Argentine economic crisis (1999–2002)

The Argentine economic crisis was a financial situation that affected Argentina's economy during the late 1990s and early 2000s. Macroeconomically speaking, the critical period started with the decrease of real GDP in 1999 and ended in 2002 with the return to GDP growth, but the origins of the collapse of Argentina's economy, and their effects on the population, can be found in action before.

Origins

Argentina was subject to military dictatorship (alternating with weak, short-lived democratic governments) for many years, that resulted in a number of significant economic problems. During the National Reorganization Process (1976–1983) huge debt was acquired for money that was later lost in unfinished projects, the Falklands War, and the state's takeover of private debts; in this period, a neoliberal economic platform was introduced. By the end of the military government the country's industries were severely affected and unemployment, calculated at 18% (though official figures claimed 5%), was at its highest point since the Great Depression.

In 1983, democracy in the country was restored with the election of president Raúl Alfonsín. The new government's plans included stabilizing Argentina's economy including the creation of a new currency (the austral, first of its kind not to carry the word peso as part of its name), for which new loans were required. The state eventually became unable to pay the interest of this debt and confidence in the austral collapsed. Inflation, which had been held to 10 to 20% a month, spiraled out of control. In July 1989, Argentina's inflation reached 200% that month alone, topping 5,000% for the year. During the Alfonsin years, unemployment did not substantially increase; but, real wages fell by almost half (to the lowest level in fifty years). Amid riots, President Alfonsín resigned five months before ending his term, and Carlos Menem, who was already President-elect, took office.

The 1990's

Following a second bout of hyperinflation in 1990, Domingo Cavallo was appointed Minister of the Economy. In 1991, he took executive measures that fixed the value of Argentine currency at 10,000 australes per United States dollar. Furthermore, any citizen could go to a bank and convert any amount of domestic currency to dollars. To secure this "convertibility", the Central Bank of Argentina had to keep its U.S. dollar foreign exchange reserves at the same level as the cash in circulation. The initial aim of such measures was to ensure the acceptance of domestic currency, since during 1989 and 1990 hyperinflation peaks, people had started to reject it as payment, demanding U.S. dollars instead. This regime was later fixated by a law (Ley de Convertibilidad) which restored the peso as the Argentine currency, with a monetary value fixed by law to the value of the U.S. dollar.

As a result of the convertibility law, inflation dropped sharply, price stability was assured, and the value of the currency was preserved. This raised the quality of life for many citizens, who could now afford to travel abroad, buy imported goods or ask for credits in dollars at very low interest rates.
But Argentina had external debts[clarification needed] to pay, and it needed to keep borrowing money. The fixed exchange rate made imports cheap, producing a constant flight of dollars away from the country and a progressive loss of Argentina's industrial infrastructure, which led to an increase in unemployment.

In the meantime, government spending continued to be high and corruption was rampant. Argentina's public debt grew enormously during the 1990s, and the country showed no true signs of being able to pay it. The International Monetary Fund, however, kept lending money to Argentina and postponing its payment schedules. Massive tax evasion and money laundering explained a large part of the evaporation of funds toward offshore banks. A congressional committee started investigations in 2001 about accusations that the Central Bank of Argentina's governor, Pedro Pou, as well as part of the board of directors, had failed to investigate cases of alleged money laundering through Argentina's financial system.[1] Clearstream was also accused of being instrumental in this global financial process.

Other countries, such as Mexico and Brazil (both of which also happen to be important trade partners for Argentina), faced economic crises of their own, leading other countries to mistrust Latin American countries moneywise, and affecting the overall economy of the region. The influx of foreign currency provided by the privatisation of state companies had dried up, and after 1999 Argentine exports were harmed by the devaluation of the Brazilian real and a considerable international revaluation of the dollar, effectively revaluing the peso against its major trading partners, Brazil (30% of total trade flows) and the euro area (23% of total trade flows).

By 1999, newly elected President Fernando de la Rúa faced a country where unemployment had risen to a critical point, and the undesirable effects of the fixed exchange rate were showing forcefully. In 1999 Argentina's gross domestic product dropped 4% and the country entered a recession, which lasted three years, ending in a collapse. Economic stability became economic stagnation (even deflation at times), and the economic measures taken did nothing to avert it; in fact, the government continued the contractive economic policies of its predecessor. The possible solution (abandonment of the exchange peg, with a voluntary devaluation of the peso) was considered a political suicide and a recipe for economic disaster. By the end of the century, a spectrum of complementary currencies had emerged.

While the provinces had always issued complementary currency in the form of bonds and drafts to brave shortages of cash, the maintenance of the convertibility regime led to this being done in an unprecedented scale, leading to their being called "quasi-currencies", the strongest of them being Buenos Aires province's Patacón. The national state also issued its own quasi-currency—the LECOP.

The Crisis

Argentina quickly lost the confidence of investors and the flight of money away from the country increased. In 2001, people fearing the worst began withdrawing large sums of money from their bank accounts, turning pesos into dollars and sending them abroad, causing a run on the banks. The government then enacted a set of measures (informally known as the corralito) that effectively froze all bank accounts for twelve months, allowing for only minor sums of cash to be withdrawn.
Because of this allowance limit and the serious problems it caused in certain cases, many Argentines became enraged and took to the streets of important cities, especially Buenos Aires. They engaged in a form of popular protest that became known as cacerolazo (banging pots and pans). These protests occurred especially in 2001 and 2002. At first the cacerolazos were simply noisy demonstrations, but soon they included property destruction, often directed at banks, foreign privatized companies, and especially big American and European companies. Many businesses installed metal barriers because windows and glass facades were being broken, and even fires being ignited at their doors. Billboards of such companies as Coca Cola and others were brought down by the masses of demonstrators.
Confrontations between the police and citizens became a common sight, and fires were also set on Buenos Aires avenues. Fernando de la Rúa declared a state of emergency but this only worsened the situation, precipitating the violent protests of 20 and 21 December 2001 in Plaza de Mayo, where demonstrators clashed with the police, ended with several dead, and precipitated the fall of the government. De la Rúa eventually fled the Casa Rosada in a helicopter on 21 December.

Since De la Rúa's vice president, Carlos Álvarez, had resigned in October 2000, a political crisis ensued. Following presidential succession procedures established in the Constitution, the president of the Senate Ramón Puerta took office and the Legislative Assembly (a body formed by merging both chambers of the Congress) was convened. By law, the candidates were the members of the Senate plus the Governors of the Provinces; they finally appointed Adolfo Rodríguez Saá, then governor of San Luis. During the last week of 2001, the interim government led by Rodríguez Saá, facing the impossibility of meeting debt payments, defaulted on the larger part of the public debt, totalling no less than $132 billion.

Politically, the most heated debate involved the time for the following elections—the spectrum ranged from March 2002 to October 2003 (the original date for the ending of De la Rúa's office).

Rodríguez Saá's economy team came up with a project designed to preserve the convertibility regime, dubbed the "Third Currency" Plan. It consisted of creating a new, non-convertible currency called Argentino coexisting with convertible pesos and U.S. dollars. It would only circulate as cash (checks, promissory notes or other instruments could be nominated in pesos or dollars but not in Argentinos) and would be partially guaranteed with federally-managed land—such features were expected to counterbalance inflationary tendencies.

Argentinos having legal currency status would be used to redeem all complementary currency already in circulation—the acceptance of which as a means of payment was quite uneven. It was hoped that preservation of convertibility would restore public confidence, while the non-convertible nature of this currency would allow for a measure of fiscal flexibility (unthinkable with pesos) that could ameliorate the crippling recession of economy. Critics called this plan merely a "controlled devaluation"; its advocates countered that since controlling a devaluation is perhaps its thorniest issue, this criticism was a praise in disguise. The "Third Currency" plan had enthusiastic supporters among mainstream economists (the most notorious being perhaps Martín Redrado, a former president of the central bank) citing sound technical arguments. However, it could never be implemented because the Rodríguez Saá government lacked the political support required.

Rodríguez Saá, utterly incapable of dealing with the crisis and unsupported by his own party, resigned before the end of the year. The Legislative Assembly convened again, appointing Peronist Eduardo Duhalde—then a Senator for the Buenos Aires province—to take his place.

The end of convertibiliy

After much deliberation, Duhalde abandoned in January 2002 the fixed 1-to-1 peso–dollar parity that had been in place for ten years. In a matter of days, the peso lost a large part of its value in the unregulated market. A provisional "official" exchange rate was set at 1.4 pesos per dollar.

In addition to the corralito, the Ministry of Economy dictated the pesificación ("peso-ification"), by which all bank accounts denominated in dollars would be converted to pesos at official rate. This measure angered most savings holders and appeals were made by many citizens to declare it unconstitutional.

After a few months, the exchange rate was left to float more or less freely. The peso suffered a huge depreciation, which in turn prompted inflation (since Argentina depended heavily on imports, and had no means to replace them locally at the time).
The economic situation became steadily worse with regards to inflation and unemployment during 2002. By that time the original 1-to-1 rate had skyrocketed to nearly 4 pesos per dollar, while the accumulated inflation since the devaluation was about 80%. (It should be noted that these figures were considerably lower than those foretold by most orthodox economists at the time.) The quality of life of the average Argentine was lowered proportionally; many businesses closed or went bankrupt, many imported products became virtually inaccessible, and salaries were left as they were before the crisis.

Since the volume of pesos did not fit the demand for cash (even after the devaluation) huge quantities of a wide spectrum of complementary currency kept circulating alongside them. Fears of hyperinflation as a consequence of devaluation quickly eroded the attractiveness of their associated revenue, originally stated in convertible pesos. Their acceptability now ultimately depended on the State's willingness to take them as payment of taxes and other charges, consequently becoming very irregular. Very often they were taken at less than their nominal value—while the Patacón was frequently accepted at the same value as peso, Entre Ríos's Federal was among the worst-faring, at an average 30% as the provincial government that had issued them was reluctant to take them back. There were also frequent rumors that the Government would simply banish complementary currency overnight (instead of redeeming them, even at disadvantageous rates), leaving their holders with useless printed paper.

 

Immediate Effects

Many private companies were affected by the crisis: Aerolíneas Argentinas, for example, was one of the most affected Argentine companies, having to stop all international flights for various days in 2002. The airline came close to bankruptcy, but survived.

Most barter networks, viable as devices to ameliorate the shortage of cash during the recession, collapsed as large numbers of people turned to them, desperate to save as many pesos as they could for exchange for hard currency as a palliative for uncertainty.[citation needed]

Several thousand newly homeless and jobless Argentines found work as cartoneros, or cardboard collectors. The 2003 estimation of 30,000 to 40,000 people scavenged the streets for cardboard to eke out a living by selling it to recycling plants. This method accounts for only one of many ways of coping in a country that at the time suffered from an unemployment rate soaring at nearly 25%.[2]

Agriculture was also affected: Argentine products were rejected in some international markets, for fear they might arrive damaged from the poor conditions they grew in, and the USDA put restrictions on Argentine food and drugs arriving at the United States.

Producers of television channels were forced to produce more reality shows than any other type of shows, because these were generally cheap to produce as compared to other programmes. Virtually all education-related TV programmes were canceled.

Tourism balance with Chile inverted due to the lowered prices in Argentina

The Recovery

Eduardo Duhalde finally managed to stabilise the situation to a certain extent, and called for elections. On May 25, 2003 President Néstor Kirchner took charge. Kirchner kept Duhalde's Minister of Economy, Roberto Lavagna, in his post. Lavagna, a respected economist with centrist views, showed a considerable aptitude at managing the crisis, with the help of heterodox measures.

The economic outlook was completely different from that of the 1990s; the devalued peso made Argentine exports cheap and competitive abroad, while discouraging imports. In addition, the high price of soy in the international market produced an injection of massive amounts of foreign currency (with China becoming a major buyer of Argentina's soy products).

The government encouraged import substitution and accessible credit for businesses, staged an aggressive plan to improve tax collection, and set aside large amounts of money for social welfare, while controlling expenditure in other fields.[citation needed]

As a result of the administration's productive model and controlling measures (selling reserve dollars in the public market), the peso slowly revalued, reaching a 3-to-1 rate to the dollar. Agricultural exports grew and tourism returned.

The huge trade surplus ultimately caused such an inflow of dollars that the government was forced to begin intervening to keep the peso from revaluing further, which would ruin the tax collection scheme (largely based on imports taxes and royalties) and discourage further reindustrialisation. The central bank started buying dollars in the local market and stocking them as reserves. By December 2005, foreign currency reserves had reached $28 billion (they were greatly reduced by the anticipated payment of the full debt to the International Monetary Fund (IMF) in January 2006). The downside of this reserve accumulation strategy is that the dollars have to be bought with freshly-issued pesos, which may induce inflation. The central bank neutralises a part of this monetary emission by selling Treasury letters. In this way the exchange rate has been stabilised near a reference value of 3 pesos to the dollar.

The currency exchange issue is complicated by two mutually opposing factors: a sharp increase in imports since 2004 (which raises the demand of dollars), and the return of foreign investment (which brings fresh currency from abroad) after the successful restructuring of about three quarters of the external debt. The government has set up controls and restrictions aimed at keeping short-term speculative investment from destabilising the financial market.

Argentina's recovery suffered a minor setback in 2004 when rising industrial demand caused a short-lived energy crisis. The prospect of future energy shortages are not discounted.

Argentina has managed to return to growth with surprising strength; the GDP jumped 8.8% in 2003, 9.0% in 2004, 9.2% in 2005, 8.5% in 2006 and 8.7% in 2007. Though average wages have increased 17% annually since 2002 (jumping 25% in the year to May 2008),[3] consumer prices have partly accompanied this surge; though not comparable to the levels of former crises, the inflation rate was 12.5% in 2005, 10% in 2006 and is believed by private economists to have approached 15% in 2007 and to exceed 20% during 2008 (citation needed)(even if the Ministry of Economy refuses to acknowledge inflation greater than 10%). This has prompted the government to increase tariffs for exporters and to pressure retailers into one price truce after another in a bid to stabilize prices, so far with little effect.

While unemployment has been considerably reduced (it has been hovering around 8.5% since 2006), Argentina has so far failed to reach an equitable distribution of income (the wealthiest 10% of the population receives 31 times more income than the poorest 10%). This disparity, nevertheless, compares quite favorably to levels seen in most of Latin America, Asia, and Africa.