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RR RUEHWEB

DE RUEHBU #1154/01 1421251
ZNR UUUUU ZZH
R 221251Z MAY 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 4612
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2180
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL

UNCLAS BUENOS AIRES 001154 
 
SIPDIS 
 
SIPDIS 
 
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE 
TREASURY FOR DAS LEE, RAMIN TOLOUI AND CHRIS KUSHLIS 
NSC FOR SUE CRONIN 
AND OCC FOR CARLOS HERNANDEZ 
USDOC FOR ALEXANDER PEACHER 
USDOL FOR ILAB PAULA CHURCH AND ROBERT WHOLEY 
USSOUTHCOM FOR POLAD 
OPIC FOR GEORGE SCHULTZ AND RUTH ANN NICASTRI 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ELAB ALOW AR
SUBJECT: Argentina Economic and Financial Weekly for 
the week ending May 19, 2006 
 
 
--------------------------------------------- -------- 
Weekly Highlights 
--------------------------------------------- -------- 
 
- Venezuela buys another USD 239 million of Boden 2012 
bonds. 
- GOA runs an ARP 1.5 billion primary fiscal surplus 
in April -- lower than expected. 
- Wheat exporters agree to supply the domestic market 
to avoid wheat price increases. 
- Unemployment fell 1.6 percent y-o-y to 11.4 percent 
in the first quarter, but increased q-o-q. 
- GOA warns oil companies to invest or lose their 
concessions. 
- March monthly economic activity index up 7.7 
percent y-o-y - weaker than expected. 
- Commentary of the Week:  "Obstacles to the 
'Argentine Miracle."  (Note: there will be no Weekly 
Report for the week ending May 26 due to American and 
Argentine holidays.  The Weekly Report will be resumed 
with a bi-weekly special edition on June 2.  End 
Note.] 
 
--------------------------------------------- -------- 
Venezuela buys another USD 239 million of Boden 2012 
bonds. 
--------------------------------------------- -------- 
 
¶1.  On May 11, the GOA sold USD 239 million of Boden 
2012 (a USD-denominated bond maturing in 2012), for a 
market value of USD 200 million, to the Government of 
Venezuela (GOV).  The GOA sold the bonds at market 
prices that translate into a yield of 7.59 percent. 
With this purchase, the GOV will have purchased 
Argentine bonds worth USD 1.5 billion (at face value, 
or USD 1.2 billion at market value) in 2006.  In 2005, 
the GOV purchased USD 1.9 billion of GOA bonds (USD 
1.6 billion market value). 
 
--------------------------------------------- -------- 
GOA runs an ARP 1.5 billion primary fiscal surplus in 
April -- lower than expected. 
--------------------------------------------- -------- 
 
¶2.  The GOA announced a primary fiscal surplus of ARP 
1.5 billion in April, below market expectations of ARP 
1.7 billion, and well below the ARP 2.2 billion in the 
same month last year.  April's surplus brings the 
accumulated fiscal surplus for the first four months 
of 2006 to ARP 6.4 billion, ARP 1.2 billion above the 
ARP 5.2 billion target for the period.  The lower-than- 
expected April surplus is the result of rapidly rising 
spending levels -- mainly debt interest payments, 
transfers to provinces, higher salaries and capital 
expenditures -- as well as lower revenues due to the 
extension of the income tax payment deadline to May. 
Ambito Financiero reported that the April surplus 
figures were padded by ARP 600 million that the GOA 
received from the Central Bank (BCRA) in April for 
profits that the BCRA earned in 2005.  (No detailed 
data is yet available to confirm this report).  The 
primary fiscal surplus decreased 31% y-o-y.  The BCRA 
consensus forecasts an ARP 22.3 billion (or 3.5% of 
GDP) primary fiscal surplus for 2006. 
 
--------------------------------------------- -------- 
Planning Minister De Vido delays negotiations with 
Bolivia on gas prices. 
--------------------------------------------- -------- 
 
¶3.  On May 18, a spokesman from the Ministry of 
Planning stated that Minister Julio De Vido had 
postponed his trip to Bolivia to negotiate the price 
at which Bolivia will export gas to Argentina.  The 
Minister's trip had originally been scheduled for May 
¶16.  No further details were provided as to when the 
Minister will travel, and no further information was 
provided on the status of negotiations.  Argentina 
currently imports 5% of its gas consumption from 
 
Bolivia at a "solidarity" price of USD 3.20 per 
million cubic meters, while the international price 
ranges from USD 2.00 to USD 8.00 per million cubic 
meters.  According to reports, the Bolivian government 
wants a 65% increase to more than USD 5 per million 
cubic meters the price of gas. 
 
--------------------------------------------- -------- 
Congress approves the creation of the state-owned 
water company AYSA. 
--------------------------------------------- -------- 
 
¶4.  On May 17, the Senate ratified a presidential 
decree approving the creation of the state-owned water 
company AYSA (Agua y Saneamientos Argentinos SA).  The 
bill received 37 positive votes, 18 negative ones and 
one abstention.  [The Chamber of Deputies approved the 
creation of AYSA at the beginning of April.]  AYSA had 
been providing water and sewage services to the city 
of Buenos Aires and fourteen suburban areas of the 
province of Buenos Aires since March, when the GOA 
rescinded Aguas Argentinas' concession contract. 
According to the decree, 90 percent of AYSA's stock 
will belong to the GOA, while the remaining 10 percent 
will be given to AYSA's employees union.  The company 
will have an initial capital of ARP 150 million and 
will be managed by the Ministry of Planning, which 
also will be responsible for designating its board of 
directors. 
 
--------------------------------------------- -------- 
GOA sends a bill to Congress to modify UIF's 
structure. 
--------------------------------------------- -------- 
 
¶5.  On May 16, the GOA sent a bill to Congress that 
would modify the structure of the Argentine financial 
intelligence unit (UIF).  Highlights of the bill 
include: 
- The UIF will be run by a President and Vice- 
President, who will be selected by the President and 
confirmed under the same process as a Supreme Court 
Justice, including public comment and disclosure. 
According to media reports, Abel Fleitas Ortiz de 
Rozas, the current head of the Anti-Corruption Office, 
will be the GOA's candidate for President of the UIF. 
- The UIF will have a Council of Advisors, who will 
represent 7 GOA agencies including the Central Bank, 
AFIP, SEDRONAR, Ministry of Justice, Ministry of 
Economy, Ministry of Interior, and Stock Exchange 
Commission; 
- The UIF President will make all decisions, after 
consulting with the Council of Advisors, but he does 
not need to accept their advice; 
 
¶6.  We expect that the bill will be approved without 
major opposition.  However, there are several other 
similar or related bills pending or about to be 
introduced, including some that would make terrorism 
finance a crime, so it is possible that this bill will 
be amended or merged into a larger bill.  The UIF 
currently is operating with only one of its five 
directors in place. 
 
--------------------------------------------- -------- 
Wheat exporters agree to limit exports to supply the 
domestic market and avoid price increases. 
--------------------------------------------- -------- 
 
¶7.  On May 18, local media reported that the GOA was 
considering a 30-day freeze on wheat export permits -- 
similar to the 180-day meat export ban implemented at 
the end of March -- to avoid domestic price increases 
in bread and flour and thus keep inflation under 
control.  However, Chief of Cabinet Alberto Fernandez, 
denied those rumors later that day.  Wheat producers 
must register any planned exports with the GOA, which 
has the right to temporarily suspend wheat exports to 
guarantee domestic needs.  The 2005/2006 wheat crop 
 
dropped to 12.5 million tons -- compared to 16.0 
million the previous year -- which analysts believe is 
not sufficient to supply both exports (mainly to 
Brazil) and domestic demand.  The slide in wheat 
production was partially caused by drought weather 
conditions, as well as the increasing switch to 
soybeans, a lower cost/more profitable crop. Argentina 
exported 8.7 million tons of wheat in 2005.  Exports 
this year (to May 15) were 3.3 million tons. 
 
¶8.  After a meeting with the Minister of Economy 
Miceli on May 18, representatives from the cereal 
export association and the flour miller association 
committed to supply the domestic market with 5.5 
million tons of wheat this year, which should be 
sufficient to guarantee that domestic flour prices 
remain unchanged. 
 
--------------------------------------------- -------- 
March monthly economic activity index up 7.7 percent 
y-o-y - weaker than expected. 
--------------------------------------------- -------- 
 
¶9.  The monthly economic activity index increased 7.7 
percent y-o-y in March -- well below the BCRA market 
survey forecast of 8.6 percent.  This was the weakest 
growth rate in the past eight months, and was a sharp 
deceleration from the 9.5 percent increase in 
February.  However, the index is 37 percent above its 
low point in the first quarter of 2003 and 9.8 
percent above its pre-crisis high, in the second 
quarter of 1998.  The growth in the index came from a 
7.2 increase in goods (mainly from industry and 
construction) and an 8.5 percent increase in the 
service sector (mainly from the financial sector). 
The index increased 0.1 percent m-o-m.  The latest 
BCRA consensus survey estimates 7.6 percent economic 
activity growth for 2006, a downward revision from 
its previous forecast of 8.6 percent.  The monthly 
economic activity index is viewed as a reliable 
leading indicator of GDP. 
 
 
--------------------------------------------- -------- 
Unemployment fell 1.6 percent y-o-y to 11.4 percent in 
the first quarter, but increased q-o-q. 
--------------------------------------------- -------- 
 
¶10.  The GOA announced that the unemployment rate 
dropped 1.6 percentage points y-o-y to 11.4  percent 
in the first quarter of 2006.  However, unemployment 
increased 1.3 percentage points q-o-q from 10.1 
percent in Q4 2005 due to seasonal factors.  According 
to the GOA survey, a total of 1.2 million people are 
unemployed out of a workforce of 10.8 million. 
Excluding participants in the Head of Households 
income supplement plan, the unemployment rate stood at 
14.1 percent, versus 12.7 percent in the fourth 
quarter of 2005.  The GOA projects that unemployment 
will be below 10 percent at the end of 2006. 
 
--------------------------------------------- -------- 
April industrial production index up 7.7 percent y-o- 
y. 
--------------------------------------------- -------- 
 
¶11.  Industrial production index increased 7.7 percent 
y-o-y in April, slightly above market expectations of 
7.4 percent and a slight acceleration following a 7.5 
percent increase in March.  During April, the fastest 
growing sectors were car production (+21 percent), non 
metallic minerals (+17 percent), oil refining (+13 
percent) and chemicals (+11 percent).  There was a 
slight decrease in paper and cardboard, which fell 2.2 
percent.  The index decreased 2.1 percent m-o-m 
without seasonal adjustment and increased 0.3 percent 
m-o-m when seasonally adjusted.  The BCRA consensus 
survey forecasts 6.8 percent industrial production 
growth for 2006 -- unchanged from last month's 
 
forecast. 
 
¶12.  The industry-wide capacity utilization index 
reached 71.6 percent in April, up 0.3 compared to 71.3 
percent in April 2005.  The sectors with the highest 
capacity utilization rates were metal-based industries 
(96 percent), oil refining (93.9 percent) and textiles 
(83.6 percent).  The sectors with the lowest capacity 
utilization rates were auto production (50.6 percent), 
tobacco production (60.1 percent) and minerals (62.6 
percent). 
 
--------------------------------------------- -------- 
GOA beef export ban has caused USD 180 million in 
losses. 
--------------------------------------------- -------- 
 
¶13.  According to the meat industry, the export ban 
has caused USD 180 million in losses since it was 
implemented at the end of March.  The sector estimates 
that if the ban remains in effect until September 
(when the ban is scheduled to end), losses may exceed 
USD 600 million, including USD 60 million from 
contracts that were broken by GOA delays in issuing 
permits for exports to the European Union under the 
Hilton quota and for other products sold before the 
ban went into effect, even though both were exempt 
from the ban.  Chief of Cabinet Alberto Fernandez 
recently reiterated the GOA's position that the export 
ban will remain in effect until domestic beef prices 
stabilize.  The export ban has also forced 
slaughterhouses to lay off thousands of workers. 
 
 
--------------------------------------------- -------- 
GOA warns oil companies to invest or lose their 
concessions. 
--------------------------------------------- -------- 
 
¶14.  On May 16, the Energy Secretary, Daniel Cameron 
warned oil executives that the GOA will withdraw 
concessions on oil fields where companies are not 
exploring.  The hydrocarbons law (N 17.319) 
establishes minimum investments for oil fields, 
including requirements to explore fields covered by 
the concession.  In January, the Energy Secretariat 
issued a resolution requiring companies to submit 
detailed exploration reports for 2005 and the first 
half of 2006.  The GOA will withdraw concession from 
companies that do not invest or reallocate those 
concessions to other companies who are willing to 
invest.  Oil and gas production dropped 5 percent and 
1.4 percent, respectively, in 2005 and reserve 
estimates have fallen to 10 years of supply. 
 
¶15.  On May 18, Cronista reported that oil producer 
provinces -- especially Neuquen the largest oil and 
gas producer province -- envision that cancelled 
concessions will be transferred to the provincial 
government instead of to the federal government. 
 
--------------------------------------------- -------- 
BCRA increases repo rates by 0.50 percent. 
--------------------------------------------- -------- 
 
¶16.  The BCRA announced a 0.5 percent increase in its 
repo lending rates, bringing its active lending rate 
to 7.50 percent  (rate at which the BCRA offers 
financing and adds liquidity to the system) and its 
passive rates to 5.00 percent for one-day and to 5.50 
percent for seven days (rates at which the BCRA 
borrows funds and absorbs liquidity).  According to 
BCRA officials, this increase in the repo rates will 
not generate an increase in the cost of credit for 
individuals and enterprises.  This is the first 
increase in passive repo rates and the second increase 
for active repo rates since the beginning of the year, 
and it continues the current upward trend in domestic 
market interest rates. 
 
 
--------------------------------------------- -------- 
BCRA may sell its Boden 2011 holdings to sterilize its 
intervention in the foreign exchange market. 
--------------------------------------------- -------- 
 
¶17.  In an interview on May 12, Central Bank President 
Martin Redrado said that the BCRA may sell its 
holdings of Boden 2011 to supplement the BCRA's 
absorption capacity.  The Boden 2011 is a peso- 
denominated bond adjusted by CER (CPI-linked index) 
with a 3.5 percent coupon.  The BCRA received ARP 6 
billion of these bonds from the GOA in compensation 
for its repurchase of provincial quasi-monies in 2003, 
and is the only holder of this bond.  Some analysts 
have argued that the BCRA may have problems containing 
the money supply this year as the BCRA continues its 
policy of rebuilding reserves.  However, Redrado 
downplayed any concerns about the BCRA having 
difficulty sterilizing the pesos it emits when as it 
intervenes in the FX market. 
 
--------------------------------------------- -------- 
BCRA rolls over its maturities and increases rates for 
some of its Lebacs. 
--------------------------------------------- -------- 
 
¶18.  The BCRA received ARP 1 billion in bids at its 
May 16 Lebac and Nobac auction, compared to the ARP 
800 million in Lebacs that came due during the week. 
Lebac accepted bids totaled ARP 667 million 
representing 84 percent of the total, with Nobac bids 
accepted for the remaining 16 percent.  The yield on 
the 28-day Lebac increased 25 basis points from 6.50 
percent to 6.75 percent, while the yield on the 63-day 
Lebac decreased slightly from 6.86 percent to 6.80 
percent and the yield on the 84-day Lebac increased 
from 7.00 percent to 7.15 percent.  The yield on the 
longest term instrument, the 280-day Lebac, was in 
10.20 percent.  Lebacs for maturities of more than 280- 
day were withdrawn due to lack of interest.  The 
spread on the one-year Nobac decreased from 2.16 
percent to 2.14 percent, while the two-year Nobac 
remained in 3.39 percent.  The Badlar rate (the base 
rate for Nobacs) is currently at 8.9 percent. 
 
--------------------------------------------- -------- 
Banks present profits of ARP 225 million in the first 
quarter of 2006. 
--------------------------------------------- -------- 
 
¶19.  Several banks listed on the Buenos Aires stock 
exchange presented their balances for the first 
quarter of 2006.  Most reported profits, including 
Banco Patagonia (ARP 76 million, up 216 percent), 
Banco Macro Bansud (ARP 73 million, up 20.3 percent), 
Banco Frances (ARP 41 million, up 26.2 percent) and 
Banco Hipotecario (ARP 64 million, up 27 percent). 
However, Banco Galicia reported losses of ARP 29 
million, compared to a profit of ARP 17 million in the 
previous quarter.  Galicia's negative results were 
primarily produced by its decision to accelerate its 
discount lending repayments to the BCRA. 
 
--------------------------------------------- -------- 
GOA reportedly will delay gas tariffs increase for 
industrial and commercial users until next year. 
--------------------------------------------- -------- 
 
¶20.  On May 16, local media reported that the GOA will 
delay gas tariff increases for industrial and 
commercial users supplied by Gas Ban -- one of the 
main providers of natural gas in the city of Buenos 
Aires -- until 2007.  This delay comes despite an 
April 10 decree that authorized a 15 percent average 
tariff increase for Gas Ban customers (including 
commercial, industrial and residential consumers). 
The same day that the decree was published in the 
Official Gazette, a spokesman for the Ministry of 
 
Planning said that tariff increases for residential 
consumers would not go into effect until 2007, despite 
the published decree.  Now it appears that gas tariff 
increase will not go into effect for industrial and 
commercial users either.  Local experts also predict 
that the Argentine government will be reluctant accede 
to tariff increases in 2007, an election year. 
 
--------------------------------------------- -------- 
Business sector reacts negatively to labor reforms. 
--------------------------------------------- -------- 
 
¶21.  On May 18, business sector representatives 
(including the banking, supermarket, commerce, food, 
rural transportation and industrial sectors) met with 
deputies from the Labor Committee to voice their 
concerns about changes to labor legislation that are 
being considered in Congress.  The business sector has 
two major concerns: (1) an amendment to article 66 of 
the Labor Law that would define an employee as being 
fired if the employer changes his labor conditions 
without his prior agreement, and (2) a bill that would 
eliminate the maximum threshold for severance pay in 
case of layoffs.  After the meeting, the business 
associations jointly issued a press release saying 
that these proposed changes would negatively affect 
employment rates and economic activity. 
 
--------------------------------------------- -------- 
Consumer Confidence Index up 5.1 percent m-o-m. 
--------------------------------------------- -------- 
 
¶22.  The consumer confidence index -- measured by 
Torcuato Di Tella University -- increased 5.1 percent 
m-o-m in May to 56.8 points, from 54.0 points in 
April.  Two of the three index components increased: 
consumer willingness to purchase durable goods and 
real estate (+15.3 percent m-o-m) and personal 
situation (+4.0 percent m-o-m).  There was a slight 
decrease in the third component of the index -- 
consumer sentiment towards the macroeconomic 
environment -- down -0.7 percent m-o-m.  The index 
increased 3.3 percent in the first five months of 2006 
compared to the same period last year and 10.4 percent 
y-o-y.  The index is based on surveys of individual 
economic sentiment and consumer willingness to 
purchase durable goods, houses and cars. 
 
--------------------------------------------- -------- 
The peso depreciated 0.3 percent against the USD this 
week, closing at 3.07 ARP/USD. 
--------------------------------------------- -------- 
 
¶23.  The peso depreciated 0.3 percent versus the USD, 
during this week, closing at 3.07 ARP/USD -- one cent 
higher than last Friday's close.  The peso's 
depreciation this week is attributed to the BCRA's 
intervention in the foreign exchange market as well as 
higher private demand for dollars due to rumors about 
a wheat export ban (see story above) and some 
contagion effect from international markets.  The BCRA 
purchased USD 323 million in the FX market in the 
first four days of the week, a daily average of USD 80 
million and lower than the daily average of USD 102 
million during the first three weeks of May.  The peso 
exchange rate has depreciated 0.7 percent since the 
beginning of the calendar year.  The BCRA's reserves 
now (as of May 16) stand at USD 23.9 billion, and have 
increased USD 5.4 billion, or 29 percent, since the 
GOA prepaid all of its IMF debt on January 2. 
 
--------------------------------------------- -------- 
Commentary of the Week:  "Obstacles to the 'Argentine 
Miracle", by Miguel Angel Broda from an article 
published in La Nacion on May 14 
--------------------------------------------- -------- 
 
¶24.  Argentina's economic indicators have turned in a 
spectacular performance, with 17 consecutive quarters 
 
of recovery.  The cumulative GDP increase during that 
time was 39 percent, driven by domestic demand, which 
rose 47 percent; it is confirmed by the 43 percent 
increase in the volume of exports and the 163 percent 
increase in imports, while industrial production has 
increased 53 percent and construction 122 percent. 
Furthermore, growth for this year is expected to 
exceed 7.6 percent. 
 
¶25.  There are various factors that explain this 
strong recovery: 
 
- An extraordinary external context, with the world 
growing above its historic average rate for the fourth 
year in a row, and with favorable terms of trade that 
could stay in place for the long term due to the 
insertion of China and India in the international 
scene as major consumers of primary materials; 
 
- The "technical bounce" that occurs after any 
collapse; and 
 
- Correct macroeconomic management by this government. 
On one side, the authorities have produced a high 
fiscal surplus and sensibly reduced financial 
obligations for the next few years in the debt 
restructuring.  On the other side, they have produced 
a high surplus in the current account by maintaining a 
high and competitive exchange rate.  Thus, the country 
has experienced an unheard of three consecutive years 
of twin surpluses (fiscal and current). 
 
¶26.  Because of this, and in contrast to what has 
happened in the past, Argentina today is not on the 
verge of any sort of macroeconomic explosion, nor any 
irreversible crisis.  In fact, it is in quite the 
opposite situation.  The Government has the 
opportunity to reach an "Argentine miracle."  But 
there are at least three obstacles to the country 
reaching a high and sustained growth rate. 
 
¶27.  First, investment is insufficient.  Without a 
doubt, the increase in gross investment has been 
impressive, increasing from 11 percent of GDP in 2002 
to 22 percent today.  However, looking at the 
functional linkage between the level o investment and 
growth in the economy, investment is still 
insufficient to sustain a robust rate of growth.  In 
reality, if we deduct depreciation of the stock of 
capital of the economy (13 percent of GDP) from gross 
investment (22 percent of GDP), we are left with a net 
investment figure (increase in the stock of capital) 
of 9 percent of GDP.  This flow of investment has a 
productivity (marginal and average) of approximately 
0.4 (i.e., each 1 percent increase in net investment 
produces a 0.4 percent increase in GDP or, inversely, 
the ratio of capital to production is 2.5).  Clearly, 
by investing 22 percent of GDP, we can grow at 3.6 
percent ((22-13) x 0.4).  However, to grow 6 percent 
per year, we would need to invest no less than 28 
percent of GDP.  In short, we are about 6 percentage 
points of GDP short of what we need to grow at a 
significant pace (5-6 percent per year), and we are 
particularly lacking investments by large companies, 
in public service companies, and foreign direct 
investment. 
 
¶28.  Concerning investment in privatized public 
utilities, the 2001-02 crisis required the breaking of 
contracts and the pesification and freezing of 
tariffs.  Four years later, since we still have not 
created a new regulatory framework, the companies have 
no other choice but to limit their investments.  The 
sector today has an inefficient division: old 
investments with sunk capital and frozen tariffs run 
by the privatized contract holders, while new 
investment is being made by the Government, using 
money from fiduciary trust funds that receive special 
tax and surcharge revenues.  This Argentine invention 
 
has all of its incentives backwards.  The private 
concession holders don't invest due to the lack of 
profitability and the risk of an "Evo-ization," while 
the State does everything at a much higher cost and 
over a longer period of time.  It will be very 
difficult to improve the productivity of capital and 
increase investment with this system of perverse 
incentives in place. 
 
¶29.  Concerning foreign direct investment, Argentina's 
share of the total flow of foreign direct investment 
into Latin America is falling, totaling just 6 percent 
of the total versus 14 percent in 1996-2000. 
Furthermore, only a fraction -- 13 percent -- of the 
profits generated from this investment is being re- 
invested, compared to 30 percent in 1996-2000. 
 
¶30.  This lack of significant national or foreign 
investment is due to the government's excessive 
intervention in the market, the volatility of the 
rules of the game, and the lack of judicial security, 
all of which prevent a predictable investment horizon. 
The response of the Government to this lack of 
investment has been to revive the archaic idea of the 
State's supplementary role as a substitute for private 
investment.  The State, instead of planning and 
directly making the needed investments, should create 
the conditions needed to attract private investment 
that would produce a qualitative leap in productivity 
and thereby consolidate the strong quantitative growth 
of the last few years. 
 
¶31.  Secondly, a number of microeconomic distortions 
are accumulating.  Particularly worrisome is the use 
of the price system and trade policy as anti- 
inflationary tools.  The current system of "political" 
prices and subsidies is perverse because it stimulates 
demand and reduces supply, making what is scarce cheap 
and what is abundant, expensive.  These price 
distortions no longer fulfill their role reflecting 
the relative scarcity of goods and inputs, creating 
disequilibria between supply and demand, disinvestment 
and poor allocation of resources, damaging long-term 
growth prospects. 
 
¶32.  Lastly, the Argentine State itself is an 
obstacle.  Countries that have reached high and 
sustained levels of growth have governments that: (1) 
work from an strategic plan and don't try for short- 
term political gains that detract from their long-term 
objectives; (2) stimulate social mobility by promoting 
equality of opportunity in the education system, 
rewarding hard-work, merit and innovation; (3) 
increase their investment in research and development; 
(4) work actively to obtain greater openness of 
foreign markets and to generate externalities for the 
development of productive clusters; and (5) create the 
mechanisms for the efficient use of resources and 
increases in productivity.  Unfortunately, the 
Argentine State has caused considerable delays in all 
of these areas. 
 
¶33.  In conclusion, given the unbeatable external 
environment and the macro stability it has reached, 
Argentina has the possibility of a brilliant future, 
after 30 years of mistakes.  Nevertheless, due to the 
economic policy of the current government, the country 
faces significant barriers to reaching the "Argentine 
miracle."  I hope I am mistaken.  (Note: We reproduce 
selected articles by local experts for the benefit of 
our readers.  The opinions expressed are those of the 
authors, not of the Embassy.  End Note.) 
 
 
GUTIERREZ