Economic Crisis In Argentina

Economic Crisis In Argentina 1890

In the 1980s there was extreme inflation that harmed Argentina’s economy. Inflation was greater than 1,000 percent in 1989.1 Peronist Carlos Saul Menem the former governor of La Rioja was elected in 1989 and was handed a struggling economy. Domingo Cavallo was appointed Minister of Finance in 1991. The Agentina stock market soared on the news of hisappointment. That same year to stop the inflation Domingo Cavallo peged the peso to the dollar. The peso was equal to the value of the dollar. The printing of more money had to be backed with dollars. This convertibility plan stabilized the currency, which brought down inflation.

The early and mid 1990s brought a major change as the economy grew exceptionally well. Gross Domestic Product per capita wasup an extraordinary 44% from 1991 to
1998.2 Gross domestic product is the overall value of products and services in a country. It is an indicator of the strength of the economy.

Argentina like many other Latin American countries in the early 1990s had been reforming their economies around a free market approach, which resulted in massive international investment and economic growth. WhenMenem was asked in an interview in 1989 about why he was promoting free market forces he replied, “Economic stagnation! Argentina is powerful in raw materials, food, energy, and human resources. We must liberate these resources and open our doors so foreign capital can help us grow.”3 Part of Cavallo’s economic agenda was to privatize industries like utilities and the YPF national oil company thatwere previously state owned. Convertibility was the highlight of the change, however, the combination of coinciding changes including free trade, privatizing industries and reducing the national debt were responsible for success in the 1990s.4

With those new initiatives the country experienced robust trade and foreign investment. The money was coming in because Latin America was opening up witheconomic reforms that stimulated trade across borders. Private industry now benefited from freely moving capital. A few things set this up. In the late 1980s average tariff rates were dropped from 45 percent to about 10 percent.5 This brought great import growth in the early 1990s.6 The lifting of international trade barriers allowed for more money from imports to make its way into the country.Menem also strengthened trade relations with Brazil, Chile, Bolivia, Uruguay and Paraguay by getting rid of taxes on trade with the Mercado agreement. Also, Argentina was a recipient of the Brady Plan that first began in Mexico in 1989 and gave banks liquid bonds instead of illiquid loans that brought an end to the debt crisis from the banks viewpoint.7

Argentina was not alone in seeing a largeincrease in foreign investments in the 1990s. All Latin American countries had a big increase in money inflow in1990 and 1991. The continent averaged $8 billion a year in money inflow in the 1980s. This rocketed to $24 billion in 1990 and $40 billion in 1991.8 Argentina’s administration certainly was not hesitant about taking advantage of this. Just as president Juan Peron in the 1940s and 1950shad spent the countries money on successful public programs; Menem spent to, but on credit. The difference with Menem and the effects on the country was the severe consequences that came from spending on borrowed money. His administration planned for the future as if the future could only bring more prosperity. The consequences of a recession on the countries realistic long-term sustainability werenot appropriately addressed in the boom years.

The country went through tough economic times beginning in the mid 1990s. In 1994 the tequila crisis upset Latin America and Argentina. With it the Mexican peso devalued and 18 percent of deposits in Argentine banks were withdrawn in fear.9 It was thought that the Mexican devaluation would spread. The Argentine administration weathered the...