This paper examines Argentina's political system and economic conditions as of 2012, tracing the country's transition from military-era instability to democratic governance after 1983, and analyzing the expansionary fiscal and monetary policies pursued under President Cristina Fernandez de Kirchner. The paper reviews Argentina's constitutional structure, its history of currency crises and debt default, and the consequences of ongoing inflation, capital controls, and state intervention in the economy. It also addresses diplomatic tensions arising from the YPF nationalization and the Falklands dispute, deteriorating market conditions, and the risks of further economic deterioration heading into 2013.
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The paper demonstrates effective use of comparative economic evidence — juxtaposing Argentina's strong GDP growth rates (9.2% in 2010, 8.9% in 2011) against its high inflation, declining market capitalization, and IMF censure threats — to argue that headline growth figures masked deep structural vulnerabilities. This technique of using paired data points to complicate a simple narrative is a valuable analytical skill in political economy writing.
The paper opens with Argentina's constitutional and governmental framework before moving into economic policy history and current macroeconomic conditions. The middle sections assess political and social conditions and the specific challenges of 2012, while the final section evaluates market performance and investor sentiment. This funnel structure — from institutional context to real-world consequences — reflects a standard approach in country-analysis reports.
Argentina was founded in 1816 as the United Province of Rio Plata, and today's nation is what remained after Bolivia, Paraguay, and Uruguay split from that country (CIA World Factbook, 2012). Argentina is a republic, and throughout most of the 20th century its political system was characterized by instability. The central government has three branches: the executive, legislative, and judicial. The current President is Cristina Fernandez de Kirchner. There are 23 administrative divisions and one autonomous city (Buenos Aires).
The instability in Argentina's government, often marked by military intervention, came to an end in 1983. Since that point, Argentina has enjoyed a democratic system, albeit sometimes with limited transparency. During the 1990s the country maintained a peso-dollar convertibility as a key economic policy, but this system proved unsustainable. In 1999, Fernando de la Rua was elected as President and faced a currency crisis. The convertibility scheme had been introduced to deal with hyperinflation, but it ultimately harmed Argentina's international competitiveness. In 2003, Nestor Kirchner won a runoff election against Carlos Menem and began putting Argentina on the path to recovery. Argentina enjoyed rapid economic growth through much of the 2000s.
Each province has its own constitution, and there is a separate constitution at the federal level. Both the president and vice-president are elected directly to four-year terms, and once elected, the President has the power to appoint cabinet ministers. The President also maintains a veto. The legislature has two chambers — the Chamber of Deputies and the Senate — and members of both are elected to limited terms through a system of proportional representation. Similar to the United States, the President appoints members to the Supreme Court with the consent of the Senate through a vetting process (U.S. Department of State, 2012). There are a handful of major political parties, but new parties and coalitions also form for each election cycle. The military, once a major factor in Argentine public life, is now a volunteer force fully under civilian authority, having lost much of its standing through a series of documented abuses (Ibid).
Buenos Aires city is autonomous and is therefore a distinct political jurisdiction from the Buenos Aires province that surrounds it. The autonomous city status grants the city a legislature elected to four-year terms. The Chief of Government is the head of Buenos Aires and is also elected to a four-year term. Because of the strong presence of the national government, Buenos Aires has a lower degree of autonomy than the provinces within the Argentine political system. The citizens of Buenos Aires do, however, elect officials to the national legislature.
Argentina has the underpinnings of a strong economy. It is rich in natural resources, has a well-educated population, and possesses a diversified industrial base (CIA World Factbook, 2012). A century of poor leadership, however, has left Argentina well below the level of wealth it should have attained, and the quality of life for its people has likewise lagged behind its potential. Prior to the dollar-peso peg in the 1990s, Argentina was locked in a cycle of hyperinflation, multiple economic crises, capital flight, and external debt (Ibid). The currency peg collapsed and plunged the country into another depression, culminating in a sovereign debt default in 2001. Since that point, Argentina's economy has enjoyed a strong recovery, leveraging the country's industrial capacity and rich natural resources. This boom was guided by expansionary fiscal and monetary policies, including the maintenance of low interest rates and increased public sector spending, particularly on salaries. By 2007, inflation was again a problem, and the government turned to active economic interventions to address it, including price controls on businesses and export taxes.
The past few years under Fernandez de Kirchner have seen slower growth. This is attributed mainly to sluggish export growth stemming from the global recession and ongoing government efforts to curb exports — efforts that run contrary to the continued expansionary fiscal and monetary policies of the Fernandez de Kirchner government (CIA World Factbook, 2012). These policies have kept inflation at high levels. One consequence is that the world bond market remains uninterested in Argentine securities, as strong government intervention in the economy is deemed detrimental and negative sentiment from the debt default lingers (Bronstein, 2012).
The inflation crisis has had a number of impacts on the country. The President's approval rating fell, contributing to what observers characterized as distractionary saber-rattling about the Falklands (Gilbert, 2012). In addition, the IMF threatened the country with censure if it did not improve the quality of its economic statistics reporting (Rastello & Raszewski, 2012). The central government fined economists for publishing accurate inflation figures, which showed the rate to be in the range of 24%. Additional concerns include rising street crime, a growing welfare state, increased corruption, moves to eliminate constitutional term limits for the President, and the nationalization of an Argentine subsidiary of a Spanish oil company.
The Argentine treasury is increasingly being financed by the central bank, which is a significant contributor to the country's inflation problem. The country has expanded its welfare state both by providing more to the poor and by financing politically motivated projects — including buying back the rights to broadcast football matches for free on national television at a cost of $1 billion (Gilbert, 2012). In effect, the country is printing money to fund its welfare state ambitions (Kerner, 2012).
Monetary and fiscal policy are also expansionary. Provisions are in place to stem capital outflow, which remains a major risk for the country. Argentine citizens face limits on the purchase of dollars, and the country has considered converting sovereign debt from dollars to pesos in an attempt to retain more hard currency in the system. These limits have also prevented the peso from devaluing at a natural rate. With expansionary monetary and fiscal policy the norm, the outlook for Argentina's economy is generally negative, as these policies conflict with the country's need to develop stability and curb runaway inflation.
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