ARGENTINAThe Boom and Bust of a

Political Economy

Overview• Population: 41,769,726• Literacy: 97.2%• GDP per capita: $14,700• GDP growth rate: 7.5%• Unemployment Rate: 7.8%• Pop. Under Poverty: 30%• Gini index: 45.8• Inflation: 9% (official);

25% (unofficial) (221 in the world)

• Exchange Rate: 4.30 pesos/$1 US

• Corruption Ranking: 100

Politics leading up to the Crisis Before Democracy

• After Peron, there was a lot of political instability

• 1955-1983 military regimes prevailed over the civil ones

• Successive military interventions, and 5 military coups in 15 years

• Ended after Malvinas

The Return of Democracy

• 1983 ->Raul Alfonsin (RCU)• $50 billion foreign debt • 1000% inflation• Plan Austral • Set-up a truth commission

and went after the Generals responsible for the mysterious disappearance of 30,000 ppl.

The Decade of Menem• The Peronist candidate was

elected in 1989• Foreign debt = $70 billion• Promised to restore

economy• Privatization of industries• Convertibility Plan

▫ 1 peso = 1 us$

• Middle class began to shrink• Olivos Pact -> re-election• Unemployment began to

rise• Corruption & Scandals

The Crisis • 1999: Fernando de la Rua,

the UCR and Frepaso’s Alliance candidate, won the elections

• GDP fell by 3.4 percent• Unemployment: 14%• IMF granted $40 thousand

million bailout• 2001 -> Cavallo becomes

Minster of Economy▫ Competitiveness plans ▫ Zero deficit

• Capital flight• Corralito• Carvallo & De la Rua

resign

The Aftermath• 2 weeks = 5 presidents• Eduardo Duhalde was

appointed president• Provisional exchange rate

of 1.4 pesos per dollar • “Peso-ification”• After months of no

regulation, the peso devaluated by 80%

• Population outraged

Observations• Values of neoliberalism?• IMF’s role?• Convertibility Plan?

The Reconstruction

• 2003 Nestor Kirchner elected president & Roberto Lavagna, Minister of Economy

• Exports boomed• Import substitution• Soybeans• Accumulation of foreign currency

reserves• Maintained the peso devalued• 2006: paid debt to the IMF, $9.810

billion• GDP claimed back• 2007 & 2011: Cristina Fernandez de

Kirchner

Monetary Policy• Buildup of reserves• 95-98% in dollars• Hard currency shortage

(coins)• Reliance on external

capital to fund projects/investment

• Martin Redrando affair

• Key goal: return to global credit markets

• Use of reserves and pension system to pay for projects

Imports/Exports• One of world’s largest food

producers, can feed their population 10 times over▫ Hasn’t developed markets for

many goods▫ High tariffs on some and not

others▫ Struggles because of lagging

infrastructure and distribution networks

• ISI approach▫ Restricting goods with domestic

equivalent▫ Coordinated political campaigns

against certain sectors• Energy

▫ 100% of export revenue now required as domestic investment

▫ Parallel quasi-governmental companies (ENARSA)

▫ Junk ratings, political tension

• Protectionist measures do more harm than good▫ 2008 and beef export

tariffs▫ Massive consumer

spending on food because of inflation

King Soja• 3rd exporter worldwide

▫ 55% of soy oil, 18% of beans• In 1997: $3.2 billion• In 2009: $16.3 billion• 95% exported (mostly to

China and the E.U.)▫ Beans and final products

make up 25% of total exports• Disputes with Brazil, EU, and

China over tariffs• Half of farmland used for soy• No export tariffs on soy

products, small tariff on beans

• Low start-up cost, no capital, less labor costs

• Monoculture; 98% genetically modified

• No crop rotation

Statistics control• Instituto National de

Estadistica y Censos (INDEC)• 2007, Graciela Bevaqua

forced out before 2007 elections, due to an inflation rate double of the numbers demanded by the government

• Government wants to avoid shortage in liquidity related to bonds

• Private inflation and other indexes banned by the government, with large fines

• World Bank, IADB, others now use unofficial statistics

• Poverty, food prices, investments, government funding all at different rates

• Poverty is twice the reported rate

Foreign exchange controls• 1/3 of economic

transactions “in the black”• Half of GDP tied up in

foreign bank accounts• If taxed and official,

government can collect revenue

• Tax collection rose 30% in 2011

• 80-90% of tested transactions not approved

• 2011 controls▫ Instituted one week after

2011 election, days before going into effect

▫ To buy any foreign currency: National ID card Tax code

▫ Transaction must be approved by AFIP (Argentina’s IRS) based on previous tax returns

• Intended to stop capital flight, control exchange market

• Try to bridge gap between unofficial and official exchange rate

Capital Flight • After Forex controls▫ Bank deposits down 13%

in two weeks▫ $2.4-3 billion withdrawn▫ Currency trading

Before: $500 million/day After: $350 million/day

• 96% of flight in dollars• Return to global markets

hampered• Real estate, big-ticket item

sales grind to a halt • Higher domestic material

costs, unclear policymaking procedures, rising inflation, byzantine labor and bureaucratic system

• Estimated at $25 billion for 2011; $18 billion in first 9 months

• More money withdrawn in 3rd quarter 2011 than any in the last 10 years

The Future

• Foreign investment will remain low

• Policymaking decisions will not have a balance

• Industrialization will continue, but specialization will not develop

• Loss in credibility will continue to hamper the benefits of any social welfare policies

• Will continue to question orthodoxy

• New Peronist parties will solidify power

Foreign Debt