Thesis on "Argentina Crisis"

Thesis 10 pages (2673 words) Sources: 5

[EXCERPT] . . . .

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.

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

Continue scrolling to

download full paper ⤓

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.

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… READ MORE

Download Full Paper

Write a New Paper for Me

Quoted Instructions for "Argentina Crisis" Assignment:

“

Paper features:

The paper must include the following:

-The introduction : Brief Economic Information of Argentina" I prefer if you introduce it as story "

-The body's : discuses the problem through processing and analysis of the facts only

-The Conclusion : you have to show up your opinion in this section

-The Appendix: the paper should include for example Dates, Tables and Graphs, and you have put it all in the last page of the paper.

-Bibliography: you must use only " Academic Recourses ", NO cut and paste , you have to Cite all the information's that used

-10 page length

This is my outline "but you can make change on it or use your own outline if it's better":

- The introduction

- Background of the crisis

- The Crisis of Argentina

- Privatization

- Deregulated the economy

- Factors Contributing to the Crisis

- The IMF & the Crisis

- The Conclusion

Argentina :

With a population of around 40 million, Argentina returned to elected civilian democracy in 1983 after seven years of harsh military rule. President Raul Alfonsin successfully consolidated the government; brought issues like human rights back to the public debate; and made the case for trade liberalization, deregulation, and privatization. However, Alfonsin was lacked the leadership skills necessary to carry out the economic reforms Argentina sought. Argentina at that time fell into hyperinflation. Inflation rose to 672 percent in 1985, and government expenditures increased from 11 percent of gross domestic product (GDP) in 1984 to 18 percent in 1985. The failure of the Argentine government to respond effectively to its economic problems contributed to an erosion of investor confidence, massive capital flight, devaluation of the peso, and hyperinflation of 3,080 percent in 1989 and 2,314 percent in 1990. As a result, president Alfonsin resigned five months before the end of his term in 1989. Carlos Menem, who had been elected president on a traditionally protectionist and took office. Menem surprised the country by announcing major plans to open the economy. The reforms he initiated during his first administration gave an immediate boost to the economy and ushered in a period of prosperity with the promise of change. However, Second term for Menem met with disappointment. The economy's decline exposed the limited nature of the reforms and the government's failure to open the market completely. Thus, Argentina faced a deep recession, and prospects of economic improvement are in doubt .

The Crisis:

President Menem instituted several serious reforms during his first term.In 1989 Argentinafell into hyperinflation. Inflation reached a monthly rate of 95% in March 1990, and theeconomy collapsed as residents scrambled to find alternative means for setting prices, maintaining savings, and doing economic transactions. A sharp contraction in monetary and fiscal policy brought inflation down to a monthly rate of 11% in April 1990. Further reductions in inflation were not achieved in 1990, and GDP, which fell by 6% in1989, did not grow in 1990. A new initiative in 1991 to establish macroeconomic stability and to improve policy credibility announced its Convertibility Program. The strategy adopted in order to eliminate hyperinflation and reverse the demonetization process was based on the designation of the U.S. dollar as legal tender. Convertibility Program established a currency board with an explicitly legislated, fixed exchange rate of 10,000 Australes (Argentina's old currency) per U.S. dollar. Any change in the exchange rate could be enacted only with new legislation. The currency board was required to provide full backing in U.S. dollars for any issue of Australes, and subsequently for the new peso. Moreover, the U.S. dollar was established as legal tender within Argentina. In 1989 when President elect Carlos Menem took office, the attempt of the government was to stabilize inflation failed, resulting in further depreciation of the peso and a serious reduction in the Central Bank's foreign currency reserves. However, unforeseen was the movements of the U.S. dollar in foreign exchange markets. The U.S. dollar has maintained extremely high valuation on international markets throughout the late 1990s, perhaps because of the desirability of U.S. financial assets such as stocks and bonds to international investors. Resulting from this the U.S. has run an extremely large trade deficit. In essence, a currency board system restricts the government's ability to issue notes and coins without a full backup of foreign reserves. Domestic notes and coins are fully convertible into the reserve currency at the fixed rate. Under this law, the government's liabilities could not be financed by printing money. This reform helped to arrest the hyperinflation problem immediately, and that what they were looking for to reform the economy system. in December 2001, Argentina suspended payments on its external debt and restricted deposit withdraw. In January 2002, it abandoned its peg to the U.S. dollar. Reflecting continuing uncertainty about financial conditions, interest rates have continued to rise and the currency has depreciated 356% against the U.S. dollar. In 2002 the impact of the Argentine crisis has been severe. Output is forecast to decline 15% and inflation to rise to 72%.Argentine citizens have been particularly outraged by the government's freeze on bank deposits, an important contributing cause of the uprising of December 2001.

How to Reference "Argentina Crisis" Thesis in a Bibliography

“Argentina Crisis.” A1-TermPaper.com, 2009, https://www.a1-termpaper.com/topics/essay/argentina-crisis-argentine/9204728. Accessed 5 Oct 2024.

Argentina Crisis (2009). Retrieved from https://www.a1-termpaper.com/topics/essay/argentina-crisis-argentine/9204728

A1-TermPaper.com. (2009). Argentina Crisis. [online] Available at: https://www.a1-termpaper.com/topics/essay/argentina-crisis-argentine/9204728 [Accessed 5 Oct, 2024].

”Argentina Crisis” 2009. A1-TermPaper.com. https://www.a1-termpaper.com/topics/essay/argentina-crisis-argentine/9204728.

”Argentina Crisis” A1-TermPaper.com, Last modified 2024. https://www.a1-termpaper.com/topics/essay/argentina-crisis-argentine/9204728.

[1] ”Argentina Crisis”, A1-TermPaper.com, 2009. [Online]. Available: https://www.a1-termpaper.com/topics/essay/argentina-crisis-argentine/9204728. [Accessed: 5-Oct-2024].

1. Argentina Crisis [Internet]. A1-TermPaper.com. 2009 [cited 5 October 2024]. Available from: https://www.a1-termpaper.com/topics/essay/argentina-crisis-argentine/9204728

1. Argentina Crisis. A1-TermPaper.com. https://www.a1-termpaper.com/topics/essay/argentina-crisis-argentine/9204728. Published 2009. Accessed October 5, 2024.

Related Thesis Papers: