Ome Alibo

Q) Research the economic crisis that struck Argentina in late 2001 and
early 2002. Identify as many potential contributing factors as you can. o
you think Argentina!s in"ol"ement in the trading bloc #$R%O&'R had
anything to do (ith its problems)
Argentina, like so many other countries in the world, suffers from a puzzling
discrepancy between economic potential and political reality. The country is graced with
natural resources that surpass those of most other countries of the world. During a period of
time in the 1990s, many considered Argentinas economy a model for the de!eloping world.
"ollowing their ma#or policy reforms in the early 1990s, Argentinas economic growth took
off at an accelerated path. $nflation was cut from a rate of o!er 1,000 percent a year to less
than 1 percent. $ncome per%capita rose by an a!erage of & percent each year between 1990
and 199', a record matched in (atin America only by )hile and e*change rate instability
was drastically reduced by means of a con!ertibility law that kept the peso%dollar e*change
rate at a stable, fi*ed !alue of 1 peso per dollar throughout the decade. +owe!er by the late
1990s, the Argentinean economy was floundering. ,conomic growth had stopped.
-nemployment was rampant. And the country became en!eloped in one of the worst
economic debacles in its history, one that continues to the present. Argentina also has
become a synonym for political instability and go!ernment mismanagement.
.hat went wrong/
,conomists and politicians differ on the causes and contributors of the Argentinean
economic crisis. 0o many e*perts blame globalization and faulty policies imposed by the
$nternational 1onetary "und. 2ut #ust as many blame the Argentine go!ernment for
runaway spending and systematic corruption. A record number of Argentines, more than
half, li!e below the official po!erty line. 1ore than one in fi!e no longer ha!e #obs. .hat
had been a snowball of po!erty and unemployment has turned into an a!alanche since the
default in 3anuary 4004 and de!aluation. $n December 4001, 5resident "ernando De la 6ua
resigned from office in the face of the imminent default on Argentina7s ballooning foreign
debt and his go!ernment7s inability to pull the country out of a three%year economic crisis.
The crisis is the result of misguided responses to globalization8 o!er%!alued parity,
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indiscriminate opening of the economy, massi!e pri!atization, and paralysis of economic
policies in a world where all the !ariables were changing. Argentina epitomizes the
problems that plague (atin America8 ine9uality, populism and corruption.
:ne of the root causes of Argentina7s economic meltdown was a massi!e debt to
foreign banks that had eagerly lent money to both dictators and a corrupted political system.
Argentina e*ported too little and imported too much. This trade imbalance made it
impossible for the country to earn the foreign e*change it needed to pay the interest on its
foreign debt. $nstead, Argentina had to borrow to meet those interest payments, causing the
debt to grow e!er larger. :nce it finally became clear that Argentina could no longer
borrow to roll o!er those debts and pay the interest, 2uenos Aires was forced to default and
to de!alue the peso. Argentina was trying to do too much with too little for too long.
)ontrolled deficit spending can be ad!antageous at the personal or macro le!el, for short
periods of time, but deficit spending, becomes dangerous when the purpose of the
borrowing is to pay%off other loans and make up for budget shortfalls. The problems started
when the economy stopped generating enough money to pay for its ser!ices ;Argentines
fancy themsel!es at the personal and macro le!els as ,uropeans, with practically the same
culture, norms and e*pectations. This has obliged them to offer first class medical care and
national uni!ersities at little or no cost to its citizens, and costly social subsidies that
weighed hea!y on the budget.<.
The failed $1" austerity program was another ma#or contributing factor to
Argentinas economic demise. Austerity programs in Argentina contributed to the collapse
of ta* receipts, sky high interest rates to compensate for currency uncertainty, and
in!estment standstill, deadly riots, and the fall of the go!ernment. There are !ery legitimate,
strong concerns about what the $1" had been doing for many years. 6obert )utner an
editor of American 5rospect magazine wrote and $ 9uote =Argentina followed the $1"
model more faithfully than almost any other nation. $ts economy was opened wide. $ts peso
was pegged to the dollar. "or a few years this sparked an in!estment boom as foreigners
bought most of the countrys patrimony, its banks, phone companies, gas, water, electricity,
railroads, airlines, airports, postal ser!ice, e!en its subways. As long as this money came in,
there were enough dollars to keep plenty of pesos in circulation. 2ut the dollar>peso peg led
to an o!er%!alued currency which killed Argentine e*ports, once there was little more to sell
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off, the dollars ceased coming in, which pulled money out of local circulation.? $t seems
that the $1"s policy pattern was !ery clear in Argentina as in pre!ious collapses around the
globe ;most notably Asia<. $t gi!es so many countries bad economic ad!ice, then lends
hea!ily to them, allowing them to waste the new funds, and watches as the go!ernments
popularity plummets to record lows.
(ooking internally for other causes of the Argentine crisis is the fact that Argentines
are !ery unwilling to pay ta*es. 1any articles ha!e stated that &0@ of the population do not
pay ta*es. This unwillingness to paying ta*es in Argentina is directly linked to the contempt
the a!erage citizen has for the political class. Argentines ha!e one of the worst reputations
in (atin America for paying ta*es, but many of them simply balked at sending their hard%
earned wages into the pockets of go!ernment officials. .hen talking about corruption in
Argentina, $ am not simply talking about politicians gi!ing go!ernment contracts to buddies
and family members instead of the lowest bidder. 6ather, it usually refers to blatant robbery
whereby ma#ority of the politicians de!ise schemes to put go!ernment funds into theirs and
their cronies pockets. )orruption is todays !ersion of the human%rights !iolations that took
place during Argentinas military dictatorship of the 19A0s and '0s8 a seemingly intractable
problem that o!ershadows e!erything.
There is also a weakness in the rule of law, coupled with a large bureaucracy. The
se!erity of this problem is e!ident in the fact that '4 percent of people li!ing in Argentina
do not trust the effecti!eness of the #udicial system and therefore do not use it. This distrust
has disastrous implications for the countrys ability to generate sustained economic growth.
A weak, non%transparent #udicial system raises the cost of doing business and undermines
an important engine of growth8 local and foreign in!estment. 2y increasing risk, a weak
rule of law undermines the confidence of citizens and foreign in!estors alike in undertaking
commercial acti!ities, sa!ing, and making long%term in!estments. 6isk increases because
the ability to seek compensation or #ustice for illegal actions is hindered in a #udicial system
that is unreliable or sub#ect to political manipulation.
The 0outhern )ommon 1arket, also known as 1ercosur, was established in 1991
and also seems to ha!e contributed to Argentina economic crisis. 1ercosur member
countries are Argentina, 2razil, 5araguay and -ruguay. 2oli!ia and )hile are associate
members. Together they produce B1 trillion in CD5, making them the third largest trading
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bloc after the ,uropean -nion and Eorth American "ree Trade Agreement. 1ercosurs goal
is to eliminate tariffs and trade barriers and present a unified trading front by 400F.
1ercosur prohibits trade barriers between member nations on appro*imately 'F percent of
tariff lines and maintains common tariffs and trade barriers against non%members.Although
the trading bloc was !ery successful in their first decade, the members ha!e e*perienced
some negati!e domestic economic situations that ha!e strongly impacted the union of
1ercosur. $f Argentina wanted to open its markets to trade, 1ercosur was not the trade
strategy to follow because its high common e*ternal tariff ;),T< of 1& percent inhibits
trade with non%members. The adoption of the ),T reduced the go!ernments discretion on
trade policy and crippled the ability of consumers to choose from among the best and
cheapest products a!ailable in the world, while also remo!ing incenti!es for local producers
to inno!ate and impro!e in order to remain competiti!e. Additionally, the interdependence
on trade among its members made each country in the bloc highly !ulnerable to other
countries economic woes. Argentina, for instance, saw a 4& percent decline in e*ports to
1ercosur countries in 1999, largely as a result of 2razils de!aluation of its real against the
dollar during its 1999 economic crisis. $nterdependence also pro!es harmful when, in
ad!erse economic circumstances, members refuse to comply fully with their commitments
under the bloc. $n sum, for Argentina, 1ercosur has functioned as a prison, limiting the
countrys potential to impro!e li!ing standards. $f a free trade agreement was made between
Argentina and certain stable countries such as the -nited 0tates, while possibly
withdrawing from the 1ercosur trading bloc, Argentina could pro!ide more stability to
Argentine e*porters.
$n conclusion 2ecause Argentina is the second largest economy in 0outh America, a
full%scale financial crisis in the country significantly harms the prospects for growth in all
de!eloping countries around the world. Argentina has to end its dependence on $1" loans
and make the reforms necessary to stimulate growth. ,conomic growth would enable the
go!ernment to ser!ice the debt and end its reliance on $1" loans. $t has a long way to go in
order to eradicate most of its problems but hopefully it is on the right track.
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2ibliography
"undacion $n!ertir Argentina, GArgentina 2usiness8 The )omplete Cuide to
2usiness with Argentina,G at http8>>www.in!ertir.com>argentina>trade.html.
Diane (ehky, "rom 0uccess to Distress8 The )hallenges of 1ercosur,
$nternational )ommerce and 5olicy Ceorge 1ason -ni!ersity, $nternet online
A!ailable from
Hhttp8>>icp.gmu.edu>course>syllabi>capstone>0ummer4004>(ehky.pdfI3uly 49,
4004
)harles .. )alomiris, GArgentina )ant 5ay .hat $t :wes.G The .all 0treet
3ournal, April 1D, 4001, p. A11.
0piegel, 1ark 1. 4004, GArgentinas )urrency )risis8 (essons for Asia.G
"620" ,conomic (etter 4004%4FJ August 4D, 4004. 5osted at
http8>>www.frbsf.org>publications>economics>letter>4004>el4004%4F.html
Third .orld 6esurgence magazine, $ssue Eo. 1&9%1F0 ;3an%"eb 400D<
http8>>news.bbc.co.uk>hi>english>world>americas>newsidK1A41000>1A41401.st
m
"eldstein, 1artin. Argentinas "all8 (essons from the (atest "inancial )risis.
Hhttp8>>www.foreignaffairs.org>40040D01facommentA9L'>martin%
feldstein>argentina%s%fall%lessons%from%the%latest%financial%crisis.htmlI.
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