Colombia and Argentina: Who’s Bigger?

Courtesy of The Financial Times, a comparison of Colombia and Argentina, and a reflection on Colombia’s rapid rise:

Two years ago, when we started our tenure at Colombia’s finance ministry, we realised that, using IMF data, Colombia’s GDP had become larger that Venezuela’s. Having been trailing behind our neighbour for decades, such an achievement was quite satisfactory.

The obvious question back then was, Now what? So the next goal became reaching Argentina – whose GDP was nearly 30 per cent above Colombia’s.

It was a reasonable target, taking into account the alleged devaluation pressures on the Argentine peso, which knowledgeable observers calculated to be around that same 30 per cent level.

Argentina’s economy was once three times the size of Colombia’s. So, setting such a target could give a sharp sense of purpose to Colombian economic officials – similar to trying to beat Argentina’s stellar football team.

Locally, many people echoed this call for action as a national goal.

Two years later, the technical staff at Colombia’s ministry of finance crunched some numbers and showed how close we were to achieving that goal, as output growth has been relatively more stable in Colombia than in Argentina.

Indeed, as Figure 1 reveals, even though Argentina has grown on average at higher rates than Colombia, Argentina experienced a 10.9 per cent drop in output during the 2002 crisis, and zero growth in 2009 during the global financial crisis.

In sharp contrast, during the 1999 Russian crisis, Colombia experienced a recession that contracted output at a rate of 4.2 per cent, while it managed to grow at a favorable 1.7 per cent during the 2008-09 crisis.

Figure 1. Colombia vs. Argentina: annual GDP growth

The lower variability of output in Colombia may be attributed, to a great extent, to effective counter-cyclical fiscal and monetary policies, as well as to the relative stability of its policy framework.

This is in contrast to Argentina, which in recent years has been suffering from the typical maladies of a 1980s average Latin American economy: a rising fiscal deficit and thus high inflation, nationalisation of private enterprises, heavy restrictions on trade, and strict controls on capital inflows and outflows.

An important consequence of these restrictions has been the emergence of a parallel exchange rate, commonly known as the “blue”. While at the beginning of 2012 the blue was standing at 4.7 Argentine pesos, or ARS, to the US dollar, quite close to the official exchange rate, by May the blue was hovering around ARS6.4 pesos per dollar, close to 40 per cent higher than the official rate of 4.6.

This large difference between market rates and official rates means that calculations of the dollar value of Argentine GDP using the official exchange rate are biased upwards. For example, Argentina’s GDP in the first quarter of 2012 was 1,874bn pesos. This amounts to $408bn at the official rate of 4.6, and $293bn at the market rate of 6.4.

Figure 2 shows the dollar value of both countries’ GDP using market exchange rates. According to this calculation, Colombia surpassed Argentina around May of this year, with Colombia now having a GDP of $344bn, 17 per cent higher than Argentina’s $294bn.

Figure 2. National currency GDP divided by market exchange rate, in $bn

A critique to this calculation is that the “blue” does not reflect the equilibrium exchange rate. This is an eternal problem with this type of discussion. We have learnt to believe more in the markets than in official figures.

A second objection could be that the market exchange rate does not reflect the purchasing power, or PP, of goods and services by domestic agents. This occurs because the price of non-tradable goods does not move in tandem with changes in the market exchange rate, so using this rate to compute the dollar value of GDP might overstate the impact of large devaluations on national income.

To partially correct for this, one can use the ratio of the IMF’s forecasted nominal exchange rate and the IMF’s PP-adjusted exchange rate to obtain an implicit conversion factor, which translates nominal exchange rates to PP-adjusted exchange rates.

Figure 3 shows the results of applying this conversion factor to the market exchange rates of Colombia and Argentina. In this case, the figure suggests that Colombia surpassed Argentina in PP-adjusted terms briefly during July of this year. Nevertheless, Colombia managed to close a $200bn gap to just $17bn today.

Figure 3. PP-adjusted GDP, $bn

In sum, using market exchange rates, Colombia is now the third largest economy in Latin America, after Brazil and Mexico. In PP-adjusted terms, Colombia’s economy is now very close to reaching the size of Argentina’s, having already surpassed it briefly this year.

In any case, the evidence points towards an indisputable fact: Colombia has managed to place itself in the leading pack of the region in terms of economic growth, size and long-term potential, due to a combination of solid fundamentals and sound macroeconomic and fiscal policies.

This entry was posted on Tuesday, October 16th, 2012 at 4:41 am and is filed under Argentina, Colombia.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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