Argentina’s crisis

Argentina’s crisis                                                                                                                                   Page  of

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Causes of the crisis

Argentina has had a history of turbulent economic, political and monetary problems. The country experienced rapid economic growth during the periods of early 1900s, mainly due to an enormous increase in exports of goods to the European market. However, due to frequent structural changes in the type of government, the country has for long suffered from unstable political and economic situation. Prior to 1999, the Peso was pegged to the USD in response to the ongoing hyperinflation. The successful growth of the real GDP to 10.3% in 1992 led to an overly optimistic view of the country’s future growth potential. However, with major economic changes in other countries, the repercussions on the Argentine economy did not end too well.  The policy decision regarding fixed exchange rate caused a major problem later that triggered the economic crisis of 1999-2002. As the economy of the United States became stronger and stronger, USD began appreciating relative to Peso. This led to a fall in the Argentine exports as these goods became more expensive than before. The repercussions of the East Asian currency crisis furthered the likelihood of a recession in the country. Brazil, which was Argentina’s largest trading competitor, devalued the Real from 1.21 per dollar to 2.18 per dollar. Due to the depreciation of the Brazilian currency, Argentine products were substituted, and investors and buyers found their dollars could buy more in Brazil than in Argentina. Due to a reduction in exports, the Aggregate Demand curve shifts left, thereby reducing overall price level and real GDP of the economy. This signaled the contraction of the economy. Focused on extensive borrowing for the sake of increasing spending, something that costed the country a lot in the long run.

Due to extensive borrowings by the government during the periods of 1995-2001, the total government expenditure as a percentage of GDP increased from 19.6 % in 1995 to 23.2% in 2001. Eventually, the government acquired a lot of debt which soared domestic interest rates. In the 1990s, the government of Menem enforced a system of free enterprise that stimulated a wave of privatization. However, his led to additional problems with regards to unemployment. Around 1998, real wages lost roughly 36% of their purchasing power and unemployment climbed to its highest point since the Great Depression. The main problem came when all these changes began having micro level impact. Due to privatization of many sectors, costs of basic services such as the electricity and phones spiraled upwards causing inflation in the economy. Argentina was clearly in a recession by this time. The debt burden along with the shrinking tax revenues, signaled economic slowdown in the country, and made IMF decide to not bail the country out.

Consequences

In 1998, Argentina entered what turned out to be a four year depression, during which its economy shrank by 28%. Argentina’s currency, the peso, which was equal to 1 US$ since April 1991 (when Argentina’s president decided to fix the exchange rate), was devaluated in January 2002 and depreciated to nearly 4 per dollar before nearly recovering. Inflation which was low or negative since the early 1990’s increased by 41% in 2002. Unemployment increased from 12.4% in 1998 to 18.3% in 2001 and 23.6% in 2002. The poverty rate rose from 25.9% in 1998 to 57.5% in 2002. Finally the real wage fell 23.7% in 2002.

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