The Decline of the Peso: the Argentina Crisis

In 1998, Argentina entered what turned out to be a four-year depression, during which its economy shrank 28 percent. Argentina's experience has been cited as an example of the failure of free markets and fixed exchange rates. Contrarily, Argentina's economic woes have been attributed to bad economic policies which converted a typical recession into a full depression. Three big tax increases in 2000-2001 discouraged growth, and interfering with the monetary system in mid 2001 created fear of currency devaluation. Consequently, the confidence people had in Argentina's government finances evaporated. "In a series of mishaps that made the situation ever worse, from December 2001 to early 2002, succeeding governments undermined property rights by freezing bank deposits; defaulting on the government's foreign debt; ending the Argentine peso's longstanding link to the dollar; forcibly converting dollar deposits and loans into Argentine pesos at unfavorable rates; and voiding contracts." Argentina has a history of constant economic, monetary and political problems. After achieving independence from Spain in a war that began in 1810, Argentina's provinces fought among themselves for many years, and no stable nationwide government existed until 1862. Until the late 1800s the provinces and the national government often financed budget deficits by printing money. The results were persistent inflation and low economic growth. More recently, in 1989, Carlos Menem became president and the core of his policies was the Convertibility Law. It ended hyperinflation by establishing a pegged exchange rate with the U.S. dollar and backed money issued by the central bank substantially with dollars. The exchange rate was initially 10,000 Argentine autrales per dollar: on January 1, 1992 the peso replace the austral at 1 peso = 10,000 australes = US $1. The major disaster of the period was that the unemployment rate rose. "From 1989 to 1999, the number of jobs grew as