Hot spots: Argentina.(economic conditions)

For anyone visiting Buenos Aires or any other major Argentine city these days, the change for the better since the financial crisis of 2001-02 is hard to overlook. Consumer credit is cheap and plentiful and durable consumer goods such as cars and household appliances are flying out of the showrooms. All kinds of service establishments, from hair salons to restaurants, are so heavily booked that it is often difficult to get a reservation. There are indications that the Argentine middle class, decimated by the debt default and massive devaluation of the peso, is reemerging. The Plata Republic has once again become a hot market for luxury goods, even though these tend to be expensive since they are largely unaffected by the regime's price control efforts.

There is no sign yet that the brisk growth, which the country has enjoyed since the "Tango crisis," is petering out. It appears that for 2006 as a whole the economy has again registered a gain well in excess of 8%, as it has done for four years in a row. This means that since its low point in March 2002, GDP has increased by a whopping 45%. The good times have already lasted longer than most analysts had dared to hope. It was quite obvious, back in 2002, that the debt default and the currency devaluation would--in the short run-turn the deficits in public finances and the current account of the BoP into surpluses, but to date predictions that official policies are not sustainable and that the economic boom cannot last have turned out to be wrong--in their timing, if not in principle.

The regime has opened the monetary spigots wide to boost domestic demand and consumption. In doing so it has pumped up growth, but it also risked accelerating inflation, which, in fact, began to speed up in 2004 as much of the economy's spare capacity was used up. The response of President Kirchner & Co. to rising prices was to blame corporate "greed" and "profiteering" and to force producers as well as retailers to adhere to "voluntary" price freezes, formal price controls and export bans designed to improve domestic supplies of designated goods.

At one time or another, the regime has prohibited the export of beef, wheat, corn and milk products. After tripling the export tax on beef last March it imposed a total ban soon thereafter, only to see itself forced to loosen it again after it realized that--while the prohibition cut prices at the big Liniers market in Buenos Aires by more than 30%--butchers and supermarkets lowered their prices by only about 7.5% and pocketed the difference. Even now, the government takes as much as 23.5% of farmers' revenues from soya exports in taxes.

With this interventionism it did succeed in getting the officially reported inflation rate down to 10% last November from 12.3% in 2005. The cave-in of production that was widely expected to result from the constraints and the total standstill of investment that was anticipated has not occurred--yet. What has happened is that, first of all, world market prices for many of the commodities Argentina exports have been so strong that Argentine exporters booked good profits even with the heavy tax burden they have had to carry. Secondly, while the ...