Founded in 2016, Ceteris Paribus is A student-led economics and finance publication at Davidson College.

Development in Argentina and Indonesia

by Gareth Hill

 

Although Argentina and Indonesia are geographically far apart, they share many similarities. For example, both countries list petroleum gas and other oil products as some of their largest exports. This is due to the massive amounts of natural resources both Argentina and Indonesia lay claim to. Their similar exports, however, do not mean that their economies are performing similarly. While both countries are blessed with an abundance of natural resources, their outlooks for the near future are distinctly different.

 

In the case of Argentina, a country plagued with political instability and macroeconomic shocks, GDP per capita is only 63.4% higher in 2015 than it was in 2000. Corruption is rampant, and the country has defaulted on its debt twice since 2000. In 2002, five different presidents took office in two weeks. In 2014, the nation’s inflation rate had risen to 40% and GDP growth rates were still extremely volatile. More struggles are bound to present themselves in the coming years, and it is unlikely we discover an easy plan of escape from the perfect storm of problems that Argentina has faced.

 

While Indonesia’s economy remains behind Argentina’s by most measures, there is more to the story than GDP per capita and other raw statistics of that nature. The country has experienced a high, sustained growth rate over the last decade and a half, which has resulted in an increase in GDP per capita by over 400%. Foreign direct investment has seen a sharp pickup since the global recession of 2008, and the government has been relatively stable.

 

Why is this the case? That question proves quite complicated to answer, and the exact circumstances that have befallen each natural resource-rich country are quite different. For starters, global location has played a large role in determining the economic outcomes of each country. Indonesia has been able to reap the benefits of its proximity to China and India, two economic giants who each grew at an astounding pace over the last fifteen years. Meanwhile, Argentina’s geographic location has only proved to be a further complication—its main trading partner, Brazil, has the highest levels of external debt in Latin America, and can only be described as deeply economically troubled.

 

Furthermore, in the recent decades, the Argentine government has taken drastic steps to ensure they reduce their foreign debt as much as possible with a protectionist policy of import taxation. The consumer bears the largest burden of this policy, but it does seem to have been effective in reducing the nation’s trade deficit. Argentina’s economy doubled between 2002 and 2013, and over this same time period, official poverty dropped from 54% to 5%. However, the country still has not overcome its struggles with inflation. As commodity prices plummet and the US dollar strengthens, Argentina is again faced with recession.

 

But to tell the full story of the Argentine economic predicament, we need to look further back in time. Argentina has been plagued by a lack of consistency in economic policy since the first World War. Rioting, military coups, and extreme inflation became the norm. According to Reuters, between 1930 and 2015, “more generals have led the country (14) than civilians (11)”. In the late 1900’s, political upheaval led to the institution of new leadership at least once a decade, often more. Each new leader promised to radically change the system for the better. Inexperienced, often corrupt leaders would ignore warning signs and craft radical economic policies.

 

The Argentinian debt crisis of 2001 came about in a shockingly sudden fashion. In the 1990s, Argentina was incredibly successful economically, with inflation falling to single digits. But by 1999, corruption and global economic downturn had turned investors away from Argentina. With the peso pegged to the American dollar, the government could not print money to finance debts—they could only borrow more.

 

This quickly led to default in 2001. The country went into crisis mode and decided to unpeg the peso from the dollar. This led to the rapid devaluation of the peso and further corroding investor confidence. However, the devaluation of the currency meant that Argentina could export more competitively. The government began employing protectionist policies such as import substitution to make the country self-sufficient and less reliant on foreign debt. It paid back the International Monetary Fund in full and was able to sustain a period of economic growth through 2013.

 

Unfortunately, the growth was not destined to last. Many believed the economic growth was too severe. According to a 2011 article in The Economist, Argentina was “overheating.” Another article that appeared in Reuters, published in early 2014, stated that Argentina’s “economy is now paying the price for President Cristina Fernandez's populist and interventionist policies, and is set to contract for the first time on an annual basis since 2002.” Needless to say, the government defaulted later in 2014.

 

Since the the government refused to pay back its debts from the 2001 default, Argentina has been blocked out of international credit markets, making it much harder for their economy to rebound. This was partly due to their track record of default, but also due to the fact that most countries with an open market system look down upon protectionist policies as indicators of a flagging economy. Many believe that the Argentinian economy is worse than the government reports, and this has kept skeptical investors away.

 

On the other side of the world, the island nation of Indonesia has taken a vastly different path to growth. There, the country has taken strong steps to increase investment, both foreign and domestic. Since the global economic downturn and Asian financial crisis of 2008, foreign direct investment has picked up significantly. This increase in investment has been fostered by low labor costs, relatively stable government, and the country’s proximity to China and India.

 

But Indonesia’s rise has not been without troubles. At the turn of the century, as it was recovering from the impacts of a recession in Asian markets, an inflationary scare hit. Sparked by trade imbalances and stagnating oil prices, Indonesia’s currency dropped to 12,000 Rupiah to the dollar. To compensate, Indonesia cut its subsidy program for fuel. Although this temporarily increased inflation, the economy stabilized.

 

The desire for investment, especially foreign, has had many positive effects on development in Indonesia. Foreign investors require basic services and guarantees of a safe investing climate, which has encouraged political stability. Additionally, it has catalyzed the creation of proper judicial systems and the adaptation of international standards for common business practices. The government has intelligently decided to use its natural resources as a springboard for economic development, rather than counting on them as a never-ending source of income. Indonesia has initiated a program with this aim, called the Masterplan to Accelerate and Expand Economic Development (MP3EI) in Indonesia. It seeks to improve infrastructure, encourage value-adding processes to the industrial production, increase efficiency and competitiveness, and encourage innovation.

 

This Masterplan acknowledges the difficulties that Indonesia has been faced with. It identifies the main challenge as the lack of diversity in the country’s economy. Being so reliant on natural resource and agriculture leaves the country vulnerable to shocks in market prices in either of these industries. To address this, the government is encouraging the expansion of value-adding industry. They also understand that the inequality between the Eastern and Western parts of Indonesia poses a threat to the stability and strength of the country. There is also a strong emphasis on interconnectedness and infrastructure development to allow that to happen. This is also necessary to support the rapid urbanization movement that is taking place currently. As Indonesia develops and attempts such dramatic changes, it will need to focus on improving its education.

 

The most important takeaway from the Masterplan is the emphasis on progressive policymaking. The plan sets out to limit government restrictions, encourage privatization of firms, and leave the market open so as to encourage investment, trade, and the international flow of information and innovation. ‘Not Business as Usual’ is the adopted mantra of the Masterplan.

 

In comparison, Argentina’s Comprehensive Growth Strategy, published by the G20, emphasizes “the public sector’s leading role” and the need to keep aggregate demand high. Concern over aggregate demand typically requires fiscal policy interventions from the government, which is already quite involved in controlling the economy though protectionist policies. The Comprehensive Growth Strategy also talks about reducing dependence on imports, especially energy imports. The hope is that this will improve foreign exchange stability and increase competitiveness among local firms, which will improve exports in the long run.

 

Due to Indonesia’s relatively recent ascent economically, it is too early to tell how they will handle more serious economic setbacks. Argentina has been hit by a barrage of setbacks and have been unable to overcome the sheer quantity and diverse range of problems they have encountered. However, their problems have been the result of decades of political complications and unaddressed economic problems. In contrast, Indonesia had a relatively clean slate at the turn of the century. While the Masterplan is a very good step, only time will tell how Indonesia handles more serious obstacles that undoubtedly lie ahead. 

An Interview with Dr. James Poterba, Professor of Economics at MIT

The Matching Economics of NBA Free Agency