Argentinas Financial Crisis

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23 April, 2021

Argentinas Financial Crisis

The 1990s brought with it a sudden and deep change in economic organization in Argentina. The cornerstone was the 1991 implementation of the Convertibility Law, a currency board system that pegged pesos to the dollar at a 1-1 rate (Petrocolla and Losteau 36). Convertibility was accompanied by other fundamental transformations including trade liberalization, broad deregulation, and fiscal reform comprising of social security reform, debt restructuring, tax reforms, and privatizations (Petrocolla and Losteau 36). The convertibility regime led to significant productivity improvements and made Argentina one of the main destinations for FDI inflows in the developing word in the early 1990s. For several years during this decade, annual FDI inflows accounted for over 10 percent of gross fixed capital formation and over 2 percent of GDP (Chudnovsky and Lopez 8). Under the convertibility regime, capital movements had a direct impact on the fluctuations of economic activity through their effect on aggregate expenditure, internal liquidity, and interest rates (Chudnovsky and Lopez 8). As a result, the Argentine economy was heavily destabilized at times of high volatility in international capital flows such as the Russian and Brazilian crises of 1998 and 1999. (Chudnovsky and Lopez 8). The unexpected stop in capital inflows to emerging countries occasioned by the Russian default was followed by huge capital outflows that in 2001 triggered the worst economic and political crisis in Argentine history.

This paper attempts to clarify the reasons for the 2001 crisis that ended the market-oriented reform that had shaped Argentinas economic evolution since the 1990s. It is organized into three sections. The first section discusses the relationship between Argentina and the International Monetary Fund (IMF) and its role in fueling the crisis. The second section discusses the sufficiency of Argentinas democracy, while the third section discusses the support offered to multinationals by the Argentinian government.

Section One: Argentinas Relationship with the IMF

This section argues that contrary to IMF reports, the Fund acted inappropriately in the case of Argentina and played a significant role in the 2001 economic crisis. The IMF was too lenient, allowing Argentina to continually implement the Washington Consensus even when the same placed the countrys economy in danger of collapse.

In 1991, Argentina began to follow the IMF formula for economic development and stabilization, which was very similar to the Washington Consensus (Paddock 158). The formula involved reducing trade barriers and regulation of capital inflows, privatization of state assets,...

The IMF backed these programs, which sources contend, significantly helped to combat fiscal profligacy and bring inflation under control (Paddock 158). Following years of high inflation and huge budget deficits of up to 23 percent of GDP, the decision to privatize state industries, reduce inflation, and cut state spending seemed to be the most appropriate action (Paddock 158). IMFs decisions, however, began to have a substantial influence on the Argentine economy in 1995, when the nation was experiencing a recession due to the Mexican crisis that forced it to obtain $11 billion in financing, including $2.4 billion from the IMF due to capital flight and budget deficits (Paddock 158).

The Argentine government was forced to renegotiate its loan conditions with the IMF despite initial reports indicating that it had no intention to do so (Paddock 158). Worryingly, despite noticing that Argentina was entering a period of recession, the IMF retained is fiscally-oriented dogmatic advice to Argentina (Paddock 159). Despite a growing recession, the IMF continued to insist on austerity measures and a fiscal surplus, resulting in the worsening of the economic slowdown that made...

…the most complicated procedures for businesses, with around nine payments per year and an average of 311 hours of work (TMF Group n.pag).

The Argentina government has, over the past decade, embarked on a progressive process of commercial opening and economic reforms geared at optimizing the flow of trade as well as diversification of exports and imports market (TMF Group n.pag). As part of these reforms, the government took steps to remove tariffs on technological products (TMF Group n.pag ). Despite taking measures to facilitate cross-border trading, overseas trading remains a challenge for multinationals, which continue to rank Argentina as one of the most complex countries to commercialize in Latin America (TMF Group n.pag). The other problematic area in regard to registering and licensing multinationals has to so with the enforcement of contracts according to the TMF report, it takes up to 36 procedures ad 995days to enforce a contract 90 days for filing and service and 905 days for trial and judgment. This makes it the second longest period among countries in Latin America (TMF Group n.pag).

In the wake of the Covid19 pandemic, most multinationals leaving Argentina have cited the lack of support from the government in regard to union activity. According to MNEs in Argentina, the countrys unions show no concern about the economic realities of the Covid19 pandemic (Eickelberg n.pag). Eickelberg (n.pag) makes specific reference to the URGARA union representing grain inspectors, which has organized numerous strikes to push for bonus and salary increments in the wake of the Covid19 pandemic. In some cases, the union has collaborated with the Grain Crushers Unin Federation (FTCIOD) leaving the industry unable to negotiate, and yet no support has been forthcoming from the Argentinian government (Eickelberg n.pag). Thus, while it has taken steps to address the challenges faced by multinationals…