Argentina Crisis Thesis

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Argentina Crisis

The Argentine Crisis

The country's economic possibilities did not foretell of any economic crisis, given the fact that Argentina was one of the world's wealthiest countries 100 years ago. Among the advantages that Argentina is able to exploit on economic level it is worth mentioning: rich natural resources, an agricultural sector very much oriented towards the exports activity, a diversified industrial base, backed by a highly literate population able to make efficient use of these opportunities.

However, these opportunities and resources, or their management, did not suffice for counteracting the effects of recurring economic crises, persistent fiscal and current account deficits, along with high inflation, increasing external debt, and capital flight (CIA, 2009). This is the image that best describes Argentina's economic context during the 20th century.

And the country's financial and economic decay did not stop here. The climax of the most important economic, social, and political crisis was reported in 2001, and was mainly expressed by severe depression, increasing public and external debt. After the interim President at the time declared the largest default in history regarding the government's foreign debt in December 2001, he resigned allowing the following President, Eduardo Duhalde, to announce in 2002 that the peso's 1 to 1 peg with the U.S. dollar had ended after a decade.

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However, it was only natural for the economy not to recover immediately. For example, the country's real GDP reached 18%, a value smaller than that of 1998. Regarding poverty, during that time 60% on Argentina's population was living below the poverty line.

But the economy started to recover, with the real GDP growing by approximately 9% each of the following five years. The factors behind the economic recovery relied on the advantages exploited by the country from the industrial capacity and labor that were not used during the crisis, the restructuring of the country's debt, the international financial conditions that favored the country's situation, and expansionary monetary and fiscal policies.

TOPIC: Thesis on Argentina Crisis Assignment

However, certain repercussions of the crisis still emerged. The inflation continued to increase. As a result, President Nestor Kirchner implemented price restraints for businesses taking place in the country, and restraints for exports taxes.

Currently, the country's economic situation is reflected by the following data: GDP - $575.2 billion; GDP real growth rate -- 6.8% in 2008, 8.7% in 2007, 8.5% in 2006; GDP per capita - $14,200; GDP composition by sector -- agriculture 9.9%, industry 32.7%, services 57.4%; labor force in urban areas reaches 16.27 million, the unemployment rate reached 7.9% in 2008, decreasing from 8.5% in 2007; population below poverty line reached 23.4% in 2007; budget -- revenues $86.65 billion, expenditures $82.85 billion.

The country's public debt decreased from 118% of GDP in 2004 to 48.6% of GDP in 2008. The official estimates rated inflation in 2008 at 8.6%, but non-official, more credible sources, estimate the real inflation rate at 22% (CIA, 2009).

Background of the Crisis

Although the country's economic and financial crisis officially began its critical period in 1999 when the real GDP decreased, the factors and events that led to this situation can be found in the decades before the crisis.

The economic problems that the country was facing can also be attributed to the military dictatorship that ruled Argentina. A tremendous amount of debt was reached between 1976 and 1983. Furthermore, the money in case was wasted on projects that were never finished. The situation continued with increasing unemployment rates that reached 18%.

Although since 1983 the military regime was replaced by a democratic one, with a government that intended to implement policies that were designed to stabilize the country's economy, the process was not a successful one. The government introduced the Austral, a new currency. This led to new loans, for which the state did not manage to pay the afferent debt. As a consequence, the government could not manage to keep inflation under control, which reached 200% in July 1999, and 5,000% for the year.

Another consequence was reflected by the significant decrease of people's wages. A series of riots of the population followed, determining President Alfonsin to resign, his place being taken by President Carlos Menem. Although his initial plan relied on populist reforms, he implemented plans based on liberalization of the country's trade, labor deregulation, and on the privatization of certain state companies that the state could not afford to keep.

Furthermore, the economy started to slightly recover, and inflation was kept more under control. In 1991, the country's currency was of 10,000 australes per 1 U.S. dollar. One of the most important financial strategies focused on maintaining the Central Bank of Argentina's dollar foreign exchange reserves as the same level as the cash in circulation was. This was intended in order to keep under control the convertibility of the currency.

In order to continue following this direction, the country's government implemented the law of convertibility that reinstated the peso as the country's official currency, attributing a fixed monetary value to the currency that equaled the value of the U.S. dollar.

The implementation of the law determined a series of positive effects that helped Argentina's economy and its population. As a consequence, inflation significantly decreased, price stability was kept under control, the currency value was maintained at a steady level. Population was directly affected by these positive changes, as the country's citizens were now able to benefit from higher living standards and to purchase many products and services that they could not afford before.

However, the situation was not as positive as it appears. The country was involved in enormous debts on international level, and besides having to pay back this money, the government needed to further borrow more money in order to support the state's expenses. The unemployment also increased.

Although the state had important international debt, it continued to increase its expenditures level. Corruption was also increasing significantly. Although the country's government was clearly unable to pay its international debt, the situation was somewhat influenced by the International Monetary Fund's decisions. The IMF decided not to stop lending money to Argentina. Furthermore, the IMF postponed payment schedules previously established.

The Crisis of Argentina

All the negative aspects that significantly affected the country's economy throughout the 1990s and the government's inability to counteract these factors have determined foreign investors to lose their trust in the country and its government, and to interrupt their collaboration with the Argentine state. Therefore, Argentina lost important amounts of money and the benefits granted by foreign investors.

However, foreign investors were not the only losing confidence in the state and withdrawing their money. The country's citizens also feared that the government could not support the economy, and started to withdraw significant amounts of money from banks, to further turn pesos into U.S. dollars, and to send the dollars abroad for better safety.

This chain of events led to a run on the banks. The government considered it was time to take serious measures. One of the most important measures implemented by the government at that time consisted in freezing all bank accounts for a period of 12 months. The exception was represented by small amounts of cash.

As expected, these measures were completely disapproved by the population, because of the negative consequences the limitation had in several cases. In order to express their disapproval, the country's citizens started a series of riots, which took place in several regions of the country, but mostly in Buenos Aires. The protests culminated in 2001 and 2002.

Although initially the demonstrations did not engage any form of violence, they developed into violent riots, with participants' range directed at destroying the property of banks, of private companies, especially of foreign ones.

Police became involved in these riots, trying to maintain a stable situation. But the participants were becoming more and more violent, getting involved into fights with the police and starting fires located at their places of interest.

In order to calm the situation, a state of emergency was declared. But its effect was exactly the opposite of what it was expected. The climax of the violence of protests was reached in 20 and 21 December 2001 In Plaza de Mayo of Buenos Aires. Among the damages created by the clashes, one must take into consideration several victims.

The situation further degenerated into a political crisis. The economic and financial crisis of the country was not properly managed at the time because the state could not gather a legal government, with several officials resigning, succeeded by others, who also resigned, creating chaos in the country's political system.

Regarding the country's public debt mentioned above and the government's inability to pay it or to diminish expenditures, in December 2001 the interim government at that time defaulted 93 billion of the total of the debt.

The government started to re-focus on the convertibility status, in its attempt to maintain a stable level of convertibility. This is when the Third Currency Plan, as it was referred to, was developed. The plan was based on creating the… [END OF PREVIEW] . . . READ MORE

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