Argentina - Report

7/29/2019 Argentina - Report

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Prologue:

Argentina - From rags to riches

to rags…



The title by itself, might bring about a thought provocative scenario to

confusion. From rags to riches, one can understand. One makes money one

day, and is rich. Again, the counter is also possible, losing money overnight. Itmight seem like, those days of gambling at Macao or Vegas. None the less the

fact of the matter lies in the periods that follow rags in the title. They

symbolize the fact that this seems like a roller coaster ride, waiting to happen

all over again. A series of events that took place over the last century, will help

defend the name given to this report.

To understand the economic fall or rise of a country, one should

understand the main criteria for the drama. Its people. To add on to the saga,we have things like policies, reforms, resources, opportunities and the likes. As

if these weren’t enough, one would dip the matches in gasoline and light them

in the form of foreign exchange, foreign investment, foreign debt and the likes.

The land of the Soccer Gods, also gave birth to the people who brought

it to the ground because of their greed and their need for power. Apparently,

the concept of live and let live, was too far ahead of its time in those lands.

Many a time have we seen through history, how the wants of a few ,slaughters the living of the rest.

Let us dive into the depths of this beautiful country’s pitiful history, to

understand better, as to why, Argentina stands where it is.



The Saga Begins…



Argentina, in the good old days, was home to many hunter and gatherer

society based natives. The whole concept of economy, per say, did not exist. To

the natives luck, the Spanish found this splendid country. Argentina didn’t have

gold deposits or any of the other precious metals. As a result, it ended up being

more of a back seat passenger when compared with few of the other countries

under the Spanish rule.

The early days of this colonial inhabitation was found mainly in almost

all the areas except the Patagonian Plateau. The people were self-sufficient.

The cattle reared and the grains produced were consumed by the producers

themselves, let alone some for the nearby town folks. The concept of foreigntrade was inexistent until late in the 18th century. It was around this time, that

this country was introduced to, national level trade amongst the otherwise

very self-sufficient and independent town folks.

During these colonial times, countries which actively participated in

foreign trade, were better off, when compared with those that weren’t.

Argentina was still not much into foreign trade, and as a result was still lacking

on the world colonial scenario. To add to this already miserable story, all of thevery little trade that Argentina was doing, was strictly monitored by the

Spanish.

All of these, along with a few more additional flavours, added to the

cooking of the Argentine Independence from the Spanish rule. This eventually

happened in 1816.



The Post-Independence

Development..



After gaining its independence, Argentina was still in a bit of a mess.

There were people who came and added a little to the improvement of the

economy, by restoring free trade and the likes. It faced wars, both internal and

external, for quite some time, until the emergence of a strong leader, Juan

Manuel de Rosas.

He was the governor of Buenos Aires until he was delegated some more

power. He made few changes in the policies, and gave Buenos Aires completepower of the port. He brought in high import tariffs on luxury goods, some

trade barriers on good produced in the country and there were export tariffs

on gold and silver. During his period of control, there was a cumulative

devaluation of 240% of the peso papel, over 12 years. But, because of the

complete control of the port by Buenos Aires, there was still a civil unrest

present. During this whole period of civil wars, 1810-1866, the exports grew

from 4% to 8%. And this was achieved so because of the increase in

productivity of livestock rearing.

But, by the end of this period, Argentina was slowly shifting from

livestock to crops.



The Boom: Thank you

exports.



The British empire were allies with the Spanish empire, during the

colonialism period. They used this to their advantage by asking for permission

to trade with Argentina. In these present times, inspite of the Spanish leaving

Argentina, the British still maintained good trade practices with Argentina.

Post 1870, Argentina underwent a lot of economic changes. The

convertibility was suspended in order to get the debt under control. Although,

the inflation grew by 20% the following year, the debt to GDP ratio fell sharply.

Since the shift from just stock rearing to crop growing, the agriculturesector in Argentina grew substantially. It brought in a lot of foreign capital,

namely from Britain. This capital was used to improve industries and lay

railway lines. This further lead to, more foreign capital into Argentina, from

various European countries. The rise in capital further led to an improvement

in infrastructure. Livestock was being sent to Buenos Aires using the railway

services. Many meat plants were being raised. These led to further packing and

shipping of meat to various parts of the world. This led to an annual export

growth of 6.8% approximately.

Argentina was in its period of riches. Capital flowing in. Thanks to the

rise in exports (especially meat), there was a boom in the economy. The rise

was of such high magnitude, that it was dubbed as the United States of South

America. The wages grew to almost 96% to that of Britain and the per capita

GDP grew to 80% to that of the United States. All of these numbers seem nice.

But, they are not long lived. This was soon to be changed in the near future.



World War 1 and

the Great Depression :

Before and After.



In 1889, Argentina went through a financial crisis. The Baring brothers, a

merchant bank, was in profitable relations with Argentina. There were few

payments which were to be made by the then Argentine government (the

Celman’s government). The government couldn’t pay these debts and it ended

up defaulting on the loan taken. This led to a financial crisis.

The next man in power was Carlos Pellegrini. He tried to stabilize the

situation by reducing on the imports. Although the foreign capital reduced, the

exports were still unaffected. There was a stagnation in the growth rate of

exports for 9 years. But, eventually the economy was back up and running. It

shot up again, GDP was increasing at an annual rate of 7.7% . There was even a

time when Argentina even surpassed countries like France and Italy.

Then came the World War 1. Recession hit Argentina. The capital inflow

declined. Britain reduced its capital outflow after the war, as it had huge debts

to USA. The superpower which emerged then, USA, perceived Argentina as

threat. Hence, USA did not bother to invest in Argentina, which further kept

Argentina in quite a fix. As if this wasn’t enough, the countries started to focus

at Asia. The prime need became coal, fuel and in short energy. This kept

Argentina further outside the loop.

Following this came the Great Depression. The only major effect it had

on Argentina was that it halted the economic growth that the country had so

far seen. The peso was devalued, thus improving the competitiveness of

Argentina in the world trade scenario. Although the revenue generated was

comparatively less, the devaluation still protected the domestic production.

As a result, there were many new reforms coming into being in order to

keep Argentina self-sufficient. There were a lot of problems



The Peron Times



Peron Era (1946-55)

During the rule of Juan Peron, Argentina followed an isolated foreign policy to

boost domestic production and as such Import Substitution was practiced. He

being a Labour centric ruler had increased wages and unionized the labours &

created the Labour Confederation. His campaigning strategy of distribution of

land and social security also added to increased state spending. He followed an

expansionary policy as such government spending was high.

State intervention was high as such there was increase in state owned

property and there was control of rent & prices. To control foreign trade he

nationalised foreign owned enterprises. As such he protected imports of

Argentina which eventually isolated them from the international trade market.

To boost the industrialisation he shifted focus from agrarian to industry as such

the Agricultural production suffered. After seeing this dip in agricultural

production, Peron favoured back to agriculture during the second five year

plan but high wages & industrial growth had expanded domestic demand of

the agricultural goods. As such the agricultural output fell and growth was hit.

This also created unequal distribution of resources between agriculture &industry i.e. the area of land available for farmer was very low compared to

industrial production. This dampened business sentiments and hit the exports.

All these contributed to inflation and slow growth. Inflation reached 50% in

1951 and Peso fell by 70% of its value from 1948 to 1950. Eventually during

the 50’s Peron signed trade agreements with Britain, Soviet Union and Chile to

revive the agricultural production.

Ad albert Krieger Vasena (1966)

In the 1960’s stagnation was witnessed because of high unemployment and

inflation. To control it there was strict monetary policy which called for

increase in taxes, cut in public expenditure. Vasena the new economic minister

played a major role in stimulating the growth by control over the money

supply, wages (wages were freezed) and prices, and bank credit provided to

the private sector and privatisation of underperforming public enterprises.

Import substitution policy was dropped and exports were boosted by lifting

http://en.wikipedia.org/wiki/Adalbert_Krieger_Vasena

http://en.wikipedia.org/wiki/Adalbert_Krieger_Vasena



trade barriers as such opening the trade to international markets. Exchange

rate practice of previous governments was removed.

As such Growth increased to 5.2 % between1966-70. Inflation moderated to

7.6% by 1969 and unemployment & real wages also fell. But due to anovervalued currency, meant certain imports were so cheap that domestic

industry was falling, and competitiveness of exports in the international

market fell. He suspended the Right to Strike Law and labour conventions to

reduce the power of unions. These policies led to riots in Argentina and Vanesa

were removed. After removal of vasena, Argentina was unable to sustain the

above economic policies and as such the per capita fell along with the standard

of living.

Return of Peron (1973)

From 1969-76 there was series of violence between right-wing peronism and

left-wing peronism, leading to years of violence and political instability.

People’s Revolutionary Army (ERP) was formed as the military branch of the

Trotskyist Worker’s Revolutionary Army, that kidnapping and killed Argentines.

Amid high state of turmoil and violence in the country Juan Peron decided to

return to presidency on June 20 1973.

Peron tried to achieve political peace through new trade and labour policies

and to develop national reconstruction. Currency was devalued and wages

were re-structured in order to attract foreign capital and revive the growth.

Peron died on July 1, 1974. His wife Isabel Peron succeeded him in office, but

her government was unable to stabilise the economy. There were peronist

intra-party struggles, and increasing acts of violence by ERP and paramilitary

forces. As such Inflation was surged and GDP fell and per capita income fell by

20%.



Martinez De Hoz : Mr. Bane

Hyper-Inflation : Eventful



In 1976, The military took over the power from lady Peron. They went

about dictating the rules. During these times, the inflation was around 700%.

At which point, Martinez de Hoz, was appointed as the finance minister.

He brought about many changes in the policies. The first thing that he

did was to reduce the trade barriers. He decided that the wage rates also be

freezed. These things led to a fall in inflation , but this also led to a lot of the

common people, lose their sustainability. A lot of the retailers and builders

ended up declaring bankruptcy. The trade deficit was soon turned over. The

financial markets were deregulated. The banks could transfer their debts on to

the State.

The introduction of the ‘Tablita’ took place as a result of an eventual

increase in inflation. The peso was pegged against the US$. The Tablita was a

time table which kept track of when to deregulate the peso. This in turn lead to

getting goods imported at a cheap price. This lead to the increase in the

purchasing power of the peso in the world. It was being called Sweet Money.

Because of cheaper imports, there was a fall in the demand for domestic

goods in the local market. This lead to a lot of the local companies declaring

bankruptcy again. There was a very controversial decision, as many economists

call it, that took place. De Hoz decided on absorbing all of these private debts

into the national debt. Now, this was done only to companies which were

owned by people, who were close to De Hoz.

There was the Falkland war, which took place against the British. There

was much more money being used. Again all of this time, the inflation has

come back on a rise. In the 70s, Argentina had issued Brady Bonds worth $2.1

billion. There was a policy change in the Brady Bonds and this amount of $2.1

billion was re-valued at $6.4 billion. All of these, along with a massive

devaluation of the peso lead to a massive increase in the inflation. The

cumulative inflation was around 12000% and there was monthly inflation rate

of 200%. This was cutely called Hyper Inflation.



The Drum Roll for the

Debt Default



The beginning of the 90s gave rise to the so called iconic President

Menem. During his term, his finance minister, Domingo Cavallo, the man

behind the scenes, was trying to bring about a change in the fortunes for

Argentina.

Menem was a Peronist. His concept of getting out of a crisis, was to

pitch a sellable show, in order to get more debt from the IMF. During his

tenure itself, the IMF had lent around $40 billion, through 5 separate lending.

This decade was going to bring forward a period in which the whole

nation would be shocked. Take a long time to get out of the crisis. Although, it

seemed like Argentina managed to get out of the hyper-inflation crisis, it was

only temporary.

In the initial years of the decade, the austral was eliminated to bring

about the peso. The inflation was brought down from 2000% to single digits.

This was because of the concept of pegging of the peso with the US$.

The problem was, this made the country’s competitiveness fall. It’s

neighbour Brazil, devalued the real, and as a result, the Brazilian products were

in demand over the Argentine products. This further lead to minimizing the

methods of gaining money for Argentina.

During the Tequila crisis, Argentina showed signs of resilience. Although,

the inflation was at around 18%, it was still under control. This lead to a belief

that the economic policies of Argentina were better. The interest rates were

also fairly high and as a result the popularity for the Argentine bond grew. It

went on to become the 2nd

most desirable bonds in South America. People

kept flooding in with a lot of capital. The interest amounts to be paid kept

rising. To pay these debts, new loans were taken from the IMF, the US and the

likes.

Eventually, when the whole system keeps piling up with a lot of debt and

barely any inlets for making money. A financial breakdown is bound to happen.



Debt Default :

The Ineviatble and

Damage Control



By the end of the 90s, lots of people perceived, that their savings were

going to be lost if they kept it in the banks. So they removed all the money.

There was capital flight of the magnitude of $2 billion per day. And as if these

weren’t enough, tax evasion was still phenomenally high.

Along with the previous mentioned problems and the above mentioned

problems, it is clear that this expanding balloon of debt was bound to burst. In

December 2001, the country defaulted on its public debt of $132 billion.

There were riots all over Argentina. The government was dissolved.

Eduardo Duhalde abandoned the peso to dollar pegging. The peso was

devalued by about 80%. Although this lead to a fall in the purchasing power,

this also meant that the competitiveness of the country improved again.

Argentina started exporting again. And it adopted the policy of import

substitution to get out of the crisis. In the export scenario, Argentina was

exporting Soy beans, which was being sold at good price in the world market,

thereby helping Argentina recover by a decent extent. The concept of import

substitution also helped. The imports were being reduced, and the domestic

product demand was increasing. This eventually lead to an increase in the

growth rate.



References :

1> Wikipedia

2> IMF

Documents

Argentina - Report