Argentinean Crisis 1999 – 2001
In 1999 – 2001, Argentina experienced one of the worst economic crises in their history. GDP output fell tremendously, inflation skyrocketed, high unemployment, the government default in its debt, the banking system was almost about to collapse, and the Argentine peso which was pegged at par with the US dollar, reached lows of Arg $3.90 per US dollar. This crisis had a major impact on the international economy as well. Countries that were investing in Argentina because of their stable economy and their peg with the US dollar, started to leave and to take all their money with them. Argentina is an interesting country to analyze because even though they are full of potential and have plenty of raw material to work with and export to the rest of the world, their politicians always find the way to create policies that instead of helping them, make it worst. In this paper we are going to analyze all the different policies that helped Argentina to come to this crisis, we are going to analyze the banking system, their reasons for defaulting on their debt, GDP output, inflation, and unemployment, the Argentine peso which was pegged to the US dollar and what policies they adopted to solve the crises. Argentina’s Economy Minister Domingo Cavallo introduced the system of peso convertibility in 1991, which stated an exchange rate of one peso one dollar. This policy helped Argentina to bring inflation down from 84% in 1991 to 7.3% in 1993. With this rapid recover, Argentina was a model of successful economic reform to imitate. Their economy was stable and growing. Inflation was in single digits, output was growing tremendously, and the economy had managed to beat the Mexican Tequila crisis in the mid-1990s. Investors started to see good opportunities and foreign capital started to flow into the country, contributing to an acceleration of economic growth. Additionally, during 1997, Asia started with their crisis, which raised fear of a worldwide economic collapse due to financial contagion, so investors withdrew their capital and moved it to Argentina. In 1998, Brazil ended their own peg with the US dollar, which resulted in a strong depreciation of their currency. This helped their economy to recover fast, since their products were very cheap and they were able to export at very competitive prices. The problem was that it affected Argentinean economy as well, because it reduced the competitiveness of Argentine producers, leading to a decrease on their exports. As a result, foreign investors and buyers found that their dollars could buy more in Brazil than in Argentina, so they started to get their investments out of the country and foreign capital started to move out to Brazil, leaving the Argentinean banking system in a difficult situation. Another major issue that helped with the creation of the crisis was the extensive borrowing done by the government of Menem in his second term. Instead of bringing dollars by exporting domestic products, the government was borrowing from the World Bank, creating a huge debt that was impossible to pay back. By acquiring this debt, domestic interest rates started to grow, and the more the government was borrowing, the more the interest rates grew, and the more expensive was for businesses to borrow from the bank, making a lot of companies to close for bankruptcy. Domestic inflation started to grow slowly again, making production cost very expensive to compete internationally. At this point, it was easier to import products from abroad than to make them home, replacing the domestic market. In Menem’s first term in 1990s, he started with a wave of privatization that created a lot of unemployment, and with the extensive borrowing and the huge debt that made interest rates to go up, created a spiral of expensive products, businesses to close, and GDP to decline, which created more unemployment, rising from 12.4% in 1998 to 23.6% in 2003. The government...
Please join StudyMode to read the full document