Economic Upheavals during 1998-2002 in Argentina

Topics: Monetary policy, Inflation, Foreign exchange market Pages: 10 (3279 words) Published: April 24, 2012
For the period of 1976 – 1983, Argentina severely suffered from junta or military dictatorship which is also known as the period of ‘National Reorganisation Process’.(Saxton, 2003, p.2). The Argentina crisis was as a result of the historical political unrests for many years which lead to economic upheavals during 1998 – 2002.

During 1976, the government fought a ‘dirty war against guerrilla groups’. (Saxton, 2003, p.4). Thousands of Argentines died during the war, mostly as victims of the military. To divert attention from increasingly severe political and economic problems, in 1982 the junta ordered an invasion of the nearby Falkland Islands, a British territory that Argentina had long claimed. British forces counterattacked and took back the islands. A huge debt was accrued as a result of the war and at the end of the military government in 1983, the country’s industries unemployment were severely affected (Saxton, 2003).

In 1983, the junta transferred power to an elected civilian president, Raúl Alfonsín of the Radical Civic Union party. The new government’s plans included stabilizing the economy and introducing a new currency known as the austral. New loans were taken out and state eventually was unable to pay the interest on debt and eventually the confidence in austral collapsed. Inflation spiralled out of control, GDP shrank and wages fell by almost half. Following riots President Alfonsín stepped down six months before his term. In 1989, the Justicialist (Peronist) party’s Carlos Menem began governing and in 1991, he appointed Domingo Carvalho as the Minister of the Economy who introduced ‘Convertibility Law System’, which took effect on April 1, 1991. (Saxton, 2004, p.4). The Convertibility Law System ended the hyperinflation by establishing a pegged exchange rate with the U.S. dollar and backing the currency substantially with dollars. The aim was to ensure the acceptance of the currency 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 for many and people could afford to travel abroad, buy imported goods and ask for loans from banks at a low interest rate. Argentina attracted extensive foreign investment, which helped modernize its utilities, ports, railroads, banks, and other sectors (Saxton, 2003). However, the fixed exchange rate made imports cheap which lead to loss of Argentina’s industrial infrastructure 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 also delayed payment schedules, while IMF kept lending money.

Eventually 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 Real and international revaluation of the dollar effectively revaluing the peso against its major trading partners Brazil and the euro area (Hornbeck, 2002). By 1999, elected President De la Rúa was left with a country where unemployment had risen to a critical point and the undesirable effects of the fixed exchange rate were showing. The De la Rúa government was mainly worried about the federal budget deficit, which was 2.5 percent of GDP in 1999. That left only one option: raising tax rates. President De la Rúa secured approval for three big tax increases, effective January 2000, April 2001, and August 2001. Hence, massive tax evasion and money laundering happened also led to funds...
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