Economic Crisis in Argentina - Essay Example

?Economic Crisis in Argentina: Argentina is a largest Spanish speaking country in the world with a population just above 40 million Argentina – Data”). The country saw a great economic boom in the 1970s when the economy was industrialized and large amount of foreign investments poured in the country. Economist recognized it as the emerging economies of the era along with Canada and Australia. Argentina now has the highest GDP per capita in the Latin America with a growth rate of almost 7 % in the year 2009 (“Argentina – Data”). The Crisis: The country went through difficult times in the late 1990s and early years of twenty-first century when it saw a great economic crunch. The shift from dictatorship to ‘real’ democracy did not yield the anticipated results. Carlos Menen, the Argentinean President from 1989 to 1999, introduced reforms that proved catastrophic for the economy. His policy of privatizing the government owned corporations and encouraging foreign investment in banking and other sectors back-fired (Lewis and Klein, 2004). Huge amount of funds were transferred overnight out of the country decreasing substantially the country’s foreign reserves. In a bid to contain this trend, the government froze all the foreign currency accounts. But this move angered the country’s wealthy middle class. They deemed it as a violation of basic human rights and a pro-elitist policy. They came out on the streets protesting against the economic policies of the government which further intensified the crisis. The unemployment rate rose as high as 31% and in a span of a year more than 1.5 million people slid below the poverty line (Tedesco, 2002, p. 470). At a macroscopic level, the GDP decreased by 10% and the investments saw a decline of 30%. An economy which was growing at a remarkable 8.7% in 1997 started declining at a rate of 3.4% in 1999 (Tedesco, 2002, p. 470). The external debt rose from $57 billion to an alarming $144.6 billion making Argentina the largest ‘sovereign defaulter’ of history (Lewis and Klein, 2004). Causes: The roots of the crisis lies in both the political and economic policies of the governments that followed the military regimes of 1980s. Raul Alfonsin assumed the presidency of Argentina through popular vote after a country wide upheaval against the dictatorial rule of military. The government’s policies largely focused on addressing the human rights issues and ensuring independence of judiciary thereby strengthening the democratic process. These policies were very effective in increasing Alfonsin’s popularity. However, when the independent judiciary started to hinder the new government’s objectives, government abandoned the policy of judicial independence by promulgating laws such as ‘Full Stop Law’ and ‘Due Obedience Law’ (Tedesco, 2002, p. 472). These policies greatly decreased the popularity of government and provoked military rebellion, guerilla attacks and labour conflicts thereby weakening the government (Tedesco, 2002, p. 473). Hence, the increased confrontation between the labour class and government resulted in a failure of economic policy. Carlos Menem succeeded Alfonsin as president of the Latin American Republic. Menem tried to bring about a consensus between the labour class and the ruling elite and was somewhat successful. However, he used the power earned from the political consensus to establish a hegemonic rule over the country. He restructured ‘the supreme court of justice’ and inducted his supporters and close aides as judges at the highest level. Similarly, the accountability courts or ‘the Tribunal de Cuentas’ was reformed with government friendly judges. These policies encouraged large-scale corruption by government officials. This resulted in a large scale economic unrest (Tedesco, 2002, p. 476). Different economic factors paved way to the grave economic crisis of Argentina. Alfonsin inherited a country with severe economic issues to be resolved. The government introduced a series of economic reforms including introducing a new currency called ‘austral’ (Grugel and Riggirozzi, 2007, p. 89). The government has to take huge loans to support this move but could not pay the interest. This decreased the confidence in the new currency. There was a massive increase in the inflation rate was a shocking 1,128.9% for the year (“1,128% Inflation Rate in Argentina”, 1985). Hence, Alfonsin regime became very unpopular and country wide protests were launched against it. Alfonsin resigned before completion of his term and the president-elect Menem took office. The new economic minister Domingo Cavallo introduced the ‘Convertibility Law’ which held the Argentinean currency ‘peso’ at par with the US dollar. This increased the acceptability of the local currency and inflation dropped to an acceptable 5% by 1994. The growth rate between 1991 and 1995 was 4.5% (Grugel and Riggirozzi, 2007, p. 91). The period saw an economic revival in the country which did not last long. The Convertibility Law made imports very cheap for the Argentinean masses. A huge amount of foreign reserves were hence lost on the imports and the government exchequer suffered badly. The government officials however failed to oversee the economic shift and continued to spend lavishly. The government tried to overcome fiscal difficulties through loans from IMF but most of the capital was lost in money laundering and tax evasion (‘Argentina after the crash’, p. 2). Hence the government lost its capability to cope with the prevailing economic crisis in the country. Other countries in the region were also passing through tough economical times which had its impact on the Argentinean economy. The Mexican peso crisis of 1994 following the government’s devaluation of its currency had damaged investors’ confidence in the markets of the region. This had negative impact on the foreign investment in Argentinean markets (Whitt, p.13). A somewhat similar crisis emerged in the neighboring Brazil as well. The Brazilian government devalued its currency in a bid to contain the crisis. The Menem-led Argentinean economic experts stuck to the policy of ‘parity with US dollar’. A huge volume of trade occurs between the two countries. This trade was badly affected by the conflicting economic policies of the governments hence damaging the economic growth of both the countries (“Argentina’s economic crisis”, p.114). Economic Revival: Eduardo Duhalde followed Menem as president in 2001. His economic policies eased the economic crunch to a certain degree. On the economic front, the government abandoned convertibility, encouraged industrial reactivation, and introduced price control measures. On political front, policy of reconciliation was adopted with the support of Roman Catholic Church and UNDP (Grugel and Riggirozzi, 2007, p. 95). Nestor Kirchner assumed presidency in 2003. He continued his predecessor’s policy of strengthening the industrial sector along with increased focus on the public works and public services. Revenue was increased by levying taxes on exports which was also supported by high international prices of export commodities. Government carried out negotiations with the super-markets in order to contain the inflation (Grugel and Riggirozzi, 2007, p. 96). The government was hence able to sustain economic growth over the years. Argentina repaid $9.8 billion it owed to IMF in 2005 to attain economic independence and a freedom of policy making. Political Impacts: The crisis showed long term impacts on Argentinean political scenario. The elections of 2007 saw the winning of Christina Kirchner supported by Justisticial Party (PJ) against the popular economics minister Robert Lavagna supported by Radical Civic Union (UCP). The pro-Kirchner allies also won majority in the bicameral legislator and the governorship of its 23 states (Levitsky and Murillo, 2008, p. 2). The victory shows great deal of voters’ confidence in the PJ dominated government. Tedesco argues that the failure of Alfonsin and Menem governments on economic fronts can be explained by the politics of ‘informality’ which these regimes pursued. The de-institutionalization of the politics and the dominance of executive over legislator led to the grave economic crisis of 1990s (2002). The succeeding governments should enhance the role of legislator in policy making and make the leaders accountable to the people in order to sustain the economic growth which Argentina experiences now. Economic Impacts: The crisis had short-term economic impacts as well. Most of the private sector companies had to suffer due at the hands of recession. However, the companies did manage to escape and the examples of bankruptcy are rare. The take-over of the industries by employees and running them as cooperatives introduced a new style of industrial management in Argentina and improved workers’ confidence. This brave step on the part of workers contributed a lot towards the uplifting of living standards of local people spreading a sense of contentment among masses and acting as an inspiration for other sectors as well (Lewis and Klein, 2004). Conclusion: The executive-dominated economic policy making, unaccountable to the judiciary and masses, led to a grave economic crisis in Argentina. The economic bail-out packages offered by international monetary organizations contributed a little towards containing the situation. It was the people’s spirit and its recognition on the part of government that finally led Argentina out of the crisis. The country now needs a political culture which strengthens democratic institutions in order to sustain the economic growth. References 1,128% Inflation Rate In Argentina. (1985, July 8). Retrieved March 15, 2011, from http://articles.chicagotribune.com/1985-07-08/business/8502140112_1_inflation-president-raul-alfonsin-argentina Argentina - Data. (n.d.). In The World Babk. Retrieved March 15, 2011, from http://data.worldbank.org/country/argentina Argentina after the crash. (2002). Strategic Comments, 8(1), 1 - 2. Argentina's economic crisis: contagion or catalyst? (2002). Strategic Survey, 102(1), 112-122. Grugel, J., & Riggirozzi, M. P. (2007). The return of the state in Argentina. Internaitonal Affairs, 83(1), 87 - 107. Levitsky, S., & Murillo, M. V. (2008). Argentina: From Kirchner to Kirchner. Journal of Democracy, 19(2), 16-30. Lewis, A. (Director), & Klein, N. (Writer) (2004). The Take [Motion Picture]. Tedesco, L. (2002). Argentina's Turmoil: The Politics of Informality and the Roots of Economic Meltdown. Cambridge Review of International Affairs, 15(3), 469 - 481. Whitt, J. A., Jr. (1996). The Mexican Peso Crisis. Economic Review. Read More