Brazil and Argentina
The tortoise and the hare
Mar 19th 2008 | BRASÍLIA AND BUENOS AIRES
From The Economist print edition
Why those wimpish Brazilians are catching up with Argentina's racier economy
TAKE two neighbouring economies, both heavily dependent on commodity prices to make their trade figures look good. Give one an orthodox monetary policy, watch it embrace foreign investors and float its currency. Hand the other over to mavericks who have resorted to fixing prices, banning or taxing some of their own exports and baldly lying about the inflation rate. The result? The rascal—Argentina—continues to grow at a blistering 9% clip, while by contrast well-behaved Brazil plods along (see chart). Is it time to rewrite the economics textbooks? Argentines would like to think so. But there are signs that Brazil may yet come out ahead.
Both countries recently reported surprisingly strong GDP numbers. In the last quarter of 2007 Brazil grew at an annualised rate of 6.4% and Argentina at 8%. But the different reaction to these figures in the two countries was telling. Whereas Brazil's government showed concern, Argentina's touted the news as a vindication of its contrarian wisdom.
In Brazil Guido Mantega, the finance minister, announced a tax of 1.5% on foreigners' purchases of Brazilian treasury bonds to cool capital inflows and slow the steady appreciation of the currency, the real. In a faint echo of Argentina's approach, he said that he wanted to forestall a large current-account deficit. But Henrique Meirelles, the governor of the Central Bank, said that his top concern was still inflation (which cheaper imports help to control). President Luiz Inácio Lula da Silva concurred, describing inflation, long a Brazilian bugbear, as a “degrading disease”. Both Mr Mantega and President da Silva often say they would prefer steady growth at 5% a year for 15 years to a faster, bumpier ride towards riches.
In Argentina such caution sounds wimpish. Its policymakers seem determined to demonstrate that all Latin America needs to grow as fast as China is to cast off the straitjacket of “neoliberalism” and its main backers—those beastly foreign bondholders and the IMF. They gleefully point out that consensus forecasts for Argentina have predicted a slowdown for the past five years. “Those economists have been wrong so many times,” says one confidant of Cristina Fernández, the president, and her husband and predecessor, Néstor Kirchner, “maybe it's time to find some new ones.”
To understand how two nominally left-wing leaders came to embrace such different policies, look back at how their respective countries responded to economic troubles in 2001-02. Argentina, after several years of slump, abandoned a fixed exchange rate, devaluing the peso and defaulting on its public debt. Brazil, which had floated its currency in 1999, responded to turbulence in its currency and debt markets in 2002 by tightening fiscal and monetary policies.
Argentine officials have since been determined to keep the peso weak, mainly to protect local industry. Devaluation worked: the economy roared back to life. But by 2005 most of the country's idle plant was back in action, and new investment was insufficient to sustain rapid growth. Mr Kirchner loosened the government's purse strings, doling out increases in wages and pensions. Growth has continued, but inflation jumped to about 20% a year. Nobody knows the exact figure, since the government massages it. “Eventually, [the country] will lose track of where inflation is,” says Carola Sandy of Credit Suisse, an investment bank. “That's when it gets really risky, because people will start having second thoughts about leaving money in banks.”
By contrast, Brazil's Central Bank pursues a target for inflation, rather than the exchange rate. The real has appreciated on the back of record commodity prices, prompting grumbles from industrialists. But the Central Bank has kept its benchmark interest rate at 11.25% since last September. Even so, domestic demand is strong. With imports soaring, the economy is likely to post a small current-account deficit this year for the first time since 2002.
Argentina's presidential couple never miss an opportunity to take credit for breakneck economic growth under their administration. But according to Daniel Volberg of Morgan Stanley, another investment bank, soaring soyabean prices may have had more to do with it than the Kirchners' economic recipes. Had world GDP growth and commodity prices played out according to 2003 forecasts, Mr Volberg reckons that Argentina would have grown at just 3.7% a year. By contrast, only 1.6 percentage points would have been stripped from Brazil's growth.
So although both countries have benefited greatly from favourable external conditions, Brazil is better placed than it might appear. Because of low inflation, in real terms the growth of Brazilian incomes has started to keep pace with those of Argentines. But Brazil has far more room for manoeuvre if the outlook turns choppier. It is free to cut interest rates or increase spending. Argentina, by contrast, has set itself up for a hard landing. Any decrease in export revenues would damage its tax base, and its Central Bank could hardly print more money than it does already.
Argentina has indeed shown that a country can get away with sacrificing price stability in favour of growth for far longer than the naysayers claimed. But eventually, as in every other country in the world, the amount and productivity of its investment will determine its economic performance. With inflation rising ever higher—and becoming harder to calculate—that investment will prove hard to come by. Foreign direct investment to Argentina rose just 12% last year, compared with an 84% increase (to a record $35 billion) in Brazil, according to the United Nations Economic Commission for Latin America. Brazilians can be forgiven occasional bouts of envy at their neighbours' dash, but good things come to those who wait.
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