Research Topics with Explanation SHOULD THE GOVERNMENT PROV.docx
Econ 326 Essay -2
1. Professor Feliciano
Economics 326
Foreign Direct Investment in Argentina
The adoption of policies to foster initiatives to promote foreign direct investment
has done wonders in ailing Latin American economies. During the 1990s, Argentina had
become a ‘poster child’ for capital inflows, with receiving over $76 billion from 1992 to
2001 – resulting in the massive expansion of Transnational Corporations. Foreign Direct
Investment aided in financing current account deficits, contributed to investment, fostered
economic growth, all while increasing employment – indirectly and directly. 1 Foreign
investors, at one point in time, were wildly enthusiastic about investing in Argentina, as
depicted in the aforementioned statements. However, in Figure 1 it is evident that FDI
has endured many major fluctuations in Argentina in the past two decades and has been
on a steady decline, which will later be explained by a in depth analysis of Argentina’s
Rule of Law and Property Rights.
1 Chudnovsky,Daniel, and Andres Lopez. "Foreign Investment and Sustainable Development in
Argentina." Working Group on Development and Environment in the Americas, n.d. Web.
<https://sustainabledevelopment.un.org/content/documents/857argentina.pdf >.
2. Figure1: Argentina’s GDP Growth
For a decade, in the 1990s, the foundation was the Convertibility Law of 1991.
The Convertibility Law aimed to eliminate hyperinflation, in order to attract foreign
investment with the establishment of a Currency Board. The Currency Board’s main
intention was to ensure parity between the U.S. Dollar and Argentine Peso. However, in
time the Currency Board just exacerbated the issues they were meant to repair, and public
debt sky rocketed as Argentina was unable to withstand external shocks. In December of
2001, under the rule of Argentina accepted a $39 billion dollar bail out by the IMF.
Immediately, foreign investors are able to view the volatility of Argentina’s economic
system – making investment less attractive. De La Rua’s policies failed and eventually
Argentina’ government collapsed in 2001. Following De La Rua, President Duhalde led a
transitional government in Argentina that worked swiftly in floating the peso. Shortly
following Duhalde’s regime, Cristina and Nestor Kirchner came into power. Nestor
Kirchner refused to follow the regulations of the IMF – he was successful in combatting
inflation and even achieved a trade surplus, presenting Argentina as an attractive
investment. However, after Nestor Kirchner relinquished power his wife, Cristina
Kirchner, came to power and Argentina’s Rule of Law, Property Rights, and overall
economy deteriorated rapidly.
Rule of law is defined as providing an enforcement of the law or contracts. When
there is a blatant lack of law enforcement, valid agreements and the law are easily
breached. Property law is defined as the purchaser’s knowledge of the seller’s right to
sale their property –while also ensuring the buyer that the property, once bought, cannot
be arbitrarily confiscated by any individual or government. Rule of law along with
3. property law, are great measures, which aid in allowing us to determine whether a
country is a viable place for foreign firms to invest in. According to the 2015 Index of
Economic Freedom, “[Argentina’s] justice system is afflicted by scores of tenured but
incompetent and corrupt judges. The lower courts are highly politicized, and the
relatively independent Supreme Court has received heightened pressure from the
government.”2 Corruption within the judicial system prevents the existence of a system
that is able to enforce Rule of Law. The lack of law enforcement discourages firms from
entering into a contract with the knowledge that their agreement may be breached,
without repercussions. Property Law is also fairly low in Argentina, Figure 2 below
elucidates how Argentina has been endured periods of intermittent decline and currently
in year 2015 has a Property Rights Index of 15 relative to the world average, which has a
Property Rights Index of 40. As a country with a relatively low Property Law rating, in
conjunction with the world average, buyers are reluctant to purchase any properties or
engage in any further economic transactions. A distinct relationship can be drawn
between Rule of Law, the level of property rights, and the trends in FDI for a specific
company. According to Mark David Nieman and Cameron G. Thies, “democracies with
low levels of property rights protections are less able to attract FDI than their autocratic
counterparts” This resonates well with the situation in Argentina, as it fits the criteria
listed by Nieman and Thies of a democracy with a low level of property rights.
Argentina, perhaps, is the prime example for Nieman and Thies’ case.
2 “Argentina.” Economy: Population,GDP, Inflation,Business, Trade, FDI, Corruption. The Heritage
Foundation. n.d. Web. http://heritage.org/index/country/Argentina.
4. In addition to a declining rate of FDI over the years as seen in Figure 1 –
Argentina, under Cristina Kirchner, has traveled to the extent of nationalizing Spanish oil
company, YPF/Repsol. According to Mr. Corey Flintoff, Argentina’s Cristina Kirchner
proposed the nationalization of YPF on the basis that YPF/Repsol was guilty of taking
their profits back to Spain. In taking their profits back to Spain, YPF/Repsol left
Argentina without the resources to develop new energy sources. In previous years,
Argentina had breached the property rights of many of their foreign investors and
nationalized two utility firms and an airline company. In nationalizing firms, investors are
cautious when thinking to invest in Argentina, since many believe that they are at risk of
losing their investment to Kirchner’s actions. Due to the lack of Foreign Direct
Investment, it is hard to believe Argentina is able top further develop, successfully, as a
country. To illustrate the relationship between the inherent lack of a distinct judicial
system and the decline in FDI, following the nationalization of YPF, their output of crude
oil fell by 0.7%. Kirchner’s actions also resulted in runaway inflation and distorted
exchange rates.3 This elucidates how crucial it is to award foreign firms’ adequate
protection over their assets.
3 “Argentina.” Economy: Population,GDP, Inflation, Business, Trade, FDI, Corruption. The Heritage
Foundation.n.d.Web. http://heritage.org/index/country/Argentina.
5. Figure 2: Property Rights Index of Argentina vs. World Average
As we evaluate the decline of FDI in Argentina, over the past two decades, we
can turn to the distribution of industries where FDI has been most prevalent. If we look at
figure 3, the sector with the largest capital contributions from FDI was Oil and Mining at
22.5% and 21.3%. The third largest sector of FDI is the financial sector at 14.2%.
Following the financial sector is the chemical and plastic industry at 8.2%. Though this
data is a bit dated, and the amount of information available, at the moment, on
Argentina’s economy is lacking – it is evident that Cristina Kirchner may be withholding
and/distorting economic data. Since the aforementioned data only leads up to the
nationalization of YPF, we are lack relevant information to decipher the state of
Argentina’s economy, now. Though, from the news and many other sources that may
hold bias, we can conclude that Argentina has experienced many drawbacks such as
higher inflation, less Foreign Direct Investment, and a steady decline in the output of
crude oil.
6. - Main Invested
Sectors
2013, in %
Oil sector 22.5
Mining sector 21.3
Financial Sector 14.2
Chemical and plastic
industry
8.2
Machinery and equipment 6.9
Food industry and tobacco 5.3
Communication 5.2
Trade 4.0
Metallurgy 2.6
Transport 2.4
Figure 3: Distribution of Industries where FDI is most important
We can also review the composition of countries that have the highest percentage
of FDI in Argentina. Referring to figure 4 below, the country that has the largest share in
foreign capital contributions in Argentina is the USA with 21% in the year of 2013.
Following the USA is Spain with 18%, and the Netherlands in third place with 9%. Once
again, we need to regard the fact that this data is a bit outdated. And, after the
nationalization of YPF, many foreign investors have lost incentive to invest in a country
that has the ability to usurp its assets. Prime example would be Spain – Spain was not
particularly pleased about the nationalization of YPF. After nationalizing the firm, Spain
began to pull out of Argentina, in effect shooting Argentina’s level of FDI. However, the
numbers after the nationalization of YPF have been touchy since there has been no ready
available data since 2013.
7. Figure 4: Composition of Countries that have the highest percentage of FDI.
Throughout the last two decades, Argentina’s GDP growth rates have experienced
numerous fluctuations, as their economic structure appears to be unhinged. In light of the
government that has caused unprecedented amounts of unrest, it is inevitable that
Argentina’s economy is deteriorating. Overall, from 1996 to present, Argentina has
experienced large fluctuations in their GDP growth rates, which are noted in Figure 1,
above. Foreign direct investment appears to be a crucial source of revenue for
Argentina’s economy since it aids in promoting economic growth while increasing
employment. The addition of job opportunities leads to more output, ultimately
illustrating that Argentina is dependent on foreign direct investment as measure of their
success.
Though Argentina’s GDP growth has endured numerous fluctuations, Argentina’s
export rate appears to be on the rise. The reason behind the minor fluctuations we observe
is due to economic crises inflicted by the ever-changing government. Overall, they
experience an uprising trend, which went from roughly $2,000 billion dollars in year
1996 to $6,000 billion dollars in the most recent year, seen in Figure 5. Their economy
Main Investing Countries 2013, in %
USA 21.0
Spain 18.0
The Netherlands 9.0
Chile 7.0
Brazil 6.0
Canada 5.0
Germany 4.0
Switzerland 4.0
Urugaray 3.0
Luxembourg 3.0
8. has experienced export rates as high as over $8,000 billion dollars. The main reason for
the increasing exports, over the years is Argentina’s wildly successful agricultural sector.
Some of Argentina’s success in exports can be attributed to capital received through
foreign direct investment, since integration between countries allows for an expanded
market for trade.
Figure 5: Argentina’s Export Rate
Figure 6 illustrates that there is a distinct positive relationship between foreign
direct investment and minimum wage. Since foreign direct investment positively affects
Argentina’s economy as a whole, it comes to no surprise that the country’s average
monthly wage is increasing at a steadily rate as well to support the living conditions and
standards of the citizens. In 1994, the unemployment rate was roughly 12.1% and
eventually rose up to as high as 18.3% by year 2001. However in the past 5 years, it is
evident that there has been a sharp decline in the unemployment rate, which has remained
between 7% to 8%. Argentina’s unemployment rate and foreign direct investment are
also positively correlated. Since foreign direct investment aids in the creation of job
9. opportunities in the market, which allows for more people to enter the job market –
leading to a decline in unemployment. Since living standards have increased, the job
market is experiencing a large amount of competition. Under Kirchner’s Populist
government, education rates are increasing at a steady pace. From the mid 1990s to
present, school enrollment has increased from approximately 49% to 76%. The
government understands the importance of the future generation’s education and level of
intellect, so they put forth efforts ensure children of the country are receiving proper
education.
Figure 6: Argentina’s Minimum Monthly Wage
As policy advisors in Argentina, we observe that Foreign Direct Investment acts
as only an asset to the nation’s economy. Though Argentina’s economy, with the lack of
Rule of Law and Property Rights, is deteriorating and losing large amounts of foreign
capital – FDI can aid their ailing economy tremendously. Foreign direct investment could
help the country to achieve economic growth while creating more job opportunities, and
an expanded market for trade. It is evident that GDP steadily increases as FDI in
10. Argentina has increased. As attractive as Foreign Direct Investment may sound,
Argentina has to tighten their Rule of Law and Property Rights in order to grab the
attention of foreign investors. Until Argentina revolutionizes their Judicial and Executive
branches, and impeaches Cristina Kirchner, their levels of FDI will continue to decline.