Argentinas Economic Crisis Essay Example for Free

genus genus genus Argentinas Economic Crisis EssayTo purloin attention from increasingly severe political and economic problems, in 1982 the junta ordered an invasion of the nigh Falkland Islands, a British territory that Argentina had long claimed. British forces counterattacked and took back the islands. A huge debt was increase as a result of the war and at the end of the military presidency in 1983, the unpolisheds industries unemployment were severely affected (Saxton, 2003). In 1983, the junta transferred power to an elected civilian president, Raul Alfonsin of the Radical civic Union party. The new governments plans included stabilizing the providence and introducing a new bills knget as the austral. New loans were taken prohibited and state eventually was unable to pay the busy on debt and eventually the self-assertion in austral collapsed. Inflation spiralled out of control, gross domestic product shrank and wages send away by almost half. Following riots Pr esident Alfonsin stepped down six months before his term. In 1989, the Justicialist (Peronist) partys Carlos Menem began governing and in 1991, he ap addressed Domingo Carvalho as the Minister of the Economy who introduced Convertibility Law System, which took establish on April 1, 1991. Saxton, 2004, p. 4). The Convertibility Law System ended the hyperinflation by establishing a flagged exchange appraise with the U. S. dollar and supporting the currentness substantially with dollars. The aim was to ensure the acceptance of the nones after the 1989 and 1990 hyperinflation period, as people started rejecting the currency and demanding US dollars (Hill, 2011). The exchange rate was initially 10,000 Argentine australes per dollar on January 1, 1992 the peso replaced the austral at 1 peso = 10,000 australes = US$1. 4 (Saxton, 2003)Argentines were allowed to use dollars freely, price stability was assured and the value of the currency was preserved. The quality of life was raised f or many and people could afford to travel abroad, buy imported goods and take away for loans from banks at a low interest rate. Argentina curled extensive foreign investment, which helped modernize its utilities, ports, railroads, banks, and other sectors (Saxton, 2003). However, the persistent exchange rate made imports cheap which lead to loss of Argentinas industrial foot and increase in unemployment.In the meantime, government spending continued and public debts grew substantially as government needed to borrow to finance external debt. However, the government showed no intention of paying debt off and excessively delayed payment schedules, while IMF kept lending money. level offtually in 1998 Argentina entered in a four-year recession, during which its economy shrank 28 percent (Saxton, 2003). This happened as a result of the Argentina exports were harmed by devaluation of Brazilian substantive and international revaluation of the dollar effectively revaluing the peso ag ainst its major trading partners Brazil and the euro area (Hornbeck, 2002).By 1999, elected President De la Rua was left with a country where unemployment had risen to a critical point and the undesirable effects of the primed(p) exchange rate were showing. The De la Rua government was mainly worried near the federal budget deficit, which was 2. 5 percent of GDP in 1999. That left only one excerpt raising tax judge. President De la Rua secured approval for three big tax increases, effective January 2000, April 2001, and wonderful 2001. Hence, massive tax evasion and money laundering happened as headspring as led to funds evaporating to offshore banks.In 2001, the freeze on bank deposits began, in response to large withdrawals as people started losing confidence in economy. The economy turned from recession to depression as people and businesses could not make payments. Credit evaporated. many people took to the streets in angry demonstrations which also led to supermarket loo ting and President De la Rua resigning (Horbeck, 2002). By slow 2001, the government tax revenues plunged as the economy contracted and the Argentina government defaulted in its debt repayments, effectively interpretation ? 80 billion of government issued bonds worth little (Hill, 2011, p. 99). The debt default to IMF was the final nail in the coffin and in archeozoic 2002, the government finally allowed the peso to float freely. Hence, the peso immediately fell $1=3. 5 pesos (Hill, 2011). Q1. A frosty exchange rate is anexchange ratefor acurrencywhere the government has unflinching to link thevalueto another currency or to some valuable commodity like gold. For event in 1990, Argentina fixed the exchange rate of the Argentinean peso to the U. S. dollar at $1=1 peso. A government may fix its currency by holdingreservesof thepeg(or the summationto which it is fixed) in thecentral bank.For example, if a country fixes its currency to theBritish pound, it must hold enough pounds i n reserve to account for all of its currency incirculation. Importantly, fixed exchange rates do not change according tomarketconditions. It is also called a pegged exchange rate. For most of the period between 1975 and 1990, Argentina experienced hyperinflation (averaging 325% a year)+, poor or negativeGDPgrowth, a severe lack of confidence in thenational governmentand theCentral Bank, and low levels ofcapitalinvestment. After eight currency crises since the early 1970s,inflationpeaked in 1989, reaching 5,000% that year.GDP was 10% lower than in 1980 and per capita GDP had fall by over 20%. Fixed investmentfell by over half and, by 1989, could not cover yearlydepreciation particularly in the industrial sector. Social indicators deteriorated seriously actual wages collapsed to about half of their 1974 peak and income poverty rates change magnitude from 27% in 1980 to 47% in 1989. After the 1990s when Argentina fixed its Argentinean Peso against the Dollar, the economy started to s ettle and actually show the benefits that fixing an exchange rate can micturate.By adopting a fixed exchange rate, the government cut down uncertainties for all economic agents in the country. As businesses had the perfect knowledge that prices are fixed and therefore not going to change, hence they could plan ahead in their productions. The fixed exchange rate system avoids the idle day to day fluctuations that are likely to occur under flexible rates and that discourage specialty in production and the flow of international trade and investment. Argentina implemented its currency board in April 1991.Its main achievement was in controlling inflation, which was brought down from more than 3,000% in 1989 to 3. 4% in 1994. other major accomplishment of the system was renewed economic growth. Enjoying the high world prices ofprimary products(Argentinas main exports), GDP grew at an annual rate of 8% between 1991 until theTequila Effectof 1995. Even after theMexican crisis, until 1 998 the annual growth rate was 6%. International tradealso increased dramatically, reflecting the growing form of bleakness of the country. Imports increased from US$ 11. 6 billion in 1991 to US$ 32. billion in 2000. Likewise, exports also increased from US$ 12. 1 billion in 1991 to US$ 30. 7 billion in 2000. 2) Why was Argentina unable to maintain its fixed exchange rate regime? What does this tell you about the limitations of a fixed exchange rate regime? In the end, the fixed exchange rate regime did not brook and Argentina had to abandon this form _or_ system of government to regain its position in the market. This was mainly because the pegged value was devalued by many countries and this caused global economic growth to decline considerably and the demand of exported Argentina commodities to decrease aggressively too.This in turn made Argentinean goods more expensive in other international markets. On altitude of this, with Brazil devaluing their own currency against the US dollar made matters worse for Argentina as this had an model on their Argentinean peso, pricing their goods out of the market. The decline in global prices for farm products and the global economic retardent only added to Argentinas problems. Even though the fixed exchange rate policy had succeeded antecedently in strengthening Argentinas competitive positioning in the global market and turned on(p) economic growth, this would not have survived for long.The fixed exchange rate regime contains many drawbacks and would not have worked forever, as maintaining this fixed exchange rate conflicted with many other macroeconomic objectives of the country. There was also less flexibility present in a fixed exchange rate policy and caused difficulty for Argentina to respond rapidly to the shocks in the market, as pressure was added on to the currency. This affected the competitiveness of the market and also inflation rates, thus causing Argentina to alter their policy further.However, this is proven to be difficult as some countries may see this as an unfair trade advantage to them, causing some degree of disagreement between certain countries, affecting their competitiveness in the economy and making it harder for them to defend its own currency. Question 3 Do you think that the IMF was correct to insist that the Argentinian government adopt a fiscal austerity program? What other approach could the IMF have taken? The Argentine monetary crisis arrive at in 1999, but the IMF had been working closely with Argentine government since 1991 and had supported the Pesos peg to the US Dollar. IEO, 2003), (Stiglitz, 2002) The IMF (2003) considers their policies in the run up to the crisis to have been lax and based on too oft optimism. The organisation blames structural weaknesses in the economy mainly high public sector debt, as well as other factors like lack of labour market flexibility and their own enforcement on these issues. eyepatch supporting Argentina through lending, the IMF called for fiscal austerity in order to boost confidence and attract much needed international investment. (MacEwan, 2002), (Stiglitz, 2002), (IMF, 2003)The fund argues that an expansionary fiscal policy was ruled out because there was no surplus from which to spend and deficit spending would have caused the debt to grow at a higher rate than the economy. Furthermore, a budget deficit could have led to higher interest rates for borrowing. (IMF, 2003) Given the fixed exchange rate, an expansionary monetary policy, i. e. increasing the money supply, was not possible. (MacEwan, 2002), (IMF, 2003) MacEwan (2002) argues that fiscal austerity had the opposite effect and lessen markets confidence in the country, which led to a worsening of the crisis.An alternative view is that it is normal for a country to run a moderate budget deficit in a recession and that an expansionary fiscal policy would have been more appropriate. (Stiglitz, 2002), (MacEwan, 2002) MacEwan (2002) goes further and explains that curtailing social spending on education, health care, physical infrastructure projects cuts the legs out from under long-term economic progress. In recent years, in spite of the financial crisis and the still-recent default, the Argentine economy has been doing well, growing by 9. 2% in 2010 and 8. 8% in 2011 and is expected to grow at least 5. % in 2012, with the growth being attributed to both fiscal and monetary stimulus. (MarketWatch, 2011), (Dow Jones Newswires, 2012), (MercoPress, 2012) The expansionary policy has led to inflation rates of 22. 75%, which seem to be causing labour disputes when wage increases fail to keep up. (MercoPress, 2012) For conclusion, something like Even considering the high inflation rate (22. 75%) and resulting labour disputes, the situation is preferable to the massive debt and street riots of 2001. Q4 In the end the Argentinean government was forced to abandon its peg to the dollar.