Scuola di Dottorato in Istituzioni e Politiche Ciclo XXV S.S.D: SECS-P/02 Volver: Argentina’s tango between economic integration and isolation Coordinatore: Ch.mo Prof. Paolo Colombo Tesi di Dottorato di: Davide Tentori Matricola: 3810438 Anno accademico 2012/2013 1 2 Index INTRODUCTION p.7 PART I – ARGENTINA: PATTERNS OF ECONOMIC p. 11 GROWTH 1.1 South America and Argentina: an overview of the social and p. 12 economic development of the region in the last decade 1.1.1 Introduction and structure of the chapter p. 12 1.1.2 The regional evolution of economic and social development p. 12 throughout the 20th century 1.1.3 South America since the ‘50s: a series of ups and downs p. 16 1.1.4 What’s next? p. 22 1.1.5 Conclusions: challenges ahead p. 23 1.2 An analysis of Argentina economic policies (2003-2013) p. 25 1.2.1 Structure of the chapter p. 25 1.2.2 Setting the scene: Argentina’ s economic history since the 1950s p. 25 1.2.3 Argentina and the Kirchnerismo: an analysis ten years after p. 30 1.2.4 Argentina’s economic structure: high potential and low p. 37 competitiveness 1.2.5 Conclusion: impressive growth, insufficient competitiveness p. 51 1.3 Argentina in front of the challenge of economic development p. 53 1.3.1 Structure of the chapter p. 53 1.3.2 Economic development: a brief review p. 53 1.3.3 New structural economics: original elements and links with ‘old’ p. 55 theories 1.3.4 Back to ‘old’ theories? Factors endowments and comparative p. 60 advantages 1.3.5 Some policy recommendations for Argentina’s development p. 66 1.3.6 Focus: Small and Medium Enterprises (SMEs)’s role in p. 71 Argentina’s economic structure 1.3.7 Conclusion: the need of coherent economic policies to enhance p. 79 competitiveness and attract investments PART II – ARGENTINA IN THE CONTEXT OF SOUTH p. 81 AMERICAN INTEGRATION: AN APPLICATION OF THE GRAVITY MODEL 2.1 Regional Trade and Economic Integration in South America: p. 82 an Application of the Gravity Model 2.1.1 Research questions and structure of the chapter p. 82 2.1.2 The Andean Community (CAN) and the Common Market of the p. 84 South (MERCOSUR): history, aims, functioning 3 2.1.3 The Gravity Model of International Trade p. 87 2.1.4 The estimation of the Gravity Equation: some econometric issues p. 89 2.1.5 Data and estimation techniques p. 91 2.1.6 Results p. 95 2.1.7 Robustness checks p. 101 2.1.8 Interpretation of the results p. 102 2.1.9 Conclusions and indications for further research p. 104 2.2 Argentina in the context of regional and global trade p. 113 2.2.1 Research questions and structure of the chapter p. 113 2.2.2 The role of exchange rate variability in international trade p. 113 2.2.3 The external trade of Argentina: empirical research 118 2.2.4 Conclusions and implications for further research p. 127 PART III – A VIEW FROM THE OUTSIDE: ARGENTINA IN p. 132 THE GLOBAL CONTEXT 3.1 Argentina and the IMF: a problematic relationship p. 133 3.1.1 Structure of the chapter p. 133 3.1.2 History: from triumph… to tragedy p. 134 3.1.3 The Kirchner era and the ‘divorce’ with the IMF p. 145 3.1.4 Conclusion: from the “routine of dependency” to... a “routine of p. 152 detachment”? 3.2 Argentina and the G20: the risk of isolation and irrelevance p. 154 3.2.1 Structure of the chapter p. 154 3.2.2 The G20: an organization searching for legitimacy and p. 154 effectiveness 3.2.3 Argentina and the G20 p. 163 3.2.4 Conclusion: the risk of becoming an outlier in the global economy p. 177 3.3 Argentina and the MERCOSUR: story of an unfulfilled p. 178 promise 3.3.1 Structure of the chapter p. 178 3.3.2 MERCOSUR: history and achievements p. 179 3.3.3 Argentina: from integration…to isolation p. 184 3.3.4 Conclusion: regional integration at a standstill p. 191 3.4 Argentina in the neo-liberal order: is there any way to play a p. 193 role? 3.4.1 Structure of the chapter p. 193 3.4.2 Economic power in a changing global environment p. 199 3.4.3 Argentina and its role as an emerging actor p. 206 3.4.4 Conclusion: Argentina’s wasted potential to become a regional p. 206 power APPENDIX: INTERVIEWS TO ARGENTINE EXPERTS p. 208 Interview to Martin Schorr Researcher, FLACSO Argentina (Latin p. 209 American Faculty of Social Sciences) 4 Interview to José Maria Fanelli, Senior Researcher at Study Centre of p. 212 State and Society (CEDES), Buenos Aires, and Professor of Economics at the University of San Andrés, Buenos Aires Interview to Verónica Moreno, former advisor at the Foreign Relations p. 215 of the Presidency of Argentina CONCLUSIONS p. 225 REFERENCES p. 231 ACKNOWLEDGEMENTS p. 250 5 6 INTRODUCTION Tango is the traditional dance of Argentina: emotional and dynamic, it perfectly represents the features of a country which is a paradox between astonishing beauties and excellencies and disappointing performances. Volver is one of Carlos Gardel’s most famous and emotional tangos: its melancholic notes suit the image of a country trapped within this paradox. “Somos number one, como también lo peor, con la misma facilidad”: we are the best, as well as the worst, with the same readiness. These words, from the song “La argentinidad al palo” by the Argentine band Bersuit Vergarabat, well convey the idea of a country that does not know mediocrity, but can just perform either too well or too badly. These features of the Argentine people involve not only the society but also the economy of the South American country. This is why this thesis aims at describing a country that has not taken advantage of its huge economic potential, and has often dissipated it implementing economic policies that prevented Argentina from becoming one of the most rich and developed countries in the world. This has happened several times over the course of the last decades (especially after World War II), and also in the last decade, after the harsh economic crisis suffered in 2002 following Argentina’s default on its public debt. Since then Argentina has been ruled by the party “Frente para la Victoria” (Front for Victory), a peronist movement led by Néstor Kirchner (died in 2010) first and then by his widow Cristina. During this period the country has experienced an unprecedented economic growth and a remarkable social development, a process which allowed millions of citizens come out of poverty. However, despite these remarkable economic and social achievements, I argue that inappropriate economic policies implemented during this period did not help Argentina to grow further and were detrimental for the country’s role as a relevant regional and global (as a member of the G20) member. Protectionism, an unfriendly attitude to foreign investors, ineffective industrial policies are leading Argentina to a position of self-isolation within the international economic community, with consequences that could be very negative for the country’s future in the medium-long term. The main research question of this thesis is aimed at exploring the relations between the internal dimensions of Argentine economic and political development and the external dimensions, in order to assess the country’s potential in terms of regional (MERCOSUR – South American level) and global competitiveness. It is divided in three parts that adopt a variety of approaches (exploring economic institutions and policies, econometric analysis, international political economy and international relations) that have a clear common thread. Their purpose is to highlight how decisions and economic policies have affected the country’s domestic growth, its external competitiveness, its role on the global economic stage, and the reputation it has within multilateral economic fora such as the International 7 Monetary Fund (IMF), the Group of 20 (G20) and the Common Market of the South (MERCOSUR). The first part of this research, entitled “Argentina: patterns of economic growth”, provides a comprehensive analysis of Argentina’s economic development model that has been implemented over the course of the last decade. In clear contrast with the neo-liberal policies of the 1990s, the Kirchner governments adopted policies characterized by a strong intervention of the State in the management of the economy and by protection of national industries. I will try to highlight the flaws of this model, which have prevented Argentina from moving towards the status of a fully developed country. I will argue that the export-led growth model, although it did not lead to a ‘re-primarization’ of the economy, relied too much on the agricultural exports in order to increase the government revenues and on a weak exchange rate as the main tool of industrial policy. Argentina would need different policies to achieve growth that might last even in the long run, which has to be pursued through structural reforms rather than only by periodical currency devaluations. The last chapter of this part will provide a comparison between three different development theoretical frameworks: structuralism, a theory elaborated by the Economic Commission for Latin America and the Caribbean (CEPAL) based on public intervention fostering the development of a national industry through the adoption of protectionist and inward- looking policies; neo-liberalism, characterized by privatizations and public disengagement from the management of the economy, which is entirely left to the rational actions of markets; new structural economics, a relatively recent paradigm that tries to be halfway between the first two theories, and tries to corrects the excesses of neo-liberalism acknowledging the importance of the public action in order to address market failures. The second part of the thesis is entitled “Argentina in the context of South American integration” and offers an empirical study of the trading flows in the region and in Argentina. Through the implementation of the Gravity equation, an econometric model particularly useful to explain the determinants of trading flows, I will try to assess how regional trade in Latin America is influenced by variables such as the membership to regional organizations for economic integration, like the Andean Community of Nations (CAN) and the Common Market of the South (MERCOSUR) and other macroeconomic determinants such as the bilateral real exchange rate. The following section will focus on a similar econometric analysis of Argentina’s trade patterns with some key partners (Brazil, Paraguay and Uruguay, as members of the MERCOSUR, and the European Union, China and the United States). The third part of this work is dedicated to provide “A view from the outside: Argentina in the global context”. I will analyze Argentina’s behavior and role in three important international organizations: the International Monetary Fund (IMF), the Group of 20 (G20) and MERCOSUR. The aim is to assess, also from an historical perspective, whether the country’s relationship with these organizations has 8 been conducive to development within the global economic system or, on the contrary, Argentina has acted as an ‘outlier’ in international economic relations. This might drive the country towards a position of isolation which might constrain its potential as a main actor both in South America and in the current context of a changing multilateral system. An appendix, containing three interviews, concludes this work. The interviews are the result of a short period of research conducted in Buenos Aires in August 2012. . The first and second interviews are mainly focused on Argentina’s domestic economic performance and development with respect to its international competitiveness. Martín Schorr, researcher at the Latin American Faculty of Social Sciences (FLACSO), and José Maria Fanelli, Professor of Economics at the University of Buenos Aires, will provide two alternative views of the economic and industrial policies adopted by the Argentina’s government during the last decade. The third interview was given by Verónica Moreno, a former advisor at the Foreign Relations of the Presidency of Argentina and offers a broad perspective of Argentina’s role and position within the global system A preliminary digression about the methodology is necessary. The thesis is heterogeneous in terms of the different research methods and approaches implemented: the potential drawbacks in terms of lack of consistency among the different parts are avoided by the fact that all the three parts contribute to provide a complete and detailed analysis of Argentina’s economic performance from different angles and perspectives. The first part is intended to be a useful and necessary introduction that offers an analysis of the model of development followed in Argentina during the last decade. It then compares different theories of economic development in order to highlight strengths and weaknesses of each approach and to convey the message that economic policies should be designed ex-post, after a careful consideration of a country’s situation in terms of resource endowments. The second part is empirical and offers a quantitative analysis of Argentina’s trading flows in the context of South American integration. The Gravity model of international trade, through the Poisson Pseudo-Maximum Likelihood Estimation technique, was proved to be the most efficient econometric methodology to research on these issues. The main objective of this part is to assess the impact of economic organizations and of key macroeconomic variables (i.e. the bilateral real exchange rate and its variability) in promoting or depressing regional trade. This will be particularly useful with respect to the troubled economic relationship between Argentina and Brazil. Finally, the third part adopts a methodology typical of the International Political Economy (IPE) analysis. The three case studies on the IMF, G20 and MERCOSUR will be included into a theoretical framework of negotiating behavior adopted by emerging powers, and analyzed from the perspective of neo-liberal institutionalism which, in my view, is the approach that suits the current context of international economic relations best. 9 To conclude, the three parts are linked by a common thread which is aimed at assessing in which direction Argentina’s “tango” is moving, from the domestic to the regional and global level. The country’s economic experience has been characterized by swings between growth and recession, indebtedness and fiscal soundness, production diversification and technological upgrade and re- primarization ,further pushes for integration with the rest of South American countries and the world and progressive isolation. Where is Argentina going, and where should it go? This thesis will try to offer an answer to these questions. 10