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Guest post: Argentina’s GDP is bigger than Colombia’s

In a recent post, Juan Carlos Echeverry and Luis Fernando Mejía presented an exercise in which they compare the growth rates and sizes of Argentina’s and Colombia’s economies. From their analysis they conclude that Colombia has surpassed Argentina as the third largest economy in the region. However, the methodological drawbacks of their exercise are significant enough to invalidate the results.

First of all, it is fair to say that both Argentina and Colombia have exhibited strong growth in recent years. From 2003 to 2012, the average real growth rate was 7.2 per cent in Argentina and 4.7 per cent in Colombia. That is, GDP has doubled in Argentina, while it has increased about 50 per cent in Colombia. When comparing income levels, the authors chose a very simple but highly controversial methodology. They take nominal GDP figures and convert them to US dollars using nominal exchange rates, which we all know can be very volatile and not representative of actual purchasing parities.

Even more questionable than comparing GDP in current dollars is using a misleading exchange rate to do so. The authors take a rate that is determined in a marginal market, at which less than 3 per cent of foreign exchange transactions are carried out and where the premium over the official exchange rate is explained by its illegality and illiquidity. They ignore the exchange rate at which all legal foreign transactions are actually made (exports and imports of goods and services, debt payments, foreign direct investments, etc). Thus, the alleged drop in Argentina is not a slower growth story, but exclusively a valuation effect explained by the fact that the authors have chosen an arbitrary exchange rate for the Argentinean peso. By doing so, the authors claim that $60bn of Argentina’s GDP just vanished from one day to the other.

In any case, taking current exchange rates may be misleading as market rates tend to fluctuate sharply and comparisons can therefore change significantly in a short period of time. For that reason, international organizations have developed other methods to conduct such comparisons. The most common practice is to compute GDP figures adjusted for purchasing power parity (PPP). In this regard, the IMF and the World Bank calculated this month that Argentina’s GDP at PPP is about $746bn, almost 50 per cent greater than the Colombian figure of $499bn, as the graph above shows. Moreover, taking a look at relative standards of living, we see that annual GDP per capita at PPP is 70 per cent higher in Argentina ($18,205 PPP-adjusted, against $10,728 in Colombia).

Argentina lived during the 1990′s with a mistaken perception about where its economy was positioned in global terms, precisely because of mistakes similar to the one Echeverry and Mejía are now making. That is, to base the analysis of the productive capacity of a country on an unrepresentative exchange rate. We learnt to avoid this kind of mistake the hard way.