Argentina has been at the forefront of news headlines following publicly defaulting on their $141billion debt. The default came as no surprise with the international community predicting such an outcome for sometime. Since the default, 30 people have been killed through riots and outbursts, protests outside banks have taken place everyday and there have been three governments and 5 presidents in 2 weeks. How did this crisis evolve?
Historically Argentina's economy has been plagued with instability which has emulated greatly from its political turmoil and corruption. The first government was established in 1810 with the following 200 years rule pendulating from military dictatorships to social constitutions. Argentina prospered highly from beef exports in the 1930s but by the 40s sank once again into difficulties due to military rule, corruption and isolationism.
Following WWII, Juan D. Peron, an ex-army colonel won office. His second wife Eva Duarte de Peron (Evita) formed a strong bond and leadership with the working classes through social reform and union support and helped establish her husbands popularity. Peron however displayed authoritarian rule and resentment to the regime grew until it was overthrown by a coup in 1955. Military dictatorships interspersed with government rule followed until Peron returned to power in 1974. His death in 1975 led to his third wife retaining power. Argentina at this point was in crisis, economically, politically and socially. Terrorism was widespread and over 700 people were killed in just one year. In 1976, the military seized power with Lt General Videla who immediately imposed martial law. During this ruthless dictatorship, thousands of political murders occured and between 20,000 and 30,000 people disappeared. Videla was overthrown in 1981 and replaced by another military leader. All through this period the economy remained in chaos. By 1983, inflation reached 900%.
In 1989, Carlos Menem, from the Peronist party won the elections. He proposed many economic reforms, the most influential happening in 1991 where a decision was made to peg the Argentinian peso to the US dollar. This hugely overvalued the peso and caused a period of hyperinflation. However under this policy, the economy grew, foreign investment increased and stability appeared to return to Argentina until the mid 90s. During this time, however Argentina borrowed millions from a variety of sources including the International Monetary Fund (IMF).
Although in the early 90s, Argentina appeared to have turned around its economy and was being hailed as a South American success story, the solutions were only surface deep.
By losing control of the value of its own money, Argentina lay itselfto an array of problems.
For instance, when the various economic crises of the 90s happened in Mexico, Asia and Brazil, Argentina could not adjust its currency to world conditions.
The peso's overvaluation meant that Argentinian goods were overpriced and not competitive in the world markets.
International Monetary Fund (IMF)
The IMF is an international organization with 183 members. It was created in 1946 and functions to establish exchange stability, promote international monetary cooperation, foster economic growth and provide temporary financial assistance to countries.
Criticisms of the IMF
Despite good intentions the IMF has been criticised particularly for the structural readjustment programs that accompany IMF loans. A few of popular criticisms are:
- Imposing austerity measures that force poor countries to slash spending on education, health and social programs
- Encouraging privatization, which transfers public assets to wealthy elites and foreign investors and creates unemployment
- Weakening of environmental standards for the sake of economic productivity, and subsequent pollution and destruction of the environment
Source: Democratic Left at Princeton
Debt repayments became harder to meet as Argentina's export market declined. Coupled with this was the considerable overspending of the Argentinian government. In spite of a $20billion IMF recovery package put together in December 2000, Argentina's problems continued to escalate until the recent announcement of the debt default last month.
On January 11th Argentina were given an unlikely reprieve by the (IMF) who postponed Argentina's repayment of $933million owing on the loan for one year.
This provides the latest government with a small degree of breathing space and an opportunity to piece together some sort of economic plans and reforms to ensure that a way out of the crisis is found and history does not repeat itself in the near future. Argentina has requested the help of the IMF and of various developing nations to assist them in putting together a plan of action.
The effects of the devaluation on the everyday person are severe. With a 30% decrease in value, savings of $10,000 become worth $7,000 immediately and that is without the effects of further devaluation market forces.
Loan and mortgage repayments often become impossible because of the ensuing inflation that often accompanies devaluation. People face crises where they may not only lose their life savings but also their homes. Following the devaluation of the peso in Mexico in 1994, many people had their homes repossessed by banks as inflation swiftly rose making it impossible for earnings to match loan repayments.
Similarities of Devaluation; Mexico 1994 and Argentina 2002
Firstly like Argentina, Mexico gave the peso an unrealistic value. It's policy of pegging the peso's exchange rate was unsustainable. The peso needed to float freely in the market place. Ultimately this became a major factor for Mexico's devaluation. Like Argentina, Mexico had used such a policy to bring down inflation and it had been successful in the first years.
Secondly, Mexico similar to Argentina looked to increase foreign investments during the period when the peso was pegged. This was achieved through liberalizing trade, privatization and structural reforms. In conjunction with this, both Mexico and Argentina have a history of political turmoil and corruption. In each cases, concern over political stability caused much of this vital foreign investment to pull out of the markets.
Thirdly, the policy of pegging the peso led to extended vulnerability to external world conditions. Both Argentina and Mexico suffered from changes in world economic status and in particular the US market in 1994 and 2001/2 and this contributed to the enforced devaluation.
The default in Argentina has caused panic and chaos as people across the country realized the possible consequences on their livelihoods. Since then businesses have been severely disrupted, banks have frozen assets and limited withdrawals. Hundreds of people queue up daily outside of banks to try and withdraw whatever savings they can. At present, people are permitted to take out up to $5000 of their savings and convert them to 7,000 pesos at the fixed official rate of 1.40 pesos per dollar. This is inline with the governments current policy of setting a fixed rate for the peso for international trade rather than allowing it to float freely on the markets. This policy is being regarded skeptically by most since it is likely to lead to serious problems of inflation and shortages of goods.
What then does the future hold for Argentina? The near future will undoubtedly hold many more difficult times for the people of Argentina. There is no quick and easy fix for the numerous problems engulfing the country. There are a number of important measures that Argentina must take in order to reach the road to recovery. Firstly they have to secure further aid and support from key countries such as the USA and Spain and this will come in part through putting together a sound economic workable strategy. Politically, Argentina must win back the people's support by ensuring that economic policies do not cause further unjust hardship and instead show support for the individual. It is vital too that any cracks of corruption are eliminated and a system of justice is seen. Thirdly Argentina needs to utilize the lessons learnt from countries who have been in similar situations of currency devaluation and economic crisis. Where appropriate they need to adopt successfully proven methods of recovery demonstrated by such countries.