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Financial and Economic Consequences of Argentina Crisis of 2001/2002
Section 18. Economics and management
Vovchenko Natalia G., Dr Sci (Econ) Finance Department, E-mail: [email protected] Epifanova Tatiana V., Dr Sci (Econ) Civil Low Department, E-mail: [email protected] Pogorelenko Nikita S., Student, University College London (UCL), E-mail: [email protected]
Financial and Economic Consequences of Argentina Crisis of 2001/2002
Abstract: The article analyses the consequences of the financial crisis on Argentina’s economy, the severity of which was disproportionately magnified by the problem of unbalanced sheets as well as difficulties faced on the political level.
Keywords: financial crisis, economic and political factors, balance of payments.
Argentina experienced one of the biggest economic shocks in its history in 2001-2002. Argentina’s output fell by nearly 20% over 3 years, the financial sector got paralyzed, inflation soared and the government had to default on its debt. In the early 2003, some signs of recovery appeared but it was still a long path to stability and sustainable growth. (IMF) Similarly to other financial crises in emerging countries, such as Russia (1998), Mexico (1995) and Brazil (1998),
Argentinian crisis was a result of a combination of fragility in balance sheets and the inability to mount an effective policy response. (IMF) Fragility was a critical determinant in Argentina as a result of public sector debt dynamics. The recession was even stronger because of the difficulties of rolling over the debt. Argentina was unable to make a sufficient policy response due to economic constrains and political factors. (Blustein).
Figure 1. Inflation and Unemployment in Argentina
This work will examine the factors, which caused the crisis. Most of the analysis will be based on the effects on the real sector of the economy. It is important to mention the historical features of Argentina in order to understand the background of the ongoing economic difficulties within the country. At the beginning of 20th century the economic outlook was very positive. It was one of the wealthiest countries not solely in Latin
America but also in the rest of the world. (Glaeser) Argentina’s GDP per capita was higher than in Germany and in France at that time. However, everything changed with the World War I and Argentina’s economic growth decreased substantially. The bad policy-making and political gridlock were the reasons of the low economic growth. Nevertheless, it got even worse after the 1970s Oil crisis that has led Argentina to a period of
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long downturn. The government got heavily indebted and was unable to get enough tax revenue in order to match its spending. Consequently, Argentina was highly dependent on monetary expansion policies. By ‘feeding’ the Money Market by infinite Quantitate Easing, they got heavily ‘inflated. (Rabobank)
Although Phillips claimed that high inflation goes hand in hand with high levels of employment and increasing levels of production, it is not the case with Argentina. With the level of unemployment of 5%, it had over 500% inflation. (Blanchard, Amighini and Giavazzi)
In 1989, the biggest priority of Argentina was to put down the extremely unusual inflation rate. Argentina experienced hyperinflation reaching 3080% that year. There was a growing political support of radical economic reforms to prevent such an unsystematic growth in price level. When Carlos Menem became a new president of Argentina, his government introduced an innovative set of measures that cured the inflationary pressure. (IMF)
First and foremost, the liberalization policy has been implemented. The reforms included deregulation of
the capital account on the balance of payments, privatization of government owned assets, partial trade liberalization and other different market-friendly reforms. (Frenkel and Rapetti) Second big policy was the Convertibility plan dated 1991. It fixed the Argentinian peso one-to-one to the US Dollar. That was a very successful policy in the short term, as it provided stabilization of the exchange rate. The expectations of the economy were very bright. However, the Mundell-Fleming model suggests that an economy cannot maintain exchange rate stability, free capital movement, and an independent monetary policy. Such a principle is called the ‘Impossible Trinity. Therefore, Argentina fixed its exchange rate with free capital movement at the expense of the monetary policy autonomy. (Feenstra and Taylor) The new legal monetary framework left little space for the central bank of Argentina to finance banks or the government. Due to that reason, the Bank of Argentina ability to change the monetary base and the domestic liquidity got fully dependent on the results of BoP (balance of payments). (Frenkel and Rapetti)
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Figure 3: Argentina Balance of Trade
Balance of Payments (Four Quarters Monthly Average, in Millions of Dollars)
Financial and Economic Consequences of Argentina Crisis of 2001/2002
It is also important to mention two significant economic features ofthe convertibility period. Firstly, real exchange rate has already appreciated in the US, while the nominal exchange rate of Argentina was pegged to USD and such an appreciated level was kept throughout the 1990s. Therefore, Argentina’s exports were more expensive and less competitive. In contrast, imports were cheaper, which deteriorated the trade balance. Moreover, labor productivity of manufacturing sector did not increase for the period. Unit labor costs of production failed to fall for both tradable and non-tradable markets due to an increase in nominal wages at the start of the convertibility period. That was both for the tradable and non-tradable goods market. Therefore, the competitiveness of Argentinian
exports decreased during the period. Such a decrease caused a growing external gap. (Feldstein) The combination of trade openness with appreciated exchange rate induced growing trade balance deficit. We can see from Figure the trend of BoP Debt accumulation for the period of 1992-1995.
Secondly, although the credibility of peso was high, many private sector savings were in the US dollars and many banks were hedging their balance sheets against exchange rate risks by offering dollar denominated credits. There has been a trend of dollarization of the economy since the Convertibility period started. Therefore, Argentina has obtained a burden of exchange risk placed on numerous local bank debtors who had peso-denominated income. (Frenkel and Rapetti)
Figure 4: Balance of Payments, Net Capital Inflows, Reserves Variations
The decrease in competitiveness of exports was a very big concern when Brazil pegged its currency to US dollar as well in 1998. That helped Brazilian economy to perform well but it reduced the competitiveness of Argentinian goods on world market. Argentina got out ofthe market, as its export prices were too high. Because of the price rigidities, it was unable to respond growing economic problems, as it was unable to use monetary policy or devaluate its exchange rate. It could not adjust nominal prices and wages, which questioned the credibility ofArentina’s fixed rate regime. That caused the revaluation of riskiness of Argentinian’s portfolios for foreign investors as they have lost their confidence. (Frenkel and Rapetti) That has led to an outflow of net capital that can be also seen in Figure 4.
Some sources call 30th November 2001 ‘point of no return’ for Argentina. The rising worries about peso devaluation and deposit freeze were too high. Interest rates on Argentine government bonds rose sharply. The spread between Argentinian government bonds and US Treasury bonds became 5,000 basis points. Both citizens and investors were worried about their peso-denominated investments. The ‘Convertibility Law’ allowed to exchange pesos into dollars and then to take the dollars out of the country. That caused a bank ran, leading to the end of currency peg and sharp peso depreciation (over 75% in a few months). Many
companies based in Argentina had to go bankrupt because of dollar-denominated loans that were common since the start of Convertibility period. (Blustein)
On the 1st ofDecember 2001, the Minister of the Economy of Argentina announced a freeze on bank deposits meaning that the Convertibility plan and ‘one-to-one’ of 1991 was untenable. The Argentinian citizens did not have an access to their bank accounts so they could not exchange their currency to dollars in order to prevent devaluation of any savings left in pesos. Later, in 2001, IMF stopped any support ofArgentina, as it could not match the conditions of the rescue problem. That caused a cut in in foreign capital inflow. By the end of 2001 Rodriguez Saa, a new president ofArgentina, announced a default on 93bn USD of sovereign debt of Argentina.
The economic outcome of the crisis was gigantic. The economy was contracting every year since 1998 and by 2002 it totaled 11%.
It is possible to see from the Figure 5 that GDP per capita in absolute terms in 2002 was of the same size as 20 years before that. Unemployment has increased substantially from 14.8% in 1998 to 22.5% in 2001. (Data.worldbank.org) Such a severe shock affected the amount of people living below the national poverty line. It mounted from 25.9% in 1998 to
57.5 in 2002. (IMf).
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Figure 5: GDP Per Capita, GDP Growth in Argentina
To conclude, Argentinian economic crisis was caused by a numerous internal political factors such as allowance of hyperinflation in the end of 1980s and external economical factors such as unpredictable hard currency peg, currency overvaluation, external shocks caused by trading partners, sudden stop of capital inflow and etc. The
aforementioned reasons together with the social unrests and political events made this crisis one of the most severe among emerging market crises in history. The world economic growth was strong enough in 2000 to allow Argentina’s export to benefit with its devaluated peso, so it was able to recover quickly.
References:
1. Blanchard, Olivier, Alessia Amighini, and Francesco Giavazzi. Macroeconomics. Print.
2. Blustein, Paul. And The Money Kept Rolling In (And Out). New York: PublicAffairs, 2005. Print.
3. Data.worldbank.org,. ‘Argentina / Data’. N. p., 2015. Web. 27 Apr. 2015.
4. Feenstra, Robert C, and Alan M Taylor. International Macroeconomics. New York: Worth Publishers, 2012. Print.
5. Feldstein, Martin. ‘Argentina’s Fall: Lessons From The Latest Financial Crisis’. Foreign Affairs 81.2 (2002): 8. Web.
6. Frenkel, Roberto, and Martin Rapetti. Argentina’s Monetary And Exchange Rate Policies After The Convertibility Regime Collapse’. Political economy research institute 1 (2007): n. pag. Print.
7. Glaeser, Edward. ‘What Happened To Argentina?’. Economix Blog. N. p., 2009. Web. 27 Apr. 2015.
8. IMF,. ‘Lessons From The Crisis In Argentina’. International Monetary Fund (2003): n. pag. Print.
9. Rabobank ‘The Argentine Crisis 2001/2002’. N. p., 2013. Web. 27 Apr. 2015.
10. Tradingeconomics.com,. Argentina Balance Of Trade / 1957-2015 / Data / Chart / Calendar / Forecast’. N. p., 2015. Web. 27 Apr. 2015.
Smirnova Elena Viktorovna, Kuban state technological University associate professor department of state and municipal management
E-mail: [email protected] Eroyan Asya Efimovna, Kuban state technological University associate professor department of state and municipal management
E-mail: [email protected]
Organizational aspects of management education in Russia
Abstract: The article examines the main organizational aspects of the education sector in Russia. Organizational management is concerned, above all, the quality of education and methods of evaluation. The analysis of national education policy.
Keywords: the sphere of education, management, accreditation, licensing, state standard.
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