What is driving Argentina’s economic recovery?

The modest soybean:

Two years after hitting rock bottom, Argentina’s economy is on the rebound. Although the 10-month-old government led by President Nestor Kirchner has taken credit, economists are praising the soybean – a small, round legume packed with protein that is at the margin of Argentina’s beef-heavy cuisine but at the heart of its economy.
Soybean prices have soared to their highest levels since 1988, bringing in billions of dollars in foreign currency and powering the economy’s 8.7 percent growth last year.
Taxes on soybean exports, meanwhile, have been a godsend for the cash-strapped government, providing a huge chunk of its budget surplus.
In recent years, soybeans have swept across Argentina’s vast plains, replacing other crops and cattle to become the nation’s top export.
The nation’s once formidable industry is still in ruins, and widespread unemployment in sprawling, urban slums remains, but the small towns that dot the sparsely populated pampas are bustling.
An emerging group of soybean-growing businessmen equipped with cell phones and sport utility vehicles is driving the boom. They have amassed huge tracts of land, building expansive agro-industrial operations that have begun displacing the region’s gauchos and small-scale farmers.

And who is buying all these soybeans?

Most of the soybeans are exported to China and other Asian countries, where they are crushed into a meal used as feed for livestock.

Here is the full story.

I have long wondered: why don’t individual investors diversify more? OK, it is bad for a country to be so heavily dependent on one crop. But surely individual investors — most of all soybean growers — should internalize these risks and hold a more diversified portfolio. Many of them don’t.

What is the upshot? Is the resulting high volatility simply the only way to get high growth? Perhaps you need non-diversified positions to generate the proper entrepreneurial incentives. On top of that, perhaps you need volatile upswings to cover your fixed costs as you move to the next stage of progress, a’ la Andrei Shleifer. Smoother growth patterns would lead to a lower average rate of growth. Or does raw hubris cause individual investors to diversify too little, thereby leading to a social inefficiency? Or how about the old days, when Kenneth Arrow argued that individual investors don’t take enough risk? I am inclined to agree with Shleifer, but these are some of the genuinely open questions in development economics.


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