In the past, Argentina was a country that has been well known for her gauchos, soccer, and the Tango. Today, Argentina is also known around the world for economic collapse and default. This paper aims to pinpoint the reasons for Argentina’s economic decline and discuss the steps that are being taken to turn the economy around and ensure that this type of crisis never happens again.
My interest in Argentina and her economy stems from the fact that Argentina was my home for a year. After I graduated from high school, I traveled to Argentina as a foreign exchange student. During the time I was there, I did a lot of sightseeing, learned a new language and culture, and met many wonderful people. I lived with two host families during my stay. My first family owned their own clothing store. My host mom would make most of the clothes, while my host father ran the business. They made enough money to support their three daughters, but still only lived in a three-bedroom apartment with minimal amenities. My second host family also had three daughters. My host mother was not always employed, but during my stay she took a job as an English teacher, working 2 days a week. My host father worked in Buenos Aires, so he was only home on the weekends. They were fairly well off, they could afford to live in a house with a pool, which was quite a luxury. Most families in Argentina were not so well off. Families like my two host families seemed to be the exception, not the rule.
My two best friends in Argentina were Juliana and Valeria. Unlike my two host families, both of their families struggled to pay the bills and support their families. Juliana’s father worked in a factory and her mother was a teacher, but they had 4 children to support and money was always tight. Valeria’s father drove a van that brought passengers from the city of San Nicolas to the city of Rosario, while her mother struggled to find a job. Despite their hardships, I never felt more welcome than I did when I was at Juliana or Valeria’s house. I was always invited to stay for dinner or overnight. I felt just like a part of the family.
Since these people are like family to me, I was rather upset when I learned about the economic problems their country experienced. When I returned to Argentina a year and a half later, in January of 2002, the changes I witnessed were astounding. What had previously seemed to be a relatively stable society had completely turned around. People were now living in fear and fighting to put food on their table. U.S. dollars were in high demand, because Argentine money was on the brink of being devalued. Instead of going to the bank to exchange my US dollars for Argentine pesos, I traded my money with the people I was staying with. Dollars were worth something because they had stability and value, whereas the peso did not. Shortly after I left, the value of the peso dropped almost 50%. People with whom I was close, like Valeria’s parents, had lost their jobs and were struggling to find work and take care of their families. I did not understand why all of these things were happening and what brought this crisis about. It upset me to see the people I cared about struggling. I wanted answers to why all of this was happening. I wanted to know what factors led up to this crisis and how the country would respond and recover from it.
In the 19th century, Argentina was viewed around the world as an emerging and promising country, a possible world leader. Argentina is the eighth largest country in the world and the second largest in South America, with a geography as diverse as any other (Lewis, 2001). The country is rich in natural resources such as petroleum and tin, and has also developed agricultural industries such as meat production, wineries, and cotton (Lewis, 2001). Argentina has a population of over 37 million and the majority of those people are literate (Lewis, 2001). Well into the early 20th century, Argentina was perceived as a land of opportunity and economic progress (Powers, 2001). The country enjoyed political stability, rapid economic development, and wealth (Sullivan, 2002). Argentina was among the first countries in Latin America to industrialize, urbanize, and develop a large middle class (Powers, 2001). Argentina’s goal was to become a leader of Latin America, which at the time seemed like an achievable goal. Unfortunately, Argentina’s early progress was not sustainable. A history of military rule, economic chaos, and poor political decisions turned Argentina’s goal of being an international leader into a struggle to even survive.
This struggle has been a part of Argentina’s history for years, but became readily apparent in the 1940’s. In 1943, the military intervened and took over Argentina’s government. Strangely enough, this was a welcome change to the people because they thought power would be returned to them shortly. They were mistaken. The military remained in power for two years. During this time, Juan Domingo Peron was a junior army officer, but he soon became so much more. He was initially put in charge of the Labor Department, but he kept moving up the ranks and eventually became Secretary of Labor and Social Welfare. In this position, Peron implemented a number of improvements and pro-labor policies, including higher wages, better working conditions, and guaranteed vacations. His reforms made him very popular with the working class. With their support he was able to overthrow the dictatorship and lead a major political movement that still remains a major force in Argentina today. (Lewis, 2001)
Peron won the presidential elections in 1946. During his first year in office he continued on his course to help the working class. Among other things, the government set minimum wages, limited the length of the workday, mandated workplace standards, and dictated that employees be given benefits. Peron knew that if he kept the working class happy, they would continue to support him. Aided by his wife, Eva Maria Duarte de Peron (Evita), Peron also reached out to the poor. However, Peron’s main goal was to expand his political base and stay in power. (Lewis, 2001)
In his first year as president, Peron set a number of economic changes into motion. His goal was make Argentina’s economy more self-sufficient by promoting industrial development, creating more jobs, and promoting local industries. Since the US was a dominant economic power at this time, it competed against Argentina for shares of the world market. Argentina was unable to pay the high tariffs imposed on them by the US and therefore was unable to export their grain and beef to the US. This meant that Argentina could not exchange its exports for US imports. In addition, World War II had done a considerable amount of damage to the European countries that Argentina had formerly traded with, so a number of Argentina’s exports were of little use there as well. As the export market slumped for these reasons, Peron decided that becoming self-sufficient was the answer. (Lewis, 2001)
The path to self-sufficiency was not so easy, or cheap. Industrial development was a tremendous expense, but Peron used revenues from Argentina’s two main industries, farming and ranching, to pay for the creation of new industries. In order to take charge of the export industries, he created the IAPI, or State Institute for Trade Promotion. This institute bought agricultural products from Argentine farmers at extremely low prices and sold them on the world market at the highest possible cost to Europeans who, suffering from the effects of the war, had no choice but to buy them.
The IAPI was initially a success and yielded huge profits. Profits from the IAPI were used to set the government’s five-year plan, also known as the Government Plan, into action. The Government Plan called for economic independence by creating and expanding industries such as the railroad, communication companies, and power companies. This plan projected more than a 43% growth in the industrial sector by
1953. (Lewis, 2001)
Growth was Peron’s main goal. The changes he made and policies he set into motion were designated to promote economic growth and self-sufficiency. Initially, he was successful. During the first two years of his presidency, conditions were greatly improved. Wages and living standards were higher, the economy had grown, and public confidence in their government and president was extremely high. By 1949, all of these positive changes were forgotten.
Changes throughout the world hurt Argentina’s economic growth. In 1948, the US implemented the Marshall Plan, which provided loans and credits to struggling European countries. This plan guaranteed that grains and meats from North America were sent to Europe and purchased through the provided credit, but in doing so, blocked Argentine products from European markets. In addition, international prices for agricultural goods had decreased significantly, making the IAPI increasingly unpopular. Instead of buying expensive Argentine goods, many countries were turning to the US and Canada for cheaper imports. Bad weather in the 1948-1949 agricultural year hurt crop production in Argentina, and decreased the volume and value of agricultural exports. A severe drought followed shortly after in the early 50’s, resulting in Argentina’s lowest harvest in 50 years. (Lewis, 2001)
During the 1950’s and early 60’s, the economic program collapsed. By 1952, inflation had reached 30% annually. Export revenues had decreased significantly and Argentina could no longer afford to maintain its social and economic programs. So, in 1953, the government initiated a second five-year plan. Instead of expanding industrialization, this plan focused on decreasing inflation, reviving agriculture, and attracting foreign investment. The plan succeeded in reducing inflation, which fell to 4% that year. However, both industrial and agricultural production were slow in showing any progress. Peron tried a number of tactics to spur growth, but failed. On August 31, 1955, Peron publicly announced his resignation to the people of Argentina and on September 19th of that year, he resigned. His resignation was a sign to many Argentineans that their problems were not over, but only just beginning and Argentina plunged deeper into political and economic instability. (Lewis, 2001)
This instability was made evident by how quickly and easily power changed hands. After Peron’s resignation, the government was taken over by General Eduardo Lonardi and Peron was sent into exile. Lonardi fell from power after only two months and was replaced by General Pedro E. Aramburu. Aramburu remained in power for a longer amount of time, and during this time he appointed Raul Prebisch as the government’s economic planner. Under Prebisch’s guidance the government dismantled Peron’s economic reform program by eliminating the IAPI, cutting imports, expanding exports, and devaluing Argentina’s currency. Prebisch’s goal in making these changes was to improve the relationship with the US, which would allow Argentina to receive assistance from the International Monetary Fund, IMF, in which the US was a large shareholder. Trade deficits, tariff revenues, and the resistance of the Argentine people to Aramburu’s regime made Prebisch’s goal unattainable and led to Aramburu’s downfall. (Lewis, 2001)
Without Aramburu’s dictatorship in power, the Argentine people were allowed to stage a real election. In 1958, they elected Arturo Frondizi as president. The years of political and economic instability had left President Frondizi with a serious economic crisis on his hands. He tackled this crisis with a new economic strategy, called “developmentalism”. This plan revolved around tight control on trade and finance and developing new industries. Frondizi also followed in Peron’s footsteps and fought for the working class. He mandated substantial wage increases and price freezes on consumer goods. Unfortunately, having tighter government control in addition to giving benefits to the working class caused a number of negative effects. Inflation rose and industrial and rural production virtually ceased. Frondizi panicked when he saw that his plan was not working. He stopped the price freeze and government control, cut employment and spending, and raised utility and transit rates. He also looked to the IMF for money, and was granted a $328 million loan. However, these changes had little effect on the economic state. The Argentine people were very unhappy and the country remained highly unstable. Once again, this internal instability allowed for the military to take over the government in 1962. (Lewis, 2001)
The military government only remained in power until 1963, when Arturo Ilia was elected president. Ilia’s plan to tackle Argentina’s economic problems was to lessen the influence that foreign companies and investors had in the country. His new government cancelled a number of contracts that Frondizi had made with foreign oil companies. The Ilia administration also raised the minimum wage, and promoted an expansion of credit for businesses and consumers. Now that it was easier to obtain loans, farmers were able to buy the goods and technology they had needed for so many years in order to compete with other countries in the world market. Production became more efficient and agricultural output increased over 50%. The money Argentina was receiving from these exports allowed them to continue paying on loans owed to the IMF. It looked as though Ilia’s plan was working. Unfortunately, due to instability with the Argentine government, Ilia’s economic program collapsed in 1964 after only a year of success, leading to inflation, increased living expenses, and another recession. Popular support for the government had dwindled, and the military was again in position to take over. (Lewis, 2001)
In 1966, the military did take over the Argentine government and appointed Juan Carlos Ongania as president. Under his leadership, the government instated yet another economic program. This program introduced taxes on exports, ordered wage freezes, and sought monetary support from the IMF. Although this plan seemed to be working economically, it angered many Argentine citizens. Farmers did not want to pay the high taxes placed on their products, workers were upset by wages freezes, and ordinary citizens were frustrated that the goods that they needed were becoming more expensive every day. Popular protests arose, so the military forced Ongania from power in 1970, and the government was taken over by a military junta. (Lewis, 2001)
Under military control, the economy continued to suffer. The 1970’s did not bring about change, but only a continuation of the same crisis. In 1973, a Peronist candidate, Hector Campora, won the presidency and then resigned in favor of Peron himself (Powers, 2001; Freymann, 2002). Peron came out of exile and returned once again as president of Argentina. Peron died only a few months later and the presidency was left in the hands of his third wife, Isabel (Powers, 2001; Freymann, 2002). Isabel was unprepared to take over the presidency and had no knowledge of how to rule a country (Powers, 2001). She was unable to control the economic problems the country was suffering from, so in 1976 she was removed from power by a military takeover (Powers, 2001; Freymann, 2002). Her overthrow was followed by a period of military juntas (Freymann, 2002). Under the control of General Jorge Rafael Videla, the military operated under a system of repression. The Argentine people refer to this time period as the “Dirty War” (Powers, 2001; Levine 2001). This war was an attempt to destroy anyone who opposed the military’s control. It was a period in Argentina’s history marked by terror, cruelty, and disappearances. Estimates state that during this time anywhere between 9,000-30,000 people “disappeared”, meaning that they were either kidnapped or murdered (Powers, 2001). Additionally, another 30,000 were imprisoned and 50,000 were exiled (Powers, 2001). Argentine citizens were struggling to survive, not only because of the political turmoil within their country, but also due to the poor economic conditions.
In 1983, democratic elections brought about new peace and progress, but failed to solve lasting economic or political problems. The newly elected president, Raul Alfonsin, had a tremendous job ahead of him in order to stabilize Argentina’s economy. In January of 1983, the Argentine government carried a budget deficit equal to 14% of their Gross Domestic Product, or GDP. Inflation was estimated at a colossal 310% and external debt was over $43.5 billion. During Alfonsin’s first year as president, he put Economics Minister Bernardo Grinspun in charge of the government’s recovery plan, but conditions continued to deteriorate. The external debt continued to grow, inflation almost doubled, and capital flowed out of the country. The IMF got involved with Argentina’s debt negotiations and issued a number of warnings to the country to repay its outstanding loans. In May 1985, the IMF and other funding sources suspended all new loans to Argentina and demanded a firm schedule for existing debt repayments. Grinspun failed to make any positive changes in the economy and resigned in the wake of the IMF challenge. He was replaced by Juan Sourrouille. (Lewis, 2001)
Under Sourrouille’s guidance, the government announced a new economic strategy in 1985, called the Austral Plan. The plan was based on four things. First, the government introduced a new currency; the austral replaced the peso. Second, the government set firm and extensive wage and price controls. Third, a series of budget cuts and revenue increases were set into motion. Finally, in order to control rampant inflation, the plan limited the government’s ability to use currency to meet its expenses. The Austral Plan worked, but only for a short time. Unions challenged the government’s economic policy and a number of strikes targeted the Austral Plan. Workers wanted higher wages and better economic standing. Since the elections were near, Alfonsin approved a 5% salary increase for all workers and a 25% increase for public school teachers, but this severely hurt the Austral Plan. In an attempt to revive the plan, the government restructured its economic policies, but the new reforms had little positive impact. For the remainder of his term in office, Alfonsin and his government struggled against inflation and lack of economic growth to no avail. Conditions continued to deteriorate, and the Argentine people hoped that the next election would bring about change. (Lewis, 2001)
Carlos Saul Menem won the election on May 14, 1989 and began his first term as president determined to bring about change and solve the economic crisis Argentina had long experienced (Lewis, 2001). He implemented a number of dramatic policies (that will be discussed later), which initially seemed to turn things around. In the long run though, these policies hurt Argentina more than they helped. By the end of the 1990’s Argentina was in a deep economic recession and the government could not find any solutions to their economic crisis.
The dramatic conclusion to this four-year recession was seen around the world at the end of 2001 and beginning of 2002. In December 2001, Argentina defaulted on a loan owed to the World Bank and the IMF of approximately $132 billion, the largest default in history (Kantor, 2003). Argentina’s default was only the beginning of a downward economic spiral. What was left of Argentine industry collapsed and unemployment levels rose to 25 % (Blackwell, 2002). On December 3, 2001, in response to the collapse, President Fernando De la Rua froze the bank accounts of all Argentineans (Basaran, 2003). This move was necessary in order to prevent fear from causing a run on the banking systems, similar to the run that occurred on the US banking system in the early 1930’s (Basaran, 2003). Nonetheless, De la Rua’s actions caused a panic throughout the country. Argentine citizens knew that the country was in financial trouble, but now they were no longer allowed to access their own money and they became scared. As the government imposed strict limitations on cash withdrawals, the value of the peso continued to fall making their money less and less valuable (Basaran, 2003).
The result was a political explosion in which Argentinean people took to the streets. There were protests, street fights, and looting. De la Rua announced a state of siege and the subsequent wave of police repression left 27 people dead (Blackwell, 2002). He was unable to regain the trust of the people and resigned on December 20, 2001 amidst huge protests and great social unrest (Sullivan, 2002). He was quickly followed by two other interim presidents. Congress then chose Adolfo Rodriguez Saa to replace De la Rua as president, but Saa was unable to face the challenges ahead and resigned after only a week. Argentina’s Congress had to choose someone to lead the country out of this crisis. Finally on January 2, 2002, Eduardo Alberto Duhalde became the fifth president of Argentina in a matter of only two weeks (Sullivan, 2002).
President Duhalde faced the tremendous challenges that Argentina’s economic crisis presented and remained in office until the May 2003 elections. One of his first moves as president was to un-peg the peso from the dollar, allowing it to find it’s own level in the world currency market. The currency immediately devalued more than 50%, but this move was necessary in order to secure further aid from the IMF. Duhalde also loosened the government imposed banking restrictions. Although these looser restrictions still remain in place today, they may account for how well the peso is doing in the world currency market. (Sullivan, 2002)
After looking at Argentina’s history, I concluded that there are four main causes to Argentina’s huge economic crisis. All of these causes are controversial, yet they all tie into poor decision making by the government. First, Argentina’s government was consistently unable to coordinate industry and agriculture. Second, the United States, the IMF, and other foreign countries played a role in lending money to Argentina which the country couldn‘t afford to pay back. Third, President Carlos Menem initiated a number of dramatic economic policies that were detrimental to the economy in the long run. Finally, government spending and corruption increased the country’s debt. All of these reasons demonstrate an overall political instability within the country and an inability of the Argentine government to create a stable economic base on which to build political support of the Argentine people. Failed economic policies hurt the people of Argentina. Instead of capitalizing on Argentina’s own products and capabilities, the government relied on inflation to give them the extra money they needed. That policy made the citizens unhappy because they could no longer afford to buy essential goods. When the people were angry about governmental decision making, the country lacked that internal stability it needed in order to make positive economic changes. Without the support of the people, the government could not implement new economic policies, and as a result became highly susceptible to military takeover and control, leading to more internal instability.
Reason One: Lack of Coordination Between Industry and Agriculture
An inability to coordinate industry and agriculture has been a common theme throughout Argentine history. The Argentine economic and political scene has historically been characterized by turbulence. Governments alternated between market-oriented policies and policies in favor of the working class. Some economists call these policies “stop-go” policies, meaning that progress made in one direction was halted while progress in another direction began. The government could not decide on one economic strategy and then expand and develop it. So, instead of attaining stability and making money off of their economic policies, the government’s indecisiveness caused it to finance their budget deficits in different ways, like inflation. No regime developed a reliable plan to increase productivity and consumption, while still coordinating industry and agriculture. (Baer, 2002)
Due to poor governmental decision making, Argentina’s economy suffered from insufficient export capacity, meaning that the country was not selling enough goods and services to parties in foreign countries to be able to repay their loans (Scobie, 1971). The economy was also unable to generate enough internal demand to use consumer and capital goods industries at full capacity (Scobie, 1971). Hence, instead of buying local goods, Argentine citizens were buying from foreign countries and decreasing the need for Argentine factories and industries to produce their own goods. As factories closed, Argentina’s economy continued in a downward cycle. The country experienced some periods of economic growth followed by periods of economic decline and recession, but was never consistent in its growth, making it highly unstable. Without both agricultural growth and industrial expansion, Argentina could not attain economic growth within the country and a prestigious standing in the international community.
Most Argentine’s feel that Peron attempted to build up Argentina’s agricultural base, as well as expand on their industrial capacity, but that any progress he made in that direction was halted by outside factors. Poor crop yields and unstable international conditions reversed the progress he made and Argentina was unable to regain control of its economy. Others contend that Peron did not try to expand the agricultural base and that his main focus was on industrial expansion. Although Peron did fight for the working class, in the end his government’s decisions resulted in the decline of agricultural productivity and output, especially in the export-oriented sector. (Baer, 2002)
Frondizi too focused solely on industrial expansion, while overlooking the promise agricultural growth could bring to Argentina’s economy. Frondizi’s plan revolved around tight governmental control of the economy and he also continued on Peron’s path of fighting for the working class. The government tried to direct revenues from trade toward the development of new industries. Inflation and increased foreign debt were the results of his plan. Frondizi’s biggest accomplishment was his vision for Argentina’s future in oil development. Frondizi knew that once Argentina was an oil producer, not an importer, the balance of payments would change (Levine, 2001). Balance of payments is a systematic record of a nation's total payments to foreign countries, including the price of imports and the outflow of capital and gold, along with the total receipts from abroad, including the price of exports and the inflow of capital and gold (Websters, 2004). Argentina was consistently paying out more than they were receiving from other countries, resulting in an unequal balance of payments. Frondizi believed that the development of oil could change all this, especially if America and other foreign countries invested in Argentina’s oil production (Levine, 2001). A number of economists argue that if Argentina had continued expanding their oil industry, their economy would not have suffered as much as it did.
Unfortunately, President Ilia did not have the same vision for the future of the oil industry that Frondizi had. Ilia annulled Frondizi’s oil contracts with foreign companies and nationalized the oil industry. This move cost Argentina terribly, and not just monetarily. The country had to pay reparations for canceling the contracts, but the move also caused a great deal of international bad will and lost development within the country by scaring away other investment. Economist Laurence W. Levine stated, “it was one of the worst mistakes ever made in modern day Argentina”. It was a mistake that Ilia never overcame, despite his attempts to save the failing economy. His administration expanded upon both industry and agriculture, but was unable to maintain the progress he made because of disagreements within his own administration and lack of popular support. (Levine, 2001)
Alfonsin took a completely different route to solving Argentina‘s economic crisis, and did not attempt to expand either industry or agriculture. Instead, he looked towards tighter governmental control, which was unsuccessful. Alfonsin’s administration had a number of issues to tackle, like the rampant inflation and an enormous budget deficit and hoped that governmental control would be the answer. Unfortunately, the size of the debt made the threat of default a major concern for the country’s creditors. The fiscal and monetary control applied by Alfonsin were not enough to stall the rising prices and growing budget deficit. The IMF threatened to cut off Argentina from any future aid, but was persuaded not to when President Menem took over the presidency. (Lewis, 2001)
Menem’s economic policies were drastically different from any other president. He “stopped” Alfonsin’s policy of tighter governmental control and implemented a new economic policy of privatization to “go” with. Change was constant. Each new regime that took over Argentina’s government played a role in these “stop-and-go” economic policies. This type of policy-making was harmful to the economy because it didn’t allow for any sense of stability or security. The people of Argentina became acutely aware of the instability within their economy and government, and continued fighting against their leaders and their policies.
Argentina has what it takes to be a productive and wealthy country. The people are educated, there is an abundance of natural resources, and the technology is available for industrial expansion. Yet no government in Argentina’s history has fully capitalized on Argentina’s economic capabilities. When thinking about why this cycle of “stop-go” policies has continued for so many years, I concluded that political instability and governmental control are the answers.
Argentina only achieved democracy about 20 years ago. Before that time, their leadership fluctuated between military juntas and elected presidents. Leaders would only be in power for months and be overthrown by the military. Any country, no matter what kind of policies their government makes, to achieve economic stability under those conditions. That is where the “stop-go” policy making comes in. Each new leader had a new vision for Argentina’s economy and no vision was ever the same. It seems to me that each leader tried to undermine the previous leader’s progress, whether or not the progress that was made was positive for Argentina. Even when democracy began in Argentina, the same cycle continued.
Governmental control of businesses and the economy also hurt Argentina’s economy. If businesses were privatized, and foreign countries were not only allowed, but encouraged, to invest in Argentina, that could have provided the country with more money and economic stability. Frondizi had a great plan for Argentina and her oil, and that plan could have been expanded to include many more of Argentina’s natural resources. Unfortunately, not all leaders held the same ideas as Frondizi, and foreign investment in Argentina has never reached it’s full potential.
Argentina’s government also implements high tariffs on their imports and in turn other nations responded with high tariffs, which is why the country has not been able to increase their agricultural production. If the government makes it easier for foreign countries to buy Argentina’s products by lowering tariffs, those transactions will bring more money into the economy also. The potential for economic growth is there, and all Argentina needs is a president to make the right decisions in order to get there. If Argentina can finally capitalize on all her resources and economic capabilities, she may even eventually be able to attain her goal of being a world leader, but today that idea is only a dream.
Reason Two: Role of U.S. and IMF.
Argentina’s economic instability was also influenced by the United States and the IMF, who fed into the economic crisis by lending the country money. Although this was unintentional, it is still a key reason as to why Argentina defaulted on such a large amount of money. Argentina’s government looked to the US and IMF for money when their economy was in trouble and they needed help, instead of working to make changes within their country. The US and IMF continued to lend Argentina money, despite the country’s inability to pay back their debt. The US played the biggest role because it is the largest shareholder in the IMF and strongly influences any decisions made by the organization. In addition, the relationship between the US and Argentina has been unstable throughout history.
Starting very early on, Argentina and the US were strong competitors in the world economic market. Both countries’ major exports were meat and grain, and competition between the two countries looking to sell their products abroad was fierce. In the 1930’s, the US began imposing harsh tariffs on Argentina’s agricultural products making it increasingly difficult and expensive for Argentina to import goods into the US. In the 1940’s during World War II, relations between the two countries worsened. The Argentine government, angry about the US’s high tariffs, refused to join the Pan American Defense Alliance. This angered the US government, as did Argentina’s position of neutrality throughout the war. In response, the US issued a strict arms embargo on Argentina and meanwhile increased arms sales to Brazil, Argentina’s historic rival. Indirectly, the US also fed into Peron’s plan for a self-sufficient Argentina by cutting off credit to the country, freezing Argentine assets, interfering with oil supplies, and urging other Latin American countries to stop trading with her. (Levine, 2001)
After Peron’s fall from power in the 1950’s when Frondizi took over the presidency, the relationship between the US and Argentina took a different turn. Frondizi’s main goal was development, especially of oil. In order to develop oil, he needed to improve the US’s image of Argentina to attract US investment in the country (Levine, 2001). He had some success, and received a substantial loan from the US to boost Argentina’s failing economy. The government also entered into renegotiations with the IMF and was granted a large loan (Lewis, 2001).
Still, by the 1960‘s, when Ilia was elected president, Argentina’s credit standing was terrible. The country was deeply in debt and unable to pay back their loans to the US and IMF. While under Ongania’s rule, Argentina signed a number of agreements with the IMF in the hopes of turning the economy around. In the following years, military control prevailed and Argentina’s government changed hands many times. Maintaining a good and stable relationship was difficult during these years. The 1980’s brought democracy to Argentina and Alfonsin into power. Alfonsin needed help in order to promote foreign investment and secure favorable treatment from the IMF regarding unpaid loans. Instead of seeking closer ties with the US and advice on how to solve Argentina’s problems, he chose to shut the US out. Alfonsin attempted to solve the tremendous debt crisis without any help, only feeding into the crisis further. (Levine, 2001)
When Menem took over the presidency, he turned everything around. He sought better ties with the US and was extremely successful. He aided the US during the Persian Gulf War, helping to erase much of the hostility that had built up between the two countries since World War II. President George Bush supported Menem and his policies and recognized Menem’s determination to improve Argentina’s economy. When Menem announced the Convertibility Plan, which tied the peso to the dollar, the first Bush administration strongly supported it. Ties between the US and Argentina were very strong at this point and President Bush’s opinion held a lot of weight for President Menem. Even when Bush lost the re-election to Clinton, and Menem was replaced by De la Rua, ties between the two governments still remained strong. In the year 2000, the Clinton administration provided additional aid to Argentina and the IMF approved a bridge loan to help Argentina’s government manage its debt in the coming year. (Levine, 2001)
Argentina joined the IMF in 1945, but did not begin borrowing money from the Fund until 1956 (Rodriguez, 2001). Since then, Argentina has borrowed money from the organization in 34 of the last 45 years (Rodriguez, 2001). When new governments could not control spending, they looked to the IMF for more loans, eventually putting them deeply in debt. Argentina has received over $26 billion in loans from the IMF since 1958, is the third highest recipient of the IMF’s funds, and perhaps the most obvious example of IMF failure (Eiras, 2003). Argentina’s financial crisis is partly a result of poor policy making within the government, which led to numerous bailouts by the US and IMF that Argentina could not afford to pay off (Eiras, 2003).
When Argentina defaulted in 2001, the US and IMF were not surprised. Columbia University professor Charles Calomiris told the New York Times on December 22nd in regards to Argentina, “the IMF and both the Clinton and Bush administrations let them stay in denial. They all wanted the problem to fall on someone else’s watch.”. Both the US and IMF knew that Argentina was in over her head, but did not find a way to help the struggling country. After the default occurred, they reacted in a way that was surprising, considering that the US and the IMF played a considerable role in the distribution of loans to Argentina. The IMF invoked harsh measures in return for the disbursement of money already promised, while the US took a hands-off approach to Argentina’s crisis. As a matter of fact, U.S. Secretary of the Treasury, Paul O’Neill even stated in an interview with the British magazine, The Economist, that “They’ve been off and on in trouble for 70 years or more. They don’t have any export industry to speak of at all. And they like it that way. Nobody forced them to be where they are” (Rohter, 2001).
O’Neill suggests that the people of Argentina were content with their government and their decision-making.
Although Argentina’s government historically made poor economic decisions, the US government also played a role in Argentina’s loan default. Throughout history, Argentina’s economy has been relatively dependent on the US. The two countries competed for exports, and Argentina often was the loser in that fight. The US’s trade policies have made it more difficult and expensive for Argentina to export her goods. Since the country has been unable to profit from exports, their economy has suffered. When their economy was suffering, the IMF and US loaned them money, but did little to improve their ability to trade. Walter Molano, chief research for BCP Securities, a brokerage firm based in Connecticut that focuses on Latin America, said, “It was very clearly the Department of the Treasury that pushed Argentina over the edge and allowed it to collapse, so I think the issue of accountability has to come up” (Rohter, 2001). In fact, accountability has come up more recently. Under new leadership, Argentina has re-opened negotiations with the IMF and recently signed a new agreement with the Fund to help pull them out of this crisis.
The IMF’s goal is to “promote international monetary coordination and exchange stability in order to foster economic growth and high levels of employment, and to provide temporary financial assistance to countries to help ease balance of payments
adjustment” (“Argentina and the IMF,” 2003). Since part of the IMF’s goal is to foster economic growth and high levels of employment, the Fund should follow-up on the loans they provide to make sure the money is used for those purposes. Government officials in Argentina borrowed money from the IMF year after year, while unemployment rates continued to rise. Instead of monitoring government spending and economic programs before providing financial assistance, the IMF provided Argentina with money without that knowledge. The IMF provided a number of bailout loans to Argentina, but bailout loan packages reduce the political risks associated with faulty economic decisions, and recipient countries consequently end up with greater debt, lower standards of living, higher unemployment, and less savings (“Argentina and the IMF,” 2003). Instead of recognizing the dangers of lending such an unstable country such large amounts of money and helping Argentina take the necessary steps to curb overspending, the IMF continued to provide Argentina with financial support. Their loans were not the cause of the crisis in Argentina, but are only a reflection of the poor judgment of the IMF, as well as poor policymaking and corruption within Argentina‘s government.
Despite the poor decisions made by Argentina’s government, those countries that played a role in lending money should also assume some responsibility. Since the US has played such a large role in Argentina’s economic decision-making, its government needs to provide some sort of guidance to Argentina‘s government. Any country as wealthy and prominent as the US is in the world today should have some sense of responsibility towards other countries. The US is an example of a successful nation, and it only seems fitting that our government could lend a hand to countries that are not so successful, to help get them back on the road to recovery. The US has done this before. When Turkey was in a situation months ago much like the one Argentina was facing, the country was not left to fend for itself (Rohter, 2001). Turkey was given a great deal of financial and political support by the United States (Rohter, 2001). This may imply that Turkey is more valuable to the US than Argentina is because Turkey is a strategic ally of the US in the Middle East. It also gives the impression that the US acts solely in its own interest (Rohter, 2001). It seems quite sad that only countries that are materially valuable to another country deserve help during a crisis. Policies need to be implemented immediately in order to change the fact that materialism can drive policy-making. Every country should be regarded the same as another, despite their resources. One country’s economy effects the whole world, and the sooner other countries realize this and offer their help, the sooner Argentina will be able to dig herself out of this crisis.
Reason Three: Menem’s Policies
On May 14, 1989, Carlos Saul Menem of the Justicialist (Peronist) Party won the Argentine presidential elections (Basaran, 2003). He addressed Argentina's economic crisis by reducing the role of the state in the economy, opening up the country to foreign trade and investment, and allowing market forces to shape the course of economic recovery and expansion (Lewis, 2001). He immediately began a very liberal economic reform program that privatized the electricity sector, oil, telephone, water distribution, and railroad industries (“Argentina,” 2002). Menem promised to deregulate the economy and let the market determine wages and prices rather than the government. He also began massive public spending cuts. New decrees helped open up Argentina to imported goods. Menem signed a treaty with Brazil, Paraguay, and Uruguay that formed the Common Market of the South, or Mercosur. This treaty linked the member countries’ markets for industrial and agricultural goods during the period 1995-1999 (Lewis, 2001). This caused regional trade barriers to fall (Schamis, 2002). Menem also renegotiated the country’s debt payments with the US government and private banks from Europe and the US (Powers, 2001). They came up with a plan to restructure the debt owed to foreign banks, by combining a thirty-year commitment to payment with a reduction of either the principal or the interest rate on the outstanding debt (Powers, 2001). The plan was designed to give Argentina the ability to make long-term decisions and build confidence on the part of international financial markets (Powers, 2001). Seeing Argentina take such dramatic steps did build the international community’s confidence in Argentina, and foreign investment in the country began to rise (Schamis, 2002).
In March of 1991, Menem and his Finance Minister, Domingo Cavallo, introduced the Convertibility Plan with the backing of international finance
organizations (Lewis, 2001). The Convertibility Plan pegged the Argentine peso to the U.S. dollar. The decision to peg the peso to the US dollar at a value of one to one seemed to be beneficial at first, and the peso became very strong in the world currency market (Lewis, 2001). The plan also blocked the government from printing money to cover government deficits, which helped reduce inflation (Lewis, 2001). As a result of this plan, inflation which at one point was running at 200 percent per month, fell to an annual rate of eight percent by 1993 (Rohter, 2001). Throughout the 1990s, inflation remained in single figures (Rohter, 2001).
Although the peso was strong and inflation under control, there were a number of problems with Menem’s economic strategy. Even though the peso was strong, it was not because of a strong and productive economy, but because of a doubling of the country’s foreign debt (Blackwell, 2002). Pegging the peso to the dollar also left Argentina’s economy terribly vulnerable in many areas. For example, when Brazil devalued its currency 30% against the US dollar, many Argentine businesses just moved across the border because it cost much less to do business there (Levine, 2001).
In addition to the problems with the Convertibility Plan, Menem’s other policies were also harmful. Public spending, government cuts, and downsizing of newly privatized industries led to many workers getting laid off. The removal of protective tariffs increased foreign competition in the country and displaced Argentine workers who found little opportunity for employment. Between 1989 and 1993, over 302,000 public sector jobs were eliminated. By 1995 unemployment rates were 18.6 %. Jobs were not readily available and many middle class citizens suffered from financial hardship. More and more people fell beneath the poverty line. Poor decision making by the government was once again hurting Argentina’s economy and her people. (Lewis, 2001)
Menem’s policies were dramatic. Menem himself was a charismatic character who promised to bring about change and actually did so. Menem may have even had the best interest of the country in mind, but it is possible to argue that the changes he made in Argentina’s economy did more harm than good.
When he privatized the economy and made budget cuts, many workers lost their jobs. Menem achieved his goal of balancing the budget and decreasing inflation by creating higher unemployment rates. The Argentine people had every right to be unhappy with this. Menem solved one economic problem by creating another. Unfortunately, every aspect of the economy is dependent on another. In order to cut the budget, the government either has to spend less money by eliminating jobs or paying the workers lower wages, or the government has to bring in more money by raising taxes and tariff rates. Neither one of these situations is optimal, and both would most likely cause popular protests. Menem had to choose a path and stick to it despite protests which in this situation he did, unlike many Argentine leaders.
The problem with this situation was that while
the Argentine people were learning to live without, Menem was lining his
pockets with money from illegal activities. If the people have to suffer, the
government too needs to cut back. The Argentines knew that they would have to
make certain sacrifices, and those sacrifices might have seemed worthwhile if
the government had worked to regain their trust. The rate of unemployment
might have been less disastrous for Menem’s policies if the people had felt
their government was actually looking out for their best interests.
Unfortunately, Menem proved to the people that the government does not always
work towards the best interest of the country, and that made the people of
Argentina very unhappy. When the people are unhappy, it is difficult to bring
about change in a country. When elections come about, the people will vote for
a new leader with new policies. If a president doesn’t have the support of his
country, his policies can never truly be a success.
In order for Menem’s Convertibility Plan to be successful, the country needed to have more flexibility in their internal market (“New World,” 2002). Despite Menem’s efforts to reduce government control in the economy and privatize, the government still controlled the labor market very tightly. If the government had changed the restrictive labor laws, it may have helped the situation (“New World,” 2002). Another flaw with the Convertibility Plan was that Menem chose to peg the peso to the dollar. At the time the plan was implemented the dollar was a relatively soft currency (Hale, 2002). This means that the US’s currency was not acceptable at the time in exchange for currency from other countries, due to unrealistic exchange rates (Websters, 2004). As a result of the US’s technology boom in the early 1990’s this changed, causing the dollar to rise sharply in value against other currencies (Hale, 2002). This change in the value of the dollar caused Argentina’s currency to be overvalued, which undermined the country’s competitive position in the international currency market (Hale, 2002). This situation was not one that Menem could have anticipated or prepared for, but because the country no longer had flexibility in their exchange rate, the problem could not be fixed.
Some of the people I talked to in Argentina, my host father for example, disagree that Menem’s plan itself was a failure and blame the problems on the times. The 1990’s were not optimal for Menem’s changes because there was a worldwide recession going on. Trying to make positive economic changes is very difficult in times of general economic decline and recession. Menem’s plan might have succeeded if not for the condition of the world economy at the time. It is hard to say, but the result is still the same. His plan ended up hurting Argentina’s economy greatly and led up to their default.
Reason Four: Governmental Corruption
Government corruption has been a long-standing problem in Argentina’s history. It is yet another example of the political instability within the country and poor decision making by government officials. Former president, Carlos Menem is the prime target when discussing corruption in Argentina’s government. Menem was elected in 1989 and served one presidential term, but in 1995 he changed the constitution and add his own constitutional amendment which enabled him to run for re-election (Lewis, 2001; Powers, 2001). He had an appetite for power and took whatever routes necessary to maintain that power. Often, the routes he took led to corruption and scandal.
Menem’s former minister, Domingo Cavallo, was at the center of an investigation into gold smuggling and associated tax rebates during the 1990’s. He also faced questioning over a debt swap last June, which reduced the country’s debt-servicing by a mere $12 billion between 2001 and 2005 in exchange for increasing it by $66 billion thereafter (“Argentina’s Corruption,” 2002). This made Menem‘s government look successful but left future presidents with a deeper economic crisis. An investigation into illegal arms shipments to Croatia and Ecuador led to the Cavallo‘s arrest (“Argentina’s Corruption,” 2002). At the same time, the investigations were re-opened on the role that Menem played in the shipments (“Argentina’s Corruption,” 2002). Although the charges against Menem were dropped, his rule in the 1990’s was full of scandals, especially relating to privatization. Charges of illicit profiteering, bribery, kickbacks, and collusion were reported with almost every privatization deal (Lewis, 2001). His family was also connected to a variety of crimes ranging from bribery and extortion to drug trafficking (Lewis, 2001). Menem himself has been accused of controlling two illegal, undeclared Swiss bank accounts and a number other charges of corruption involving state funds (Lewis, 2001).
When Fernando De la Rua campaigned for office, he promised that he would clean up the corruption that had run rampant during Menem’s term. While in office, he created an “Anti-corruption office” that investigated scandals by public officials. Surprisingly enough, after all his promises to clean up corruption, De la Rua’s own name became tainted by a kickback scandal. (Lewis, 2001)
Despite the overwhelming number of accusations and scandals within the government, no government official has ever been convicted of a crime. This is because the political and judicial systems are too intertwined. Economist Nancy R. Powers believes that under President Menem, the court system, especially the Supreme Court, “became subservient to the executive branch” (Powers, 2001). Argentina was governed by a democratic regime that allowed political insiders to live well from corruption or high salaries, while the general populations suffered from poor economic conditions (Powers, 2001). The Argentine government has been continuously unable to live within its means. The government simply issued money to cover its deficits, which led to rampant inflation, angry citizens, and instability. In more recent years, the Argentine government borrowed money abroad to cover its deficits, which caused more external debt, and contributed to Argentina‘s default.
Corruption is a very complex topic. It is difficult to pinpoint why people become corrupt and what influences the choices they make. Even historians do not know when the corruption in Argentina began and why so many government officials chose to take that route. It could be a desire for more money or more power, but it is hard to say for sure. It is fair to say though, that Argentina’s government has undergone a history of corruption that has been very detrimental to the country politically, socially, and economically.
Argentina’s government corruption has revealed itself in many ways. It has been as simple as bribery or as complex as illegal activities. We can also find corruption when looking at government spending trends. When government spending increases, the government budget deficit increases. During Menem’s time in office when scandal and corruption were quite prominent, government spending increased tremendously. The deficits caused by this spending could not be financed by money creation after the implementation of the Convertibility
Plan (“Argentina’s Corruption,” 2002). Instead, the government had to borrow money internationally in order to cover its own deficits. So, instead of cutting their spending and balancing the budget, the government took the easy route of borrowing money, only feeding into their foreign debt.
Argentina’s government officials continually overspent and used money for their own good. In order to cover this, they borrowed more money. Once again, the problems cycle. Argentina’s government must change. They need to continue privatizing the economy, cut government spending, and stop the corruption that is so detrimental to their country. The government has to develop public trust and show the people that they remain committed to fighting corruption and help repair their battered reputation for honesty.
After the Crisis:
All four factors of these factors contributed to the default of 2001 and influenced Argentina’s economy in a negative way. The economy and the country are still suffering. Argentina’s economic problems spurred a mass emigration from the country. Over the past 2 and 1/2 years, 255,000 people have emigrated, which is over six times the total number that left between 1993-2000. Spain, Italy, the United States, and Israel are the main destinations, with Spain and Italy being the preferred choices. (“U.S. Official,” 2002)
During the worst of this crisis, Argentina’s economy had shrunk 11%, joblessness peaked at 25%, inflation skyrocketed to 41%, and many formerly middle class citizens were living below the poverty line. Since then, inflation has fallen to 4.1%, joblessness decreased slightly to 18%, and the outlook for the year 2003 called for 5.5% economic growth. Although these numbers look good, they are merely an illusion because things fell so far in 2002. There is still a very long way to go on the road to economic growth and stability and confidence. Banks are still not lending, but Argentines have helped their own economic growth by buying local goods rather than imports. This change has helped perk up local industries and has led to a small increase in consumption. (Jachimowicz, 2003)
Recently, Argentina has been making moves toward restructuring the economy and improving conditions for Argentine citizens. President Nestor Kirchner was elected by default on May 18, 2003 when the opposing candidate Carlos Menem dropped out of the race. Kirchner officially took over the presidency on May 25th (NYPR, 2004). He had formerly been the governor of the state of Santa Cruz in the province of Patagonia. He served as governor there for over 10 years. While there he was very successful in making a large profit off the oil found in that part of the country and he even protected Santa Cruz from the large blow the economic crisis caused (“Argentina’s Menem,” 2004). Kirchner is a member of the Peronist party and is known as a fiscal conservative (“Argentina’s Menem,” 2004). His policies are based on making Argentina internally stable, and so far, he seems to be taking the right measures to get Argentina’s economy back on track (“Argentina’s Menem,” 2004). Kirchner stated that he wants “an Argentina that is internally stable and can integrate” with the rest of the world “but that never again prioritizes” foreign policies that lead to domestic unrest (Hall, 2003). Kirchner renegotiated with the IMF and implemented a plan to help reduce Argentina’s debt and spur the economy. Since Duhalde set the peso free to find its own level, it has done very well in the world currency market. The peso has gained strength, making foreign goods cheaper and driving imports up. Although the country is still unstable, it is improving everyday.
I still keep in touch with my friends in Argentina, and they agree that the country is making progress. Valeria and her mother found a job in a small shop, which eases the burden for her father. Juliana’s family continued working through the crisis. When I asked Juliana and Valeria how the situation is today, they both agree that it is better, but not anywhere near stable. It is still a struggle, but the government seems to be taking the right steps to pull Argentina out of this crisis. They are working to strengthen their economy and their people’s faith in a government that has done nothing but let them down time and time again. For the sake of all the people in Argentina that I know and love, I sincerely hope that the government will put Argentina’s economy back on the road to recovery.
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