The Takeoff of the Argentine Economy: Engines Ignited?

As the second half of the year begins, Argentina’s economic challenges remain critical. The government has managed to curb hyperinflation and is on its way to resolving the monetary chaos. However, public attention is now shifting towards economic growth.

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When will the Argentine economy start to grow?

First, it is essential to understand that a country needs a stable macroeconomy to achieve sustained growth. Achieving fiscal balance quickly has been the foundation of the current economic program and has helped reduce inflation. This has brought some relief to the pockets of Argentines. However, more than a decade of stagnation and record inflation have depressed wages and left many below the poverty line. This increases the urgency to overcome the economic crisis. Patience is running thin, and the need to see results is immediate.

Second, according to economic growth theory, investment is key to expanding an economy. In recent years, Argentina has lost capital due to both the outflow of investments and the depreciation of capital. The lack of legal security and capital controls have driven investors away. The incentives to invest are increasingly limited, given that foreign investors cannot repatriate their profits, and high taxes distort resource allocation and reduce disposable income.

What has been done and what can be done to change this situation? The Bases Law and the Incentives Regime for Large Investments (RIGI) are important measures. These laws circumvent some capital controls and offer tax benefits to attract investments. This is crucial for capital accumulation in the country, as they compensate for the risk generated by the instability of the rules of the game in Argentina.

However, capital controls are still in place, and the government continues to postpone their removal. Without lifting these controls, significant and sustained growth is impossible. Although the marginal return on capital in Argentina is high due to the low stock of capital, which generates attractive returns, the profitability of investment projects would be higher if the country’s risk were reduced. In this aspect, we are also halfway there. In December, it was around 2,000 points, and currently, it is hovering around 1,500 points. Therefore, it remains extremely high and is about 1,000 points above the average of Latin American countries.

The future of the Argentine economy
We have taken an important first step with macroeconomic stabilization. Now, we are about to enter a second stage: economic rebound. Activity indicators showed mixed signs in March and April, and they are expected to improve in the coming months, closing 2024 with a rebound. However, returning to pre-recession levels of late 2023 will take time. The third stage of sustained growth will be achieved if we continue deregulating the economy, stabilizing legal security, and lifting capital controls.

In summary, although Argentina has the potential to take off economically and the engines are ignited, much remains to be done. Macroeconomic stabilization has been a crucial first step, but we still need to release the handbrake to generate real growth. This will depend on the government’s ability to create a favorable environment for investments and eliminate the barriers that hinder the country’s development.

About the Author

Lautaro holds a Bachelor’s degree in Economics from UTDT and is a Master’s candidate in Finance at UCEMA. He works as an Economic Analyst at the Fundación Libertad y Progreso, a liberal think tank, and is an Adjunct Professor at the University of CEMA. He has written dozens of articles for Argentina’s leading economic media outlets, ranging from La Nación to Forbes, establishing himself as a notable figure among them.