Argentine Economic Crisis 1998-2002
Abstract
During the east Asian crisis of 1997, Argentina was being referred to as a model state because of its fixed exchange rate regime. However, by 2001, due to several macroeconomic reasons the economy had collapsed. It is now clear that Argentina will reverse at least some of the economic reforms introduced by president Carlos Mennen in the early 1990s to survive the crisis it is currently experiencing. That small and open economies are far more susceptible to large external shocks, such as changes in foreign interest rates, terms of trade, regional contagion effects, etc, is among the many lessons of the Argentine crisis.
Argentina : The Country Argentina is a massive South American nation with terrain encompassing Andes mountains, glacial lakes and Pampas grassland, the traditional grazing ground of its famed beef cattle. The country is famous for tango dance and music. Its big, cosmopolitan capital, Buenos Aires, is centered on the Plaza de Mayo, lined with stately 19th-century buildings including Casa Rosada, the iconic, balconied presidential palace.
Argentina : The Economy The economy of Argentina is an upper-middle income economy for fiscal year 2016 according to World Bank Latin America’s third largest, and the second largest in South America behind Brazil.
The country benefits from rich natural resources, a highly literate population, an export-oriented agricultural sector, and a diversified industrial base. Argentina’s economic performance has historically been very uneven, in which high economic growth alternated with severe recessions, particularly during the late twentieth century, and income maldistribution and poverty increased. Early in the twentieth century Argentina had one of the highest per capita GDP levels in the world and the third largest economy in the developing world. Today a high-income economy, Argentina maintains a relatively high quality of life and GDP per capita.
Argentina is considered an emerging market by the FTSE Global Equity Index, and is one of the G-20 major economies.
Economic History of Argentina Argentina possesses definite comparative advantages in agriculture, as the country is endowed with a vast amount of highly fertile land. Between 1860 and 1930, exploitation of the rich land of the pampas strongly pushed economic growth. During the first three decades of the 20th century, Argentina outgrew Canada and Australia in population, total income, and per capita income.By 1913, Argentina was the world’s 10th wealthiest nation per capita.
Beginning in the 1930s, however, the Argentine economy deteriorated notably.The single most important factor in this decline has been political instability since 1930, when a military junta took power, ending seven decades of civilian constitutional government.In macroeconomic terms, Argentina was one of the most stable and conservative countries until the Great Depression, after which it turned into one of the most unstable. Despite this, up until 1962 the Argentine GDP per capita was higher than
of Austria, Italy, Japan and of its former colonial master, Spain.Successive governments from the 1930s to the 1970s pursued a strategy of import substitution to achieve industrial self-sufficiency, but the government’s encouragement of industrial growth diverted investment from agricultural production, which fell dramatically
The era of import substitution ended in 1976, but at the same time growing government spending, large wage increases and inefficient production created a chronic inflation that rose through the 1980s. The measures enacted during the last dictatorship also contributed to the huge foreign debt by the late 1980s, which became equivalent to three-fourths of the GNP.
In the early 1990s the government reined in inflation by making the peso equal in value to the U.S. dollar, and privatised numerous state-run companies, using part of the proceeds to reduce the national debt. However, a sustained recession at the turn of the 21st century culminated in a default, and the government again devalued the peso. By 2005 the economy had recovered, but a judicial ruling originating from the previous crisis led to a new default in 2014.
Argentina : Depression, Revolt and Recovery During most of the 1990s, Argentina outperformed most other countries in Latin America in terms of growth. However, in the late 1990s, Argentina’s hard currency peg to the US Dollar, pro-cyclical fiscal policies and extensive foreign borrowing left the country unable to deal with a number of economic shocks. This eventually led to the outbreak of a severe currency, sovereign debt and banking crisis.
The Timeline November 30th , 2001 – As a result of rising worries among Argentines about a peso
devaluation and a deposit freeze, overnight interest rates rise sharply. Moreover,
spreads between US Treasury bonds and Argentine government bonds increase to
5,000 basis points. A bank run begins.
December 1st , 2001 – In order to avert an aggrevation of the bank run, the Minister of
Economy Domingo Cavallo announces a freeze on bank deposits. The deposit freeze,
popularly called the Corralito, proves that the existing Convertibility Plan, which had
coupled the Argentine peso to the US Dollar on a one-to-one basis since 1991, is
untenable. The foundation of the Convertibility Plan, the possibility of freely converting
Argentine pesos into US Dollars, has become meaningless, as deposit holders can no
longer access their savings. This causes unrest among the Argentine population and
people start to demonstrate; similar freezes imposed in the 1980s had deprived the
population of the means to protect their savings against high inflation.
December 5th , 2001 – Social unrest further grows after the IMF announces it will cut off
its support, as Argentina continuously fails to meet the conditions tied to the rescue
program that has been in place since September 2001. This means that Argentina loses
access to its last source of foreign capital. With a total amount of almost USD 22bn in
2000 and 2001, the IMF support for Argentina is larger than its support for any other
country at this time. In the protests and looting that follow, 24 people lose their lives.
Both President De La Rúa and Minister of Economy Cavallo will resign soon after these
events.
December 23rd , 2001 – President Rodriguez Saá, who has just been elected by the
Argentine Congress, announces the default on USD 93bn of Argentina’s sovereign
debt. Rodriguez Saá will have to resign a couple of days later, thereby increasing
political instability even more; as much as four different presidents will try to rule
Argentina in December 2001, none of them however manages to remain in office.
January 1st , 2002 – The Argentine Congress chooses Eduardo Duhalde as the new
president.
January 6 th , 2001 –The implementation of the Law of Public Emergency and Reform
of the Exchange Rate Regime marks the end of the Convertibility Plan. At first, the peso
is devalued from 1 peso per Dollar to 1.4 peso per Dollar. Later on, the exchange rate
will become fully floating, which allows the peso to depreciate even further.
Aftermath
The economic and social impact of the crisis is huge. While economic growth had
already been negative in every year since 1998, the economy contracts by 11% in
2002. In absolute terms, GDP per capita in 2002 is only slightly higher than twenty
years earlier. Along with the fall in GDP, the unemployment rate rises from 14.8% in
1998, to a peak of 22.5% in 2001. As a result of the deteriorating economic situation,
the proportion of Argentines living below the (national) poverty line rises sharply from an
already high 25.9% in 1998 to 57.5% in 2002. Partially thanks to the strong depreciation
of the peso, the Argentine economy starts to recover in the course of 2002.
When the IMF stops providing new loans in December 2001, Argentina fully loses its
access to foreign finance. In order to regain the access to the international financial
markets it lost in the run up to the crisis, the government needs to restructure the debt
on which it defaulted. However, as Argentina posts large surpluses on the fiscal and
current accounts after the default and large devaluation of the peso, access to foreign
finance has become less urgent. Argentina takes a hardline approach against creditors,
which results in protracted negotiations. By 2010, 92% of the Argentine defaulted debt
has been restructured. However, ongoing litigation by holdout creditors could lead to a
new Argentine default in the near future.
Concluding remarks The Argentine economic crisis was caused by the undesirable confluence of several
economic events: a hard currency peg, currency overvaluation, economic rigidities,
inappropriate fiscal policy, external shocks, large scale foreign currency borrowing
followed by a sudden stop in capital inflows and enduring IMF support played an
important role in the course of the crisis. This, together with the political and social
turmoil that accompanied the events, made the Argentine crisis one of the most severe
emerging market crises in history. As world economic growth in the early 2000s was
strong and Argentine producers benefitted from the strong depreciation of the currency,
the Argentine economy was able to recover rather quickly. Profound reforms were
therefore not implemented.
References Blustein, P. (2005), ‘And the Money Kept Rolling In (And Out): Wall Street, the IMF and the Bankrupting of Argentina’
Feldstein, M. (2002), ‘Argentina’s Fall: Lessons from the Latest Financial Crisis’, Foreign Affairs, 81:2
Ozdemir, Y. (2007), ‘Politics of Price Stabilization: a Comparative Analysis of Argentina, Brazil, Israel, Mexico, and Turkey’, Pittsburgh: University of Pittsburgh
http://www.imf.org/en/publications
Wikipedia: Argentina
Wikipedia: Argentinian Economic crisis
