Argentina - Economy

Argentina has one of the most highly developed economies and most advantageous natural resource bases of Latin America, but political instability and conflicts among various sectors of the economy have delayed the realization of this potential. The delay has likely been lengthened by the four-year recession that turned into an acute financial crisis in 2001 and 2002 that reduced Argentina's per capita income from $7,330 in 2001 (the highest in Latin America) to $2,700 in 2002 (the sixth highest), and left an estimated 54.3% of the population below the poverty line. It may have set a modern record for the amount of wealth lost in the shortest period of time.

Argentina's economy had weathered repeated blows to its prospects for sustained growth during the previous decade—deep recession and slow growth that accompanied hyperinflation in 1989 (4,924%) and 1990 (1,344%), a recession in 1995 following the devaluation of the Mexican peso, non-stop recessions from 1999 that followed the successive impacts of the Asian financial crisis in 1997, the Russian financial crisis in 1998, and the Brazilian financial crisis in 1999, all raising the question of the viability of emerging markets like Argentina's, and finally the global slowdown caused by the United States recession from the beginning of 2001, aggravated by the aftereffects of the 11 September 2001 terrorist attacks on the United States, which in particular put a chill on foreign investment flows. However, the factor that seems to have pushed the Argentine economy over the brink was a tough policy by the incoming Bush administration with respect to IMF rescue packages. Public doubts were expressed by the US Treasury as to Argentina's ability to repay its debts and there was public discussion about a willingness to allow an "orderly default." Unpopular steps taken by the government—tax increases (January 2000, April 2001, and August 2001), spending cuts, a "zero deficit" target, and restrictions on bank withdrawals to preserve the peso's convertibility to the dollar—proved of no avail in stopping the decline in investor and consumer confidence, evidenced in widening spreads on Argentine bonds, massive withdrawals from the banks, a halt to investment and a slowdown in production, with a consequent decline in revenues, and a hopelessly worsening debt situation. The IMF had agreed to a standby agreement in December 2000, and to its enhancement in March 2001 when it became apparent that the original targets were not going to be met, but no agreement on a third arrangement could be reached at the end of 2001, as street violence broke out and the country went through an extraordinary "five presidents in two weeks." It was the third president who actually took the step of defaulting on payments due on $132 billion of bonds in late December 2001, and it was the fifth who broke the one-to-one peg of the peso to the dollar in January 2002, which plunged to a low of EC $3.87/ US $1 in June 2002. With the devalued currency, external debt jumped from 56% of GDP to over 130%. In November 2002, Argentina also defaulted on payments due the World Bank.

Economic stagnation during the 1960s was due partly to the tremendous government bureaucracy and partly to political and social unrest, which caused serious work stoppages. Prior to 1970, Argentina suffered serious deficits in trade balance, but with increased exports, favorable trade balances were achieved during the 1970s. In 1974, increases of 7.6% were registered for agriculture, 7.5% for commerce, and 22.3% for construction. However, the average increase of annual GDP registered only 40% from 1977 to 1987. During the period between 1988 and 1999, average annual growth reached 4.4%, due largely to successful economic planning and political stability. On 23 January 2003 the government entered into a nine-month agreement with the IMF supported by loans of $6.87 billion with the explicit understanding that a longer term arrangement would be concluded following the presidential election in April 2003. The winner, Nestor Kirchner, is a Peronist, but from Patagonia and not widely known. He has promised a $3-billion public works program but without deficit spending. His government and the IMF have until August 2003, when the program runs out, to work out a longer term arrangement.

There was widespread inflation in the early 1960s, but rigid controls initiated in 1967 decreased the rate of inflationary growth. From 1973, however, a combination of political instability, massive budget deficits, and union wage demands increased inflation once again. At the time of the March 1976 coup, the annual inflation rate was 444%; it decreased in the late 1970s but rose again to 209% in 1982. The peso had so depreciated by 1982 that the government decided to redenominate the currency in 1983, at 10,000: 1. Also in 1983, Argentina received a stabilization loan from the IMF to compensate for the effects of inflation and recession. As a condition for the loan, the government agreed to reduce the inflation rate to 165% in 1983. By autumn, however, inflation was running at an annual rate of over 900%; the inflation rate for the whole of 1983 was 434%, the highest in the world. Thereafter, it rose without interruption until it reached some 1,200% in mid-1985. At that time, the government introduced the Austral Plan—a bold attempt to halt inflation by freezing wages and prices, revaluing (and redenominating) the currency, and resolving to finance public spending with real assets only (not by printing money); under this plan the annual rate for 1985 was cut to 385%. By the end of 1986, the rate had been cut further to 82%; by early 1987, however, inflation had begun to surge again, and it was expected to exceed 100% by the end of the year.

In July 1989, President Carlos Menem of the Justicialista Party took office at a time when the economy was entangled in a hyperinflationary spiral. In 1991, President Menem unveiled an innovative stabilization/reform program which was implemented successfully. The cornerstone of the stabilization/reform plan was to link the peso to the dollar at a fixed rate of 0.99 pesos per dollar (under the 1991 "Convertibility Law"), and requiring congressional approval for devaluation. In 1992, economic policy continued to focus on structural adjustment involving a strategy of cleaning up the fiscal accounts. The reforms took on a four-pronged approach: fiscal revenues were strengthened through a broadening of the VAT and an enhancement in revenue enforcement; administrative reforms included a substantial cut in public payroll and revamping of national fiscal accounting; the use of the Central Bank's rediscount window to finance deficits of provincial governments was curtailed; and public enterprises were privatized. Both revenue enhancements and expenditure cutbacks sharply reduced the inflation rate

After three years of swift growth, the devaluation of the Mexican peso on 20 December 1994 pushed the Argentine economy into a severe recession, but Economy Minister Domingo Cavallo took an austere line and refused to devalue the Argentine currency in 1995, even though the economy shrank by 4.4% in that year. However, the economy began to recover in 1996, and by 1998 the inflation rate held at about 1%, one of the lowest rates in the world. Even though inflation was low in 1999, a recession brought the realization that high consumer prices were not the only roadblock to economic development. Negative growth also reflected poor labor policies and a lack of capital in 2000

By 1974, the share of GDP from manufacturing amounted to almost a third of revenues; however, manufacturing (including mining) fell to 24.3% in 1986 and to 19% in 1998. The country has to a large degree overcome its dependence on imported machinery and finished products, but in their place there has grown a great external demand for parts and raw materials that are assembled or finished within the country. Basic industries, such as iron and steel, petroleum and petrochemicals, aluminum, plastics, and electrical equipment are being established, but these will continue to require extensive raw material imports for some time, or even permanently, because of the absence of certain minerals, such as bauxite (which is needed for aluminum production).

User Contributions:

Comment about this article, ask questions, or add new information about this topic: