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AN ANALYSIS OF ECONOMIC GROWTH OF ARGENTINA AND CHILE – IS THERE A CASE OF

ONE COUNTRY INFLUENCING THE OTHER?

Pete Mavrokordatos Tarrant County College/U. of Phoenix/Intercollege Larnaca

Stan Stascinsky Tarrant County College

Andrew Michael Intercollege Larnaca/University of Nicosia

ABSTRACT The purpose of this paper is to first do an extensive research about Chile and Argentina, two of the largest countries in Latin America. After the collection of all the information and the data, the authors will do a comparison of the two economies along with an economic analysis. In order to do this, the authors will present and discuss data for about twenty nine years, and this data will include things like the Gross Domestic Product, Exports and Imports, Foreign Direct Investment, Growth rates, and the Inflation Rates. This data for both countries should be good enough to give us a good idea. HISTORY In this section, we are going to do a historical analysis of both Chile and Argentina, as we believe that history is very important to a country’s growth and development. Both of these countries have a history of thousands of years, and obviously we are not able to discuss their history entirely, but just some of the most important events that took place. CHILE If we take a look at a map, we’ll see that Chile has a very strange shape, which is very long, approximately 2650 miles, and fairly narrow of about 250 miles. As a result of its shape, it borders with three countries and the ocean on the forth side. On the North it shares a border with Peru, on the Northeast with Bolivia, and on the Eastern side, which is also the longest one; it shares a border with Argentina. On the West side, we find the Pacific Ocean. Chile has a population of about 16.76 million (2008), and its capital city is Santiago. A quick review of Chile’s history shows that the first Spanish settlers arrived in Santiago during 1541 and Concepcion in 1550, and what attracted them to this area was the climate and farming. Under Spanish rule, Northern and Central Chile belonged to Peru, and the South was under the control of the Araucarians until the 19th century, until independence was declared in 1810. Researching the history further we see that Chile defeated Bolivia and Peru in it’s pursue to control the Atacama Desert, which had rich mineral deposits.

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In more recent history, we learn that the left wing party candidate, by the name Salvador Allende, won the 1970 elections, and immediately nationalized the mines, industries and public services. A coup in 1973 overthrew him, and for the next 16 years Pinochet was the head of the military government. Democracy was restored in 1990 and the president was Patricio Azocar. Although it is not possible to discuss the history of Chile, the following is a list of some of the most important years in its history. 13,000 – 10,000 B.C. Arrival of first humans in Chile 500 A.D. Human populations established throughout Chile 1470 - 1535 Inca conquest of communities north of the Rio Maule 1520 Ferdinand Magellan explores the strait that now bears his name 1541 Pedro de Valdivia leads an expedition to Chile and found Santiago 1567 Chile’s first royal court, inaugurated at Concepcion 1700 End of Spanish Hapsburg dynasty with the death of Charles II 1810 Beginning of independence movement 1822 The United States officially recognizes Chile’s independence 1837 - 1839 Chile at war with the Peru – Bolivian Confederation 1879 - 1883 War of the Pacific. Chile defeats Bolivia and Peru 1970 Salvador Allende becomes the first Socialist elected president 1973 Military overthrows Salvador Allende on Sep. 11 1978 Pinochet declares amnesty for political crimes committed since Sep. 11,

1973 2003 Chile opposes U.S. invasion of Iraq

Again this list does not cover the whole history of Chile, but it gives us a good idea about some of the most important events that took place in Chile over the years. ARGENTINA Argentina is the second country in size and population in South America after Brazil. On the south Argentina borders with Bolivia and Paraguay on the north. On the east we find Brazil and Uruguay. Historically, Argentina’s first exploration was done by Juan Diaz de Solis in 1516, and continued to develop under Spanish rule, with Buenos Aires being established in 1580. Finally in 1816 Argentina declared its independence from Spain, and the early stages of the independence were characterized by a struggle between two groups, the Unitarists and the Federalists, which had different approaches to government. In more recent history, we see that Argentina remained neutral during both World War I and II, although towards the end of World War II declared war against the Axis powers. The first postwar president was Juan Peron, but due to his authoritarian control, a coup by the armed forces sent him to exile in 1955. Peron returned in 1973, and after his death his wife became the first woman president. Just like Chile, Argentina has a long history that cannot be discussed in a few pages. Below, we are going to list chronologically some of the most important events. 12000 B.C. Migrating hunting bands arrive in Argentina 1492 A.D. Christopher Columbus arrives in Caribbean Islands 1516 Juan Diaz de Solis explores the Rio de la Plata estuary 1535 Pedro de Mendoza found Buenos Aires

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1588 City of Corrientes is founded; first slaves are imported to Buenos Aires 1776 Viceroyalty of the Rio de la Plata is established 1787 The Filipina Company gains monopoly to import slaves to Buenos Aires 1810 Cabildo abierto establishes creole government at Buenos Aires, slave trade is outlawed

1820 Buenos Aires government is overthrown 1853 Constitution establishes the Republic of Argentina 1893 Financial crisis occurs 1919 Right wing vigilantes kill hundreds in Jewish neighborhoods of Buenos Aires 1946 Peron is elected president 1955 Military takes power in the Revolucion Libertadora, Peron lives in exile the next 18 years 1973 Peronists win presidential elections, Peron returns to presidency 1983 Inflation rises to 343 percent and the International debt reaches $45 Bil. 1991 Mercosur is formed by Argentina and three neighbors 2002 Peso is severed from dollar and falls in value by 40 percent

CURRENT LITERATURE – STATISTICAL ANALYSIS In this section the authors will present and discuss the present economic situation in both Chile and Argentina. In doing this, the reader should be able to get a better picture about these two countries. Following this analysis, we are going to present several years of economic data for the two countries in order to be able to do a better and more accurate comparison between these two South America countries. At this point we would like to present some very recent indicators about Chile’s economy, and after that we’ll present the same indicators for Argentina for comparison. Chile has a population of about 16.5 million (2008 est.), and out of these 16.5 million, about 8 million make up the labor force. One of the biggest economic problems of Chile, related to the labor force, is the unemployment. In 2008 the unemployment rate was 7.75%, but in 2009 it jumped to 10%, which is very high by any standards. Another major economic problem of Chile is that almost one fifth of its population is below the poverty line. Other interesting economic indicators of Chile’s economy are the following: GDP $150.4 bill. (2009), which is not bad, but it had a -1.5% growth rate, and this caused the per capita GDP to drop from $15100 in 2008 to $14700 in 2009. Chile’s economy does not have only bad indicators, and one very good indicator is the inflation rate which is almost nonexistent. During 2009 it was 1.7% down from 8.7% in 2008, so obviously some things are moving in the right direction. The last two things we would like to mention are trade and direct investment (FDI). During 2009 Chile had total exports of $48.85 bill. made up by copper, fruit, fish products, chemicals and wine. On the other hand they had total imports of $40.91 bill. made up by petroleum products, chemicals, industrial machinery etc. Obviously during 2009 Chile had a trade surplus of $7.97 bill. which is good but it was down about a billion from 2008. From these figures we derive the conclusion that Chile has a lot to offer and as a country it needs to concentrate on its exports. Finally we would like to take a look at FDI both at home and abroad. In 2009 the FDI at home was $115 billion, up from $108 in the previous year, and FDI abroad was $32 billion in 2009 up from $25 in the previous year. Once more these figures lead us to the conclusion that Chile is very attractive to foreign investors, since the FDI at home is almost 4 times bigger than the FDI abroad, so it needs to concentrate on bringing more foreign direct investment into the country.

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In Argentina, the situation is a little different than Chile. After all as our data will show, Argentina is a bigger country with a bigger economy. Argentina has a population of almost 41 million (2009), more than two times that of Chile, and a labor force size of almost 16.5 million, which is the population size of Chile. Its unemployment, although high and rising, is lower than Chile’s. During 2009 it was 9.6% whereas in 2008 it was 7.88%, another indication that world economic crisis impacted Argentina as well. Another indicator that proves the impact of the world crisis is the GDP. In 2009 it was $301 billion, and this had a negative growth of 2.5% from the previous year. As a result of this, the per capita GDP declined from $14400 in 2008 to $13800 in 2009. One of the biggest advantages that Argentina has over Chile is population under the poverty line. In Chile it is about a fifth of the population whereas in Argentina it is around 13%. On the other hand Chile has an advantage with respect to inflation. In 2009 its inflation was 1.7% and Argentina’s was 6.2%. With respect to trade, Argentina also had a surplus of $21 billion in 2009, but total trade both exports and imports were down from the year before. Argentina exported soybeans, petroleum and gas, vehicles, corn and wheat, and imported machinery, organic chemicals and plastics. Finally in the FDI area, Argentina has almost a 3 to 1 advantage in the incoming over the FDI abroad, which makes it obvious that investors like Argentina for investments, and they need to promote that further. In the pages that follow we are going to show a lot of data for both countries both in a tabular form and a graphical form to make comparison easier. Table 1 below shows the GDP, the Growth rates, the Inflation rates, and the net exports for both countries between 1980 and 2008. We believe we have a large enough sample for a better picture.

TABLE 1 ECONOMIC DATA CHILE AND ARGENTINA

1980 - 2008

CHILE ARGENT. CHILE ARGENT.

CHILE FDI ARG. FDI

CHILE ARGENT.

YEAR GDP B. $ GDP B. $ GR. RATE

GR. RATE Millions $ Millions $

NET EXP.

NET EXP.

1980 27.57 76.96 8.15 0.0415 213 678 -1410 -4,099 81 32.65 78.68 4.74 -0.0569 383 837 -2965 -2,430 82 24.34 84.31 -10.32 -0.0496 401 227 324 3,451 83 19.77 103.98 -3.79 0.0387 135 185 1006 4,242 84 19.23 79.09 7.97 0.0221 78 268 802 3,631 85 16.49 88.42 7.12 -0.0759 144.3 919 1679 6,252 86 17.72 110.93 5.59 0.0788 315.5 574 1941 3,850 87 20.9 111.11 6.59 0.0291 890.5 -19 1527 2,613 88 24.64 126.21 7.31 -0.0256 967.9 1147 1636 5,397 89 28.39 76.64 10.56 -0.0749 1283.5 1028 1351 7,585 90 31.56 141.35 3.69 -0.0239 661.2 1836 1684 10,190 91 36.42 189.72 7.97 0.1267 821.7 2439 2338 4,708 92 44.47 228.78 12.28 0.1194 935.1 4431 1980 -2,678 93 47.69 236.75 6.99 0.0591 1034.3 2793 923 -4,757 94 55.15 257.44 5.71 0.0584 2583.1 3635 1212 -6,706 95 71.35 258.03 10.63 -0.0285 2957 5609 -516 -21 96 75.77 272.15 7.41 0.0526 4814.6 6949 -586 -2,282 97 82.81 292.86 6.61 0.0811 5271.4 9160 -1020 -6,507 98 79.37 298.94 3.23 0.0385 4627.8 7291 -1387 -6,446 99 73 283.52 -0.76 -0.0338 8761 23988 2297 -2,667

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0 75.21 284.2 4.49 -0.0079 4860 10418 1402 -1,801 1 68.57 268.7 3.38 -0.0441 4199.8 2166 2207 3,613 2 67.27 102.04 2.18 -0.1089 2549.9 2149 2091 18,699 3 73.99 129.6 3.92 0.0884 4307.4 1652 1447 15,378 4 95.65 153.13 6.04 0.0903 7172.7 4125 305 10,431 5 118.25 183.19 5.56 0.0918 6983.8 5265 -3658 10,040 6 146.77 214.24 4.59 0.0847 7357.7 5537 -5843 8,156 7 163.88 262.45 4.68 0.0865 14457.3 6462 -9069 4,611 8 169.46 328.39 3.16 0.0697 -13520 -1,194

SOURCES: DDP QUICK QUERY. (n.d.) QUICK QUERY - WORLD DEVELOPMENT INDICATORS, ddpext.worldbank.org Net Exports in Millions of US $. Figure 1 that follows shows the Gross Domestic Product for Chile and Argentina. Obviously Argentina is a bigger economy but at least during the last several years they are both growing.

FIGURE 1

The next figure, Figure 2 shows the Growth rates for both countries, and as can be seen on this graph, the growth rate for Chile has been very unstable. We can see that it was as high as 12.28% during 1992 and as low as -10.32 during 1982. On the other hand the growth rate of Argentina has been very stable; although it did have some years it was negative as well, but not by too much.

GDP CHILE - ARGENTINA

0

50

100

150

200

250

300

350

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29YEAR

BIL

LIO

NS

OF

US

$

Chile

Argentina

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FIGURE 2

FIGURE 3

Figure 3 above shows the net inflow of FDI in both Chile and Argentina. As was discussed earlier in the paper, both countries have many billions of dollars coming in as foreign investments, (much more than going out), so they need to concentrate on this because it is obvious that foreign investors like both of these countries for investments. The last figure from Table 1 is Figure 4, and it shows the net trade of these two countries. As can be seen on the graph the Net Exports (X – M), of Argentina are much higher than that of Chile’s, but they both have a trade surplus (positive Xn), which shows that they both have goods and services that other countries want, and once more they need to concentrate and improve their trade by finding more countries to export to.

GROWTH RATES CHILE - ARGENTINA

-15

-10

-5

0

5

10

15

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

YEAR

GR

OW

TH R

ATE

S

C hile

A rgentina

FDI NET INFLOW CHILE - ARGENTINA

-5000

0

5000

10000

15000

20000

25000

30000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

YEAR

MIL

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$

Chile

Argentina

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FIGURE 4

Finally, Table 2 that follows shows the inflation rates for Chile and Argentina, and it is obvious that inflation is a major problem for both of them, although a much bigger problem for Argentina than Chile.

TABLE 2 INFLATION RATES CHILE – ARGENTINA

1980 - 2008

YEAR CHILE

ARGENT.

1980 28.76 90.84 1981 13.04 106.36 1982 8.53 207.62 1983 30.66 382.35 1984 12.61 606.74 1985 30.71 625.8 1986 22.1 74.46 1987 25.83 127.09 1988 22.67 388.49 1989 13.52 3057.63 1990 22.46 2076.79 1991 22.44 132.95 1992 12.89 11.92 1993 11.75 -1.42 1994 13.73 2.85 1995 10.42 3.17 1996 2.73 -0.05 1997 4.27 -0.46 1998 1.93 -1.71 1999 2.43 -1.84 2000 4.56 1.04 2001 3.79 -1.1

NET TRADE CHILE - ARGENTINA

-20000

-15000

-10000

-5000

0

5000

10000

15000

20000

25000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

YEAR

MIL

LIO

NS

OF

US

$

Chile

Argentina

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2002 4.17 30.56 2003 6.23 10.5 2004 7.48 9.22 2005 7.55 8.84 2006 12.42 13.52 2007 5.09 14.16 2008 0.23 19.46

SOURCE: DDP QUICK QUERY. (n.d.). WORLD DEVELOPMENT INDICATORS ddpext.worldbank.org/ The last figure shows that inflation has been a major problem for Argentina for years, since it has been as high as 3000%, but it seems that for the last several years they were able to control it and bring it down to about the same levels as Chile, or fairly close.

FIGURE 5

CONCLUSION In conclusion as was mentioned in a previous section, the purpose of the paper was to do a comparative study between Chile and Argentina, and the data presented did just that. Obviously the two economies are of different size, since Chile has a population of 16.5 million and Argentina on the other hand has a labor force of more than 16.5 million. Even though they are different in size, they both have areas in which they have advantage over the other. For example Chile has an unemployment rate of more than 10% (2009) and Argentina’s unemployment is around 9%. They both have high unemployment but Argentina is in a better shape. Another area in which Argentina has an advantage over Chile is the population under the poverty line. Chile has about a fifth of its population under the poverty line, whereas in Argentina that number is under 13%. On the other hand Chile has an advantage over Argentina in inflation. Chile’s inflation during 2009 was almost non-existent at 1.7% whereas Argentina’s was 6.2% and rising. There is one area in which both countries are doing very well, and we saw that on Table 1 and Figure 3. This is the Foreign Direct Investment (FDI). Both countries have a surplus of incoming FDI over outgoing. For Chile the ratio is almost 4 to 1, and in Argentina it is 3 to 1. This is something that both countries need to take a closer look because it is obvious that foreign investors see both of them as good countries to invest in, and they need to promote that in order to attract more foreign investments, as they have a lot to gain from that.

INFLATION RATES CHILE - ARGENTINA 1980 - 2008

-500

0

500

1000

1500

2000

2500

3000

3500

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29YEAR

PER

CEN

T O

F IN

FLA

TIO

N

Chile

Argentina

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Finally we would like to say that this paper is not finished. We are looking into different statistical models that we like to use in order to give us a better understanding about the two economies, and any possible connections. To this end any suggestions and recommendations will be greatly appreciated.

BIBLIOGRAPHY

Argentina-History and Culture, http://www.geographia.com/argentina/history.htm Retrieved Mar. 18, 2010. Argentina: History, Geography, Government, and Culture, http://www.infoplease.com Retrieved Mar. 18, 2010. Brown, Jonathan C., “A Brief History of Argentina”, Facts on File, Inc. New York, New York, 2003. Chile: History, http://ddg.com/LIS/aurelia/chihis Retrieved Jan. 28, 2010. Chile, http://ddg.com/LIS/aurelia/chile.htm Retrieved Jan. 28, 2010. Ferns, H. S., “Argentina”, Frederick A. Praeger, Publishers, New York, Washington, 1969. Galdames, Luis, “History of Chile”, Russell and Russell, Inc., New York, NY 1964. Latin America Bureau, “Chile: A Guide to the People, Politics and Culture”, Interlink Books, New York, 1998. Lewis, Collin M., “Argentina: A Short History”, Oneworld, Oxford, England 2002. Lewis, Daniel K., “The History of Argentina”, Greenwood Press, Westport, Connecticut, London, 2001. Rector, John L., “The History of Chile”, Greenwood Press, Westport, Connecticut, London, 2003. The World Fact Book, https://www.cia.gov/ Retrieved Mar.4, 2010.

APPENDIX In the appendix, which is also the last section, we ran some simple regressions using aspects of both the Chilean and the Argentinean economy. REGRESSION MODEL 1 In our first regression we used Chile’s GDP as the dependent and Argentina’s GDP as independent. The R2 = 0.426, which means that 42.6% of Chile’s GDP can be explained by Argentina’s GDP. The hypothesis is that Argentina’s GDP does not affect Chile’s GDP. The P-value for this test is P = 0.000124, and since this is much smaller than 0.05, the null hypothesis is rejected at a significance level of 5%. Also, we are 95% confident that the slope of the regression

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equation is between 0.181 and 0.484. This means that a $1 billion increase in Argentina’s GDP will cause a small rise in Chile’s GDP. This is shown in Figure 1A below.

FIGURE 1A

REGRESSION MODEL 2 Model 2 is a simple regression with Chile’s GDP as the dependent and Argentina’s Growth Rate. as the independent. The R-squared is 0.144, so approximately 14.4% of Chile’s GDP can be explained by Argentina’s Growth Rate. The hypothesis is that Argentina’s Growth Rate does not affect Chile’s GDP. The P-value for this test is 0.043 which is smaller than 0.05, so the hypothesis that Argentina’s Growth Rate does not effect Chile’s GDP is rejected at a significance level of 5%. We are 95% confident that the slope of the regression line is between 9.1 and 494.9, so each 1% increase in Argentina’s Growth Rate causes an increase in Chile’s GDP. This is shown in Figure 2A below.

FIGURE 2A

GDP's

0

100

200

0 100 200 300 400

Argentina

Chile Y

Predicted Y

Chile's GDP vs. Argentina's Gr. Rate

0

100

200

-0.2 -0.1 0 0.1 0.2

Growth Rate

Chi

le's

GD

P

YPredicted Y

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REGRESSION MODEL 3 In the third model we used Chile’s GDP as the dependent and Foreign Direct Investment (FDI) in Chile as the independent. The R-squared is 0.852, so approximately 85% of Chile’s GDP can be explained by FDI in Chile. The hypothesis is that FDI in Chile does not affect Chile’s GDP. The P-value is 2.82x10-12, which is much smaller than 0.05, so the hypothesis that FDI in Chile does not effect Chile’s GDP is rejected at a significance level of 5%. We are 95% confident that the slope of the regression line is between 0.009 and 0.012, so each 1 million increase in FDI in Chile causes a very slight increase in Chile’s GDP. This result is shown on the next page in Figure 3A.

FIGURE 3A

REGRESSION MODEL 4 In our final regression, we used Argentina’s GDP as the dependent and Foreign Direct Investment (FDI) in Argentina as the independent. The R-squared is 0.480, so approximately 48% of Argentina’s GDP can be explained by FDI in Argentina. The hypothesis is that FDI in Argentina does not affect Argentina’s GDP. The P-value is 4.39x10-5, which is much smaller than 0.05, so the hypothesis that FDI in Argentina does not effect Argentina’s GDP is rejected at a significance level of 5%. We are 95% confident that the slope of the regression line is between 0.007 and 0.016, so each 1 million increase in FDI in Argentina causes a very slight increase in Argentina’s GDP. This result is shown on the next page in Figure 4A.

FIGURE 4A

Chile: GDP vs. FDI

050

100150200

0 5000 10000 15000 20000

FDI

GD

P YPredicted Y

Argentina: GDP vs. FDI

0200400600

-10000 0 10000 20000 30000

FDI

GD

P YPredicted Y

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In concluding the appendix, our results show that the Argentinean economy apparently has a slight impact on the GDP of Chile. Our results also show that FDI in each country has a small impact on each country’s GDP. More testing might be needed to measure the exact impact of Argentina’s economy on Chile’s.