Argentina Economic Crisis 1998-2002

Argentina located in Southern America. It is the 8th largest country of the world and it is the 4th largest in America. The native language of Argentina is “Spanish”. Argentina is mostly Agriculture based country; production of livestock and cereals is the specialty of Argentina. It has a great source of Minerals. Its capital is Buenos Aries and its currency is “Peso”. In Argentina the Government system is Federal Government. The economy of Argentina is a high income economy in 2017 according to the World Bank report.

The country comprises of highly educated population, but Unfortunately Argentina has to survive with political and economic issues. History of Argentina Economy In Great Depression Argentina GDP fall in 1929 to 1932 and then the economy recovered some portion in 1935 by implementing the strategy of Import substitution.

Import substitution means lowering the import products by increasing the use of domestic products as this increase the domestic industry growth. But Great Depression caused unemployment in the whole world as well as in Argentina.

Due to unemployment in Argentina, there were huge internal migration occurred from the small town to cities and especially to capital as capital had far greater opportunities for employment than other cities. In 1976,The Military dictatorship Prevailed in the country and the dictatorship Economist Jose Alfredo Martinez de Hoz introduced a strategy of anti-labor policy of Financial liberalization and because of this Industrial development interrupted and increased the debt burden. This Economist left the concept of import substitution and was in favor of free trade and lift burden on import commodities by relaxing in import tariffs and quotas.

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Due to this open trade, the domestic industry growth fallen and they go in bankrupt situation and economic growth fall and there were increase in price of everything and country face the stagflation and hyperinflation situation and a large amount of debt. For the cure of that situation economist Domingo Cavallo fixed the Peso to the US dollar in 1991 and control Money supply foe overcome the situation of Hyperinflation. By applying this strategy , inflation dropped and the Economy growth start and also employment rate rose in the country. Argentina Economic crisis Economy side: Argentina economy had to face external shocks which shock the Argentina economy such as 1997 East Asian crisis, 1998,Russian crisis and in 1999 the Brazilian currency devaluation. The Brazilian change in exchange rate policy were beneficial for Brazilian own economy but it had a huge negative impact on Argentina economy as Brazil was the neighbor and the main trading partner of the Argentina.

Due to this, Argentina exports fall badly and prices of its agriculture product fall and current account deficit of Argentina rose and it faces a recession phase. Due to fixed exchange rate system the Peso charged over valued and mostly investors stop investing in Argentina and preferred different countries to invest. Lack of foreign investment was become the cause of increased domestic interest rate and that increase in domestic investment then led to increased external and internal debt. Privatization Process: One more suggestion from the economist was the privatization. But this suggestion could not become beneficial for the economy. The privatization process were become the cause of unemployment as mostly workers were down sized when that process were taken and the prices of the products were rose and it creates unrest situation in the economy as people were already in a phase of poverty and increased prices were like a bomb for them.

Debt Side: Argentina economy suffered with abundant number of debts including external and internal debt. The causes of debt were lack of local government support, they did not implemented on the policy of austerity in depression period. Due to this government expenditure was far greater than their revenues and government take loans for compensating their expenditures. Lack of exports and economic growth also the cause of huge debt and country faces a huge fiscal deficit condition. Banking side: The Argentina banking sector was a strong and world second strong banking sector before crisis. The contraction of economy in crisis caused a non-performing loans and apparent strong position of bank could not support the domestic and foreign bank sector and bank sector fall and suffered with heavy losses and near to shut down position.

Political side: After dictatorship period the election held and Menim selected as president of Argentina. In dictatorship tenure the debt increase almost 500% and the economy was in bad condition In 1991,The President Menim implement the convertibility plan without the aid and advice of International Monetary Fund. This plan was helpful in handling the situation of inflation but it had create some other economic issues.When Argentina suffered with crisis the IMF threw cold water in president Menim one Peso per one dollar plan and did not support the economy by bailing in loans. In 1999, Fernando de la Rua became president of Argentina and the bad condition of economy goes to worse condition.The new policies which adopted by newly elected president was badly failed and not helpful for economy betterment.The policy comprise of lower interest rates,at that time the world was facing higher interest rate process and by adopting lower interest rate policy economy badly suffered with huge debt .

The other one was increasing the tax rates for the greater revenues for government and this policy also failed and caused tax evasion and increased debt. In tenure of Fernando ,the Peso were depreciated almost more than 300% and it creates a fear in people to more devaluation of Peso and they in a frenzy convert their peso to dollar on one to one rate. And people were very angry and in a state of depression as poverty rate were very high and people were start strikes against the president. Due to too much social unrest, the president resign from the designation. Then new president Néstor Kirchner took the charge. Kirchner took the two recovery steps which were domestic policy and external demand and worked on it for increasing job creation as in crisis, unemployment rate was increased too much. Kirchner wins the support of working class worker and they were happy with the public and social reforms of Kirchner. But Kirchner policies were not beneficial for removing inequality and in tax system. Epilogue These were the overall reasons of Argentina economic crisis. Some analyst said political instability was the main cause and some said the wrong economic policies lead to this crisis.

Overall all the reasons had some impact on failure of economy. But the fixed exchange rate system was the main cause as all analyst said about it although in short term it was beneficial but not for long term and Argentina fixed its currency rate because such a fixed rate had cured hyperinflation and adjust price stability which is beneficial for strong economic growth .And policy officials in Argentina feared that breaking this system of fixed exchange rate bring back high inflation and all of the accompanying economic problems and second fear is that households, business and government had too much dollar debt, devaluation would bring widespread bankruptcies and personal defaults by raising the peso value of outstanding debts. And there was always a hope that the situation may be improve over time and dollar value may decline as compared to other trading countries currency. But that did not happened and the dollar value continued to rise in 2000 and 2001.so from this we got a point that fixed exchange rate system and long term external debts are the alarming things for the economy.