The Fiscal Mismanagement and Fixed Exchange Rate Were the Cause of Argentina 2001 Crisis

Topics: Monetary policy, Public finance, Economics Pages: 3 (653 words) Published: March 28, 2011
The Fiscal Mismanagement and Fixed Exchange rate were the cause of Argentina 2001 Crisis

Summary: Argentina’s economy verge to a state of collapse in the year of 2001, but the economy started to struggle with an economic recession in 1997. The fiscal mismanagement paired with the fixed exchange rate policy conducted the country to a financial crisis. IMF policies in lending to a country with struggling economy made people think if IMF was the responsible for the default crisis that affected Argentina in 2001.

Public Deficit – The Major “devil”
As economic reforms were happening in Argentina, the country started to face large capital inflows, as it was able to borrow large capital amounts at lower interest rates because of the currency pegging, in the global market. However the government fiscal policies failed to maintain surpluses during economic growth period and actually even during this period the government budget deficits were large. Fiscal mismanagement can be considered as the main reason for the economic crisis, which includes: * Weak fiscal policy – the fiscal policy should have been adjusted during times of economic rapid growth in order to achieve fiscal surpluses and give a cushion in government accounts against future downturns. Lax in tax collection and high budget expenditures led the government budget to deficits which combined with the economic recessions led to long-run budget constrains because the deficit was unsustainable. * Structural Reforms – failed to place the key structural reforms during the economic growth period in some critical areas hindered the ability of domestic wages and prices to adjust quickly, making the expenditures in social issues higher than normal. * Political Factors – political factors limited the federal government to take decisive actions, and the provinces had been entrusted with major public expenditures responsabilities which reduced the flexibility of fiscal policy. The Convertibility...
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