country to enjoy middle-income
status. These factors have also contributed to Argentina's avoidance of the
four developmental traps Paul Collier lays out in his book The Bottom Billion--the conflict trap, the natural resources
trap, the landlocked with bad neighbors trap, and the bad governance in a small
country trap. That is not to say, however, that Argentina has been free of
problems or conflicts. Argentina's recent battle against "vulture"
funds, for example, have created the possibility that Argentina might default
on debt in the future. Argentina's government, however, has had faith that they
will not be forced to pay the vulture funds, as the US ruling that mandated
this payment violates Argentine law.
To begin with, Argentina has managed to escape
Collier's "conflict trap"--a developmental hindrance resulting
from military, societal, or governmental conflict within a country--through its
strong governmental structure and regulation. Argentina, however, possesses two
of the three risk factors Collier outlines for conflict: a predominant ethnic
group (in Argentina's case, white people with mostly Spanish/Italian roots) and
abundance of natural resources (petroleum, metals, plains). In other countries,
the imbalance between ethnic groups and profits from natural resources that can
finance rebellion serve to spark conflict. Argentina only evades Collier's risk
factor of a high percentage of young and uneducated males; while some investors attribute their uncertainty about investing in Argentina because of an "inadequately educated workforce", the educational life expectancy of Argentine children (16 years) is identical to that of children in the United States. Argentina
has also not experienced a coup or civil war recently, which makes it less
likely to experience another in the near future.
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| A chart showing Argentina's export categories and the profits gained from each (in millions of US dollars) shows the exports are not dominated by one natural resource |
The natural resources trap--which holds that large
profits from natural resources can actually harm a country's development, if
mishandled--also fails to affect Argentina. Argentina is an export-based
economy with a strong, diversified industrial base that has prevented its
exports from being undermined by a single profitable natural resource; in other
words, Argentina does not have "dutch disease." In fact, Argentina's second largest export after agricultural
fodder is motor vehicles and parts (less than a million dollar difference
exists between the profits from each). Additionally, Argentina has not in
recent years tapped into a large reserve of a natural resource like Zimbabwe
did in discovering fruitful diamond fields six years ago. For this reason, the
government has not lost accountability for how the profits from a large,
profitable resource are handled. There has also been little conflict over
ownership of the prominent natural resources in Argentina; Argentina has
reduced the chances of conflict by nationalizing its largest oil firm about six
months ago.
Argentina has also avoided Collier's third trap--the
'landlocked with bad neighbors trap'--through trading globally, not only with
its neighbors, and having an acceptable (though struggling) infrastructure.
Argentina's neighbors--Chile, Bolivia, Paraguay, Brazil, and Uruguay--have not
recently suffered from conflict or infrastructure issues that directly affected
Argentina's ability to trade with those countries. A free trade agreement
between Argentina, many of its neighbors, and Venezuela--Mercosur--also serves to promote
positive, productive relations between Argentina and the nations that border
it.
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| Foreign firm investors in Argentina cite government-enforced tax rates/labor regulations and political instability as strong concerns related to their investment in the country. Argentina has recently experienced a severe lack in foreign investor confidence in the nation. |
Argentina, while it does suffer from bad governance,
is not stuck in Collier's fourth trap, "bad governance in a small
country." It does not qualify as being trapped in that way because it is
not a microstate--a sovereign state with an area of less than 1,000 km² or a population of less than 500,000--and as such
does not detract potential investors because of its small size and
unfamiliarity. Nonetheless, Argentina's history of questionable political
decisions over the last half-century has served to deter investors more and more
over time. Argentina's alternating military dictatorships, subsequent
neo-liberal policies, and its failed democratic government in 1983 resulted in
massive government debt, high unemployment rates, extremely high prices of
goods, and rampant inflation. These problems reached a peak in the 1990s/early
2000s when the country was forced to default on its debt. This decade-old
default combined with the high taxes Argentina levies on imports, the regulations it imposes on trade and labor, and its recent streak of
nationalizations have made investors wary of investing in the country and have
eliminated much-needed foreign exchange from the country's economy.
Nonetheless, Argentina's strong exports and solid growth rate (that was able to
rebound quickly after the economic collapse of 2008) have prevented its bad
governance from grossly undermining its ability to remain a middle-income
nation.
Recently, some ramifications of
Argentina's 2001 default have endangered the country's financial state, and
have left Argentina relying on faith that a federal appeals court will rule in
their favor. These "ramifications" involve hedge funds that refused to take part in a massive debt restructuring that took place in Argentina after the country
defaulted on its debt in 2001. The investors that did participate in the
restructuring--93% of bondholders, in fact--agreed to a 70% reduction in what
Argentina would pay them. A U.S. court ruling in November decided that
Argentina would need to comply with the hedge funds--dubbed "vulture
funds" by Argentina's government--and pay the defaulted creditors $1.3
billion dollars. As journalist Sujata Rao of Reuters writes, "the U.S.
court ruling upheld the principle of pari passu, meaning debtors cannot pick
and choose between creditors." However, Argentina appealed the ruling
because paying the creditors the $1.3 billion dollars would surely have forced
the country to default on debt owed to the creditors that agreed to the
restructuring. Such a default would have had detrimental global implications.
Additionally, the U.S ruling violated Argentine law. A federal appeals court
has agreed to hear the case in late February.
| Vulture funds like those Argentina is battling against have also affected poor countries in Africa and Latin America |
Nonetheless, Argentina's government
has had faith that it would not need to pay since shortly after the U.S.
hearing in November. Both President Fernandez de Kirchner and an Argentine
economic minister have released press statements asserting they would not pay
the vulture funds. They could not imagine being forced to comply with a ruling
that violates their law and would surely cause a national default. Though this
affirmation of Argentina's government's power over the petty, voracious vulture
funds may give the
country some leverage over the funds, the judge that imposed the November
ruling against Argentina--U.S. District Judge Thomas Griesa--has responded
negatively to Argentina's staunch defiance of his ruling. It would be advisable
that Argentina, instead of relying on faith that the federal appeals court will
rule in their favor, accept the possibility that the appeals court will force
them to fork up the $1.3 billion dollars they owe to the vulture funds. After
accepting this possibility, Argentina should take practical measures to reduce
the potential for a national default or reduce the impact of a possible
national default, should Argentina be forced to pay the vulture funds. Though
relying on faith is an advisable technique when no further action can be taken,
Argentina should take advantage of cautionary measures while it still has time.
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