Panorama for the different strategies, agents and modalities of FDI’s in latam
Classes 22 and 23
15. Argentina: FDI and Corporate strategies
Foreign Capital in the Argentine Economy
Strategies of MNCs in Argentina
Course’s wrap up, debate, delivery and presentation of Final Reports
Classes 1 - 2
Classes 15 - 16
Classes 17 - 18
Classes 19 - 20
Classes 22 - 23
Wrap up, debate and delivery of Final Rep.
STUDENTS´ WEEKLY REPORTS
The students will deliver a 1 page weekly report about the subjects mentioned below or about any other subject required by the professor (including translations of some economic news) Chapter 2
1. Bolivar and San Martin Summit in Guayaquil
2. Human Development Index for different sectors of Latam
3. A brief description of the S. Huntington´s book “The clash of civilizations”. Identify the groups of countries of the different cultures and the leader of each one, as described in the book.
4. The US - CAFTA and the US-Chile Free Trade Agreement
5: The FTAA advancements. The Summit of the Americas, Mar del Plata, Nov. 2005.
6. The WTO meetings (Doha, Uruguay Rounds and subsequent negotiations)
7. Definition of balances: trade, current account and payment.
8. Brief synthesis of Stiglitz concepts in his book: “Globalization and Its Discontents”
9. The Argentine default.
10. An update of what is going on with the Kyoto Protocols negotiations.
11. A comparison between Chilean and Argentine economic evolutions since 1982.
12. A brief report of a Multinational Company’s performance in Argentina (any one you choose)
STUDENTS´ FINAL REPORT
All the topics mentioned below, have to be included in this 5-10 page report: 1. What reasons do you identify, after you Argentine experience, which may justify the comparative economic and politic development lag of the country in comparison with the USA? (Remember that 100 years both countries had a similar level of economic development)
2. Your perception of the current Argentine business environment
3. WTO and negotiations taking place: Which are you opinions?
4. Your opinion in relation to the impacts of globalization in Latin America
5. Your opinion on the advantage (disadvantage) of the FTAA (Free Trade Agreement of the Americas)
6. Your conclusions of this course
"The Impact of Globalization in Latin America"
IES - Buenos Aires, 2006
(Session 1) In IB 310 "The Impact of Globalization on Argentina and the Southern Cone" we will go through an in-depth analysis of the globalization process and its effects on regional markets, regional economic integration and free trade pacts. We will also analyze the business strategies of US and European companies in the Latin American markets.
We will start with a brief economic background of Argentina and a historical background of the Latin American region, in order to give the students a basic understanding of the country and of origin of its current political division. We will then see some economic, political and human variables of the different countries.
The following stage will be a brief explanation of the Free Trade Agreements that have been conformed during the last decades, their members and features and the processes towards new integration agreements within the region and with countries outside the region, such the case of the FTAA agreement (Free Trade Agreement of The Americas) that is being shaped among the Nafta and the Latin American countries.
We will analyze the globalization process from a historical point of view, the different periods of globalization and the main traits of each one of these periods. We will make an economic analysis of the globalization process, analyze some recommendable strategies at local, regional and global order, for a better insertion in the globalization process, strategies that may give the region’s countries the opportunity of increasing their human development, their standard of living, education, health standards and so forth.
We will briefly analyze the macroeconomic policies and the external vulnerability of the region’s countries and the environmental consequences of globalization
In the final stage of the course, we will give the students a brief scope of Foreign Direct Investments (FDIs) in the region, the strategies that have been applied by Transnational Companies (TNCs)and a brief update of nowadays’ foreign investments.
During the course, the students will prepare research papers on different subjects that will give them a better understanding of globalization and the region.
The present report is the basic bibliography for the course, even though there several recommended books listed in the course’s syllabus that may help the students to strengthen their understanding of the effects of the globalization process in the region.
1. Argentina Today
(Classes 1 and 2) We are going to make a brief synthesis of the background and the current economic and political situation of the country.
1. I. Background Argentina has not been institutionally stable for the last 70 years, since the military coup d’etat of J.E. Uriburu of 1930 that ousted radical president Hipólito Yrigoyen. Since then, a succession of conservative governments (at the beginning), radicals, peronists, and basically military, took place until 1983, when democracy was finally reinstalled.
Once among the world's most prosperous economies, Argentina experienced slow economic growth from the 1940s. From the 7th per capita GNP worldwide and the 50 % of total South American GNP enjoyed in 1920, those values have descended to the 40th and less than 10 % at the present time.
Foreign debt growth path: The evolution of the country’s foreign debt is the following:
By the end of Isabel Perón’s government u$s 5.8 billion (1976)
The military u$s 50 B (1983);
Radicals u$s 72 B; (1989)
Menem u$s 130 B (1999)
De La Rua u$s 144 B (2001)
Default in December 2001
KIrchner after default negotiations u$s 120/130 B (2006)
1. II. The Alfonsin Presidency (1983/1989) After 7 years of a military government, Raul Alfonsin (of the UCR, Union Civica Radical) is named President. During this period, Argentina suffered a long recession. Savings and investment rates fell from the mid-1970s until 1991. Argentines, responding to the unstable macroeconomic environment, increasingly saved and invested abroad. Labor productivity fell and poverty worsened.
This economic performance was traceable to chronic public sector deficits and endemic inflation. After the return to constitutional democracy in 1983, public demands to control inflation were translated into four successive stabilization programs. All failed to eradicate inflation, and each ended in a more virulent inflation than the one preceding it. The main reason for these failures was the inability of the stabilization programs made in order to diminish the structural deficit of the public sector In 1989, after a process of hyperinflation Alfonsin finally resigned (inflation from March 1989 to May 1990: over 5,000 %) 1. III. The Menem Presidency (1989/1999) When Argentina's newly elected President, Carlos Menem, in June 1989, the situation was unstable. The country had passed through a previous hyper-inflationary process (beginnings of 1989)
The convertibility: To achieve stability, a cure for Argentina's endemic inflation and unstable money was required. Then in 1991, an orthodox currency board was settled. The road began on April 1, 1991, when Carlos Menem's government installed what was known locally as a "convertibility system" to rid Argentina of hyperinflation and give the country a confidence shock. Under the Convertibility Law, the peso and the U.S. dollar both circulated legally at a 1-to-1 exchange rate. The owner of a peso had a property right in a dollar and could freely exercise that right by converting a peso into a dollar. That redemption pledge was credible because the central bank was required by law to hold foreign reserves to fully cover its peso liabilities (some kind of a “gold standard but supported with dollar reserves instead of gold).
Argentina's monetary system from April 1, 1991 to January 6, 2002 was known locally as convertibility. It was an unusual name for an unusual system. The convertibility system was not an orthodox currency board. Rather, it was a currency board-like system: a mixture of currency board and central banking features.
The three defining features of an orthodox currency board are:
a fixed exchange rate with its anchor currency,
unrestricted convertibility into and out of the anchor currency at the fixed rate, and
Net reserves of 100 percent or slightly more of the board's monetary liabilities, held in foreign assets only.
Under the convertibility system the Banco Central (the Nation’s Federal Reserve) also retained the power to regulate banks, such as by setting reserve ratios. It was also unofficially a lender of last resort,
FDIs flows during the 1990s: During Menem’s Presidency and since 1991, the country had 19 consecutive quarters of economic expansion until the Mexican devaluation in December 1994, known as the “Tequila Effect”, which led to a considerable change in GDP trend. Nevertheless, the financial roots of the crisis allowed a relatively fast recovery. This new period of growth lasted 11 quarters, until the Russian devaluation and the Asiatic crisis, accompanied by the Brazilian devaluation provoked a significant recession, showing once again the vulnerability of the Argentine economy to external shocks.
FDI (See Graph 1) inflows into Argentina began to increase during the late ‘80s after decades of economic isolation and gathered a momentum during the ‘90s, reaching a total amount of about us$ 80 billion during the period 1992-2000, peaking almost us$ 24 billion in 1999 (then 10.4 B in 2000, 2.1 B in 2001. By 2002 FDI decreased to less than 1 billion, 90 % less than the average of the period 1995-2000. By 2005, this amount is growing again)
During the ‘90s, the argentine government implemented several economic reforms, which favored FDI inflows:
The introduction of the convertibility regime with a fixed exchange rate (which lasted over ten years).
Privatization of most state owned companies.
Legislation permitting free capital movements.
Initially, the new owners after privatizations were:
The state itself (in a small percentage),
Some local groups
In a following stage, companies gradually restructured their capital base, when the foreign companies bought stakes form local companies.
Privatizations were the main magnet for foreign investment. From 1993 on, when national YPF Oil Company was finally sold, a shift from privatization to Mergers and Acquisitions (M&As) of privately-owned companies occurred. During the period 1992 - 2001, over 55% of FDIs in Argentina corresponded to asset transfers involving “change of hands” rather than new investment. A great deal of these purchases was done with external borrowing, benefiting from the international liquidity of that time (non financial sector borrowed over us$ 35 billion during that period)
Reasons for the recession and posterior crisis On the other hand, in the late 90’s, Argentina was hit by a combination of external and domestic factors:
- Internationally: They include the 1998 Asian crisis, a weakening currency in neighboring Brazil (making Argentina's exports more uncompetitive in comparison), a global economic slowdown (reducing demand for exports from Argentina) and a continued weak capital market (reducing portfolio investments and increasing interest rates on loans). - Domestically: The Menem administration (1989/1999) had huge fiscal deficits and continued to borrow in excess. At the same time, the Convertibility Plan had failed to work properly. Although de la Rúa (1999/2001) won the 1999 elections as an opponent to Menem's economic policies, he largely continued the same policies.
1. IV. De La Rua´s Presidency (1999/2001)
De La Rua became President in 1999 as the leader of an alliance between the traditional Party UCR (Union Cívica Radical) and the Frepaso (Frente Pais Solidario)
When de la Rua’s Presidency started, the country already had two years of economic recession. Expectations turned strongly negative and the impossibility to restart growth increased doubts about debt sustainability. The resignation of the vice-president in October 2000 made things even worse and weakened in a remarkable way the government. Sovereign risk (as measured by the spread of Argentine dollar external bonds over those of the US Treasure) showed the first significant increase from the beginning of De la Rúa government.
In March 2001, in the face of declining market confidence and the failure to meet IMF targets for the first quarter, the Minister of Economy resigned and another Minister took place for only 20 days and left due to an unsuccessful attempt to lower the fiscal expenditure. Cavallo, who had been Minister of Economy during President Menem’s first term and was widely known as the “Father of the Convertibility”, replaced him. All these events had strong implications –in terms of uncertainty– on the evolution of economic policy and the financial system. These implications were reflected in a mini bank run in the first quarter of 2001.
Another negative signal for the markets, viewed as a decline in Central Bank independence, was Cavallo’s replacement of the Central Bank President in April. In June, the original convertibility had disappeared. In addition, a preferential exchange rate for commercial transactions was announced, so that Argentina had a dual exchange rate. To all these events, one must add the fact that for the first time Argentina could not rollover its debt at a reasonable spread. The deterioration in expectations became generalized, both inside and outside the country.
Country risk rose sharply and rumors about possible resignations – of the President and ministers– spread rapidly. In July the second bank run of the year started what turned out to be a process of no return. The measures taken from that moment on: zero deficits, cuts in salaries and pensions, and a Mega-canje (debt exchange), failed to restore confidence and bank deposits continued to flee, becoming even more severe in November. The response was a set of restrictions on deposits withdrawal (Corralito) implemented on December 2001