Economy of Argentina Argentine peso Convertibility plan Corralito Corralón Cacerolazo 2001 riots Apagón Economic emergency law Debt restructuring
For most of the period between 1975 and 1990, Argentina experienced hyperinflation (averaging 325% a year), poor or negative GDP growth, a severe lack of confidence in the national government and the Central Bank, and low levels of capital investment.
Austerity measures pursued by President Raúl Alfonsín trimmed this 4% in 1985, though the 1989 crisis pushed the shortfall to 7.6% (which could only be financed by suspending debt interest payments).
[2] Since Argentina could not participate meaningfully in world capital markets given the great investment risk it posed, the only course available was the financing of these fiscal deficits by monetizing them.
Erratic or punitive responses to global financial vagaries by the Central Bank of Argentina itself often left the Argentine economy bearing the brunt.
This system involved a program of massive privatization and labor deregulation laws, which encouraged foreign investment and infused the country with cash to finance its fiscal deficits.
At the time, there was much debate in Argentina and abroad about how to control inflation and build confidence in local currencies in order to foster investment and growth.
Others argued that the peso should be pegged to the U.S. dollar because it would provide simplicity of understanding, the highest degree of safety, greater international credibility, and the promise of increased trade with the United States.
Enjoying the high world prices of primary products (Argentina's main exports), GDP grew at an annual rate of 8% between 1991 until the Tequila Effect of 1995.
Despite these impressive results, side effects on social issues included increased unemployment, unequal income distribution and decreased wages.
Initially, the poverty rate declined as hyperinflation receded, reaching 17% by 1993 (implying that the inflation tax was primarily absorbed by low-income households), but after the Mexican crisis the trend reversed.
Unwilling or unable to raise taxes, and precluded from printing money by the currency board system, the government's only other recourse to finance its budget deficit was to issue debt instruments in the capital markets.
The relative prices of public utilities thus increased and shifted wealth from the state to the privatized firms which, without any exchange control restraints, were free to expatriate these windfalls and invest them elsewhere.
In quick succession, the ensuing 1997 Asian and 1998 Russian financial crises pounded at the economy by further increasing interest rates as foreign investors became much warier of where they invested their assets, continuing to keep the cost of borrowing high for Argentina.
Argentina's competitiveness in world markets was severely hit, given the peso's link to the appreciating U.S. dollar and weakening demand in its northern trading partner.
Simply put, the dollar peg overvalued the peso in the rest of the world, especially against a weak euro and the Brazilian real, reducing Argentina's competitiveness and compounding the account deficit.
Since most of country's debt was denominated in U.S. dollars, there would be a huge cost to breaking the peg, not to mention the long-term damage to Argentina's credibility in world capital markets.
On the other hand, allowing the market to determine the exchange rate would radically improve competitiveness and eliminate the current account deficit along with the need to borrow money to finance it.