Argentina and Brazil – The Different Paths They Followed Since 2000

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This paper examines the different financial paths followed by Argentina and Brazil since 2000. The writer starts by tracing the economic history of the two states from the colonial days to the present day. The evaluation of the historical economic milestones is meant to create a clear insight into the forces that have shaped the two economies. The main emphasis however will be on the different paths adopted by the two economies and the cause of the present economic disparities between the two states. Today Brazil stands out as rich and more powerful whereas Argentina is still on its path towards the realization of this goal.

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The aggregate growth of Latin American economies has been significantly rising since the beginning of 2000. Most of the countries in the region have had a stable inflation with an improved current account balance that has led to a consistent annual growth rate of about 4%. The improved economic performance in Latin American economies is an indication of the careful macroeconomic plan management and the continuous dedication to structural reforms.

The regional economic growth rate tends to hide the clear picture of the individual countries. This is because the impressive regional average growth rate is boosted by the economies of Brazil, Chile and Mexico. The three nations have consistently registered an average annual growth rate of at least 4% (Torre and Schmukler, 2007). Other nations in the regions such as Argentina, Venezuela and Colombia register an annual growth rate of less than 2% each year. The current disparities in the growth rate have been attributed to the different economic paths that each of the nations has adopted especially in the 90s. Brazil has diligently pursued the path to economic growth after undergoing severe global economic crisis.

Background information

Argentina encountered serious inflation problems from 1989. This was to be countered by the convertibility regime that was enacted in 1991. The regime was meant to put in place rapid and robust measures to ensure recovery. The regime strategy was to put the value of the peso at the same value as the dollar. It also constrained the autonomy of the central bank as a sole money-making institution, besides the “structural reforms that were aimed at improving efficiency and productivity” (IEO, 2003).

Towards the end of 2000, Argentine’s access to the global capital market was significantly reduced. The IMF at this very time responded to Argentine’s case by giving financial support to the country. However, continued deterioration of the international macroeconomic conditions, volatile political systems and lack of appropriate reform measure further hampered the country’s access to the capital market. The development in the banking system was further hampered by the deposit run programs. Failure by the Argentine government to comply with the IMF regulations caused the IMF to stop the disbursement of the funds.

In the case of Brazil, its economic problems are traced from the small recession that occurred in 1888 following political unrest in the country. The unrest resulted from an agitation to “end slavery as well as republican transition” (Adrogué, Cerisola, and Gelos, 2006, p. 18). Another source of problem to the economy is traced to the economic boom in 1889 that was as a result of the liberal monetary reforms. In 1898, Brazil faced the most severe recession causing it to reschedule its debts

Brazil embarked on a massive reconstruction and stabilization plans from the mid-90s which was supported by renewed political reforms. The approach helped in setting stage for domestic economic growth in the subsequent years. Torre and Schmukler (2007) observe that Brazil consistently repaid her debts all throughout the nineteenth century. This is contrary to the rest of the Latin American countries which often defaulted in repaying their external debts.

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The differences in the rate of recovery from major economic turndowns have been another cause of the differences in economic performance. The rate of recovery is influenced mainly by the cost and ease of obtaining foreign investment. Brazil’s spread in 2000 rose from 630 to at least 700 basis points, whereas Argentina’s spread over the same period rose from 530 basis points to 690. Major external risks that have consistently posed a threat to the growth of both economies have been; fluctuations in oil prices, poor external financial conditions and global economic problems.

Brazils’ Growth Strategy

The Brazilian economy has been on a path of positive recovery since 2000 with an annual growth rate of 4% and inflation rate falling to a mere 6%. Unemployment and interest rates have been declining since 2000 whereas the exchange rate remained much stable. This success is attributed to the county’s commitment to the pursuit of relevant economic policies. Adrogué, Cerisola, and Gelos (2006, p.14) point out that some of the important policies that have helped Brazil regain from hard economic times include; “fiscal adjustment, inflation targeting regimes and focusing more on structural reforms.”

The structural reforms and other policies have allowed Brazil an entry into the global capital market. The good economic performance has enabled Brazil to service most of her global support debts leading to more support. Other policies that have been pursued were aimed at securing the economy against external shocks. The authorities have also been more alert to develop more strategies to cushion the economy further from vulnerability. There is a need for the government to pursue further economic reforms to make the economy

Continued commitment to structural reforms will ensure a sustained growth of the Brazilian economy. It is worth noting here that it is difficult to maintain a continuous process of structural reforms, however, this is the only proven path to gaining economic growth. The Brazilian government reform measures on social security fund system for workers in the private sector as well as the introduction of legislation on fiscal responsibility have often been singled out as the most outstanding reform measures towards economic stability.

There is still more room for more reforms and legislation to improve the economy more. Adrogué, Cerisola, and Gelos (2006, p.18) suggested that there is need to “regulate the pension funds in the private sector, monitor contributions to the social security fund by civil servants, indirect taxation and corporate governance.” There is also need to focus more on privatization programs to allow more private investment.

The Brazilian government has also been keen on developing a favorable investment climate both to the local and foreign investors. This has been achieved by pursuing ways of maintaining political stability in the country. This has allowed the country access to the international market where it can sell goods and services produced locally. Another important area of investment for every country aiming at attaining a high level of economic development is education. Investment in education improves a country’s human capital to effectively support the growth of the economy. Among the policy

Brazil began realizing economic growth from the mid-90s. Adrogué, Cerisola, and Gelos (2006, p.14) indicate that the achievement was after the “implementation of the real plan in 1994.” The real plan was further strengthened by the inflation targeting regime and the plastic exchange rate system towards the end of the millennium. The country also at the same time embarked on a general fiscal reform process aimed at reinstating price control. The other strategy as pointed out by Adrogué, Cerisola, and Gelos (2006, p. 14) was to enact a monitoring scheme to reduce risks on the exchange rate. These strategies contributed to high economic growth rate that was Brazil achieved in early 2000.

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Trade liberalization strategy has also been cited as on major reforms that enabled Brazil gain economic growth. The reforms were enacted at the beginning of the 90s. Trade liberalization together with the flexible exchange rate improved the movement of trade products in and out of the country, translating into a significant economic growth rate.

The Brazilian government also pursued and enacted legislations that improved “the supervisory systems for the financial system.” Adrogué, Cerisola, and Gelos (2006, p. 15). More reforms in the financial sector were also carried in the banking sector. The public banks’ reforms that were implemented in the mid-90s helped to increase financial distribution in the economy. The government further targeted implementation of policy structures in macroeconomics which led to reduced instability in interest and exchange rates.

Investment in infrastructure development was another major step that impacted positively on per capita income growth. Significant infrastructure that helped improve Brazil’s per capita income included; telephone, energy and road. Aiolfi Catão and Timmermann (2006, p. 35) warn of the recent decline in public infrastructure development investment as an eminent constraint to the projected growth. He points out the energy crisis experienced by the country in 2001 and the pressure at the ports and the road transport network as indicators of constraints to economic growth resulting from insufficient public infrastructure.

Argentina’s Growth Strategy

Argentina’s economic crisis dating from the late 90s to the present time has been explained with differing theories. Studies point out a number of factors that exposed Argentina’s economy to the vulnerability. The factors point a finger at the policies implemented by the country at various times. Most prominent of these policies include; the extreme negligent fiscal policy: (IEO, 2003) report confirms that the government failed to institute measures to ensure the fiscal surplus gained during the rapid growth times is saved to cushion the economy during recessions. The result was lack of an economic buffer during the economic recessions that exposed the economy to risks.

The government adopted the convertibility regime as a growth strategy in the late 90s. The regime however did not adjustments in the exchange rate at minimum depreciation rates. While enacting the convertibility regime, the government failed to consider its physical model of trade that opened it to external shocks. The IEO (2003) report adds that “lack of price and wage flexibility” also compromised the effectiveness of the convertibility regime.

This resulted in a state where the exchange rate of the peso could not adjust accordingly to the forces of depreciation. The situation was even worse in the late 90s when the US dollar was stronger in the market and the Brazilian real lost value. This phenomenon led to a sharp rise in the exchange rate that effectively made the country lose its competitiveness. At the same time, the country also faced a sharp decline in exports.

High dependence on capital inflow at the expense of developing a domestic savings scheme has been pointed out as a weakness that led to a retarded development of Argentina’s local financial market. This was further aggravated by the “sudden stop” of the international capital flow to the country in 1998 (Motamen-Samadian, 2006, p.89). The cost of raising capital from the global capital market went up at this time. The convertibility regime and the small export division could not allow Argentina to adjust to the external shock through a quick drop in the exchange rate. The aftermath of the debt dynamics left Argentina with only one option: to restructure the debt.

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Another commonly cited aspect that contributed to the crisis is the structural inflexibility as well as the lack of appropriate reforms to solve emerging economic problems. The IEO (2003) reports point out that “provisions in the convertibility regime required that adjustments in the exchange rate occur when prices change.”

Motamen-Samadian (2006, p.99) suggests the best way out would be to allow exchange rates through “adjustments in the nominal exchange rate.” This problem was experienced by Argentina in the mid-90s after the appreciation of the US dollar against the peso. The expected price fall to pay off the appreciated dollar was not realized. The IEO (2003) report indicates that other reform areas such as “product market, foreign trade and infrastructure” have been so slow to meet the changing requirements.

There were efforts to remove trade barriers but this was not done to completion. The country maintained some restrictions to trade which relatively hampered its growth. Trade restrictions reduced the amount of foreign exchange earned by the country. As a result, the country was not able to re-service its external debts. There was a need for a substantially large depreciation in the real to offset a shock like that of the dollar and the economic recession of 2001. The current account deficit experienced by the country throughout the 90s was a clear indicator of lack of appropriate structural reforms.

The political and institutional frameworks adopted by the country have also been singled out as ineffective in terms of empowering the federal government to deal with crises. The IEO (2003) report supports the most prominent of them is the electoral politics which is hampered “fiscal adjustment in the provinces.” The federal government had entrusted the provincial government with power to incur huge expenditures on public issues. The practice was not healthy for the growth of the economy as this considerably altered the fiscal policy. In the same vein, poor governance and corruption practices largely tainted the image of the government, especially at the international levels.

The period of the 90s was characterized by constructive global economic climate. Argentina was one of the nations that enjoyed the good global economic conditions of the times. However, towards the turn of the decade, events changed and the global economy went through a recession. Argentine economy did not respond rapidly to the changes in the economy as a result of the convertibility regime and lack of appropriate structural reforms. What followed was a series of external shocks that impacted negatively on the economy. The IEO (2003) counts the “Russian/ LTCM crises in 1998, devaluation of the Brazilian real and the appreciation of the dollar in the 90s” as the major external shocks that almost brought the Argentine economy to its knees. The recession in 2001 lowered the country’s export sector.

The Argentinian government further had a problem of debt dynamics which severely impacted the policy options. Motamen-Samadian (2006, p.89) observed that the “combination of large stocks and external debts exposed the country to more risks and contributed to a retardate growth that emanated from increased ratio in debt to GDP.”

In the 90s, the Argentine banking system was considered one of the best, especially for emerging markets. Aiolfi Catão and Timmermann (2006) observe that the sector was more secure in terms of “prudential standards, liquidity as well as capitalization.” This was one of the factors that seen to support the convertibility regime. The issue of the central bank serving as the final resort lender was restricted. Tables turned from 2001, the banking sector started experiencing the accumulated effects of economic turndowns and the contentious policy moves on banking. Aiolfi Catão and Timmermann (2006, p.18) argue that the strategies the government applied to depart from the convertibility regime were not supportive of the banking sector. Such strategies included; instituting actions blocking deposits, and requiring that banks with assets and liabilities dominated in dollars convert to pesos weakened the banks even more.

Data Analysis

Inflation problems have been a major economic issue for Latin American regional countries. Adrogué, Cerisola, and Gelos (2006, p.19) indicate that the region’s inflation rates hit a staggering 500% in 1990 in which Brazil and Argentina’s economies were hard hit. Argentina recorded a record high inflation rate of 3080% in 1990 which steadily decline to zero by 1993. Brazil on the other hand struggled with inflation issues from a record high of 3000% in 1990. Inflation rates steadily declined to 500% in 1993 before shooting up again to more than 2000% by 1994.

Brazil has however maintained a commendable economic growth rate especially in the years after 2000. IEO’s (2003) report indicates that Brazil’s “annual percentage changes in real per capita GDP” rose from 0% in 2000 to 3% in 2001. This was a good improvement in a range of one year considering the economic state the country was raising from.

Argentine case has been a sorry one within the same period. The country’s annual percentage change in real per capita GDP hit 0% in 1998. Aiolfi Catão and Timmermann (2006, p.21) observe that the economic situation continued worsening and by 2002, the annual percentage change in per capita GDP was a desperate -11%. The IMF world economic outlook data records Argentina’s annual percentage change from 1998 – 2003 to an average of -2.6% (Aiolfi Catão and Timmermann, 2006, p.19). This was a poor performance compared to Brazil which within the same period maintained a constant 0.0%. The economic output volatility from 1990 to 2002 had an average percentage change in standard deviation of 6.7 compared to Brazil which had a deviation of 2.0.


Inflation problems pose a major risk to most economies especially the emerging markets. The economic models adopted by Argentina and Brazil can be used to explain the current differences in the economic positions of the two countries. The convertibility regime and the fiscal policy adopted by Argentina in the mid-90s have been pointed out by commentators as the main factors that contributed to the escalation of Argentina’s economic crisis. Brazil on the other hand focused on the implementation of structural reforms that have seen its economy grow to higher levels.

Reference List

  1. Adrogué, R., Cerisola, M., and Gelos, G. (2006). Brazil’s Long-term Growth Performance- Trying to Explain the Puzzle. IMF Working paper WP/06/282. Web.
  2. Aiolfi, M. Catão, L. and Timmermann, A. (2006). Common Factors in Latin America’s Business Cycles. IMF working paper WP/06/49. Web.
  3. IEO. (2003). The Role of the IMF in Argentina, 1991-2002 Issues Paper/Terms of Reference for an Evaluation by the Independent Evaluation Office (IEO). Independent Evaluation Office of IMF. 
  4. Motamen-Samadian, S. (2006). Economic and Financial Developments In Latin America. New York: Palgrave Macmillan.
  5. Torre, A. and Schmukler, L., S. (2007). Emerging Capital Markets and Globalization: The Latin American Experience. California: Stanford University Press.

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