Don’t Cry for Me, Don’t Cry for Me, ArgentinaArgentina

March 18March 18thth, 2005, 2005Presented by, Presented by,

Four People Who Are Not John Four People Who Are Not John StiverStiver

BackgroundBackground

Argentina has a history of chronic Argentina has a history of chronic monetary, economic, and political monetary, economic, and political problems.problems.

In 1810, it declared independence In 1810, it declared independence from the Spanish Government.from the Spanish Government.

No stable government ruled until No stable government ruled until 1862.1862.

BackgroundBackground

Late 1800s: Steady growth and a Late 1800s: Steady growth and a booming economy due to beef booming economy due to beef exports to Europe.exports to Europe.

1890: First large economic downturn 1890: First large economic downturn as a nation due to budgetary as a nation due to budgetary problems by an incompetent problems by an incompetent government. government.

Power traded between Presidents Power traded between Presidents and military dictators.and military dictators.

BackgroundBackground In 1902, Argentina followed a Gold In 1902, Argentina followed a Gold

Standard that had a 100% reserve ratio.Standard that had a 100% reserve ratio. In 1914, this was abandoned.In 1914, this was abandoned. Brought back in 1927.Brought back in 1927. Abandoned in 1929.Abandoned in 1929. In 1945, inflation became a big problem.In 1945, inflation became a big problem. Unresolved political pressures resulted Unresolved political pressures resulted

in the government spending more than in the government spending more than it had taken in in taxes, causing it had taken in in taxes, causing inflation.inflation.

BackgroundBackground

In the 70’s there was triple digit In the 70’s there was triple digit inflationinflation

Early 90s: President Menem stepped Early 90s: President Menem stepped in with a reformin with a reform

He pegged the peso to the dollarHe pegged the peso to the dollar Inflation quickly fell to below 4%Inflation quickly fell to below 4%

The Crisis (1999-2002)The Crisis (1999-2002)

1999: President De la Rúa elected1999: President De la Rúa elected Federal budget deficit highFederal budget deficit high

Tax increases attempt to control itTax increases attempt to control it Tax rates are already substantialTax rates are already substantial Caused tax evasion-related corruptionCaused tax evasion-related corruption 2000: Economy continues to shrink2000: Economy continues to shrink Drastic decreases in government spending Drastic decreases in government spending

causes chaoscauses chaos

The Crisis (1999-2002)The Crisis (1999-2002)

Political deadlock between president and Political deadlock between president and senatesenate

December 2001: freeze on bank depositsDecember 2001: freeze on bank deposits Recession turns into depression Recession turns into depression

People and businesses cannot make paymentsPeople and businesses cannot make payments IMF cuts off loans to Argentina: no IMF cuts off loans to Argentina: no

outside fundsoutside funds Five presidents in two weeksFive presidents in two weeks

The Crisis- The Crisis- Statistical Data Statistical Data

Bankruptcies reached record levelsBankruptcies reached record levels From 1998-2002:From 1998-2002:

Real GDP fell 28%Real GDP fell 28% Inflation went from negative levels to 41%Inflation went from negative levels to 41% Exchange rate fell from 1 Peso/$ to 4 Pesos/$Exchange rate fell from 1 Peso/$ to 4 Pesos/$ Unemployment increased from 12.4% to 23.6% Unemployment increased from 12.4% to 23.6% Poverty rate rose from 25.9% to 57.5% Poverty rate rose from 25.9% to 57.5%

Real wages fell 23.7% in 2002Real wages fell 23.7% in 2002 Real supermarket sales fell 26% in 2002Real supermarket sales fell 26% in 2002

Why the Recession Why the Recession Did Not HappenDid Not Happen

CorruptionCorruptionFailure of Free MarketsFailure of Free MarketsThe Currency BoardThe Currency BoardOvervalued PesoOvervalued PesoProvincial Government FinancesProvincial Government Finances

Why the Recession Why the Recession HappenedHappened

Currency crisis in Russia and BrazilCurrency crisis in Russia and Brazil Tax IncreasesTax Increases Lowered Confidence in the PesoLowered Confidence in the Peso Contamination of the private sectorContamination of the private sector

What could Argentina What could Argentina have done differently?have done differently? Fiscal: cut taxes early, accept Fiscal: cut taxes early, accept

more drastic budget cuts to more drastic budget cuts to avoid inflationavoid inflation

Monetary: dollarize, allow Monetary: dollarize, allow banks to issue own notes, banks to issue own notes, default on public debt earlydefault on public debt early

Systematic: could go strictly Systematic: could go strictly floating or gold standard, but floating or gold standard, but disadvantages to both disadvantages to both according to precedentsaccording to precedents

What to do now?What to do now?Short termShort term Dollarize now Dollarize now Implement tax cuts Implement tax cuts Revamp banking system Revamp banking system

to promote confidenceto promote confidence Set floor price for default Set floor price for default

debtdebt

What to do now?What to do now?Long termLong term

Examine structure of lawExamine structure of law Simplify tax strategySimplify tax strategy Improve Federal-Province Improve Federal-Province

relationshipsrelationships Reduce unnecessary Reduce unnecessary

government spendinggovernment spending More flexible labor lawsMore flexible labor laws Improve health careImprove health care

International Policy International Policy ImplicationsImplications

Determine comprehensive Determine comprehensive view on handling financial view on handling financial crisescrises

Examine US laws on foreign Examine US laws on foreign seizureseizure

Improve IMF Improve IMF recommendationsrecommendations

Borrow / Bailout / Depreciation Borrow / Bailout / Depreciation / Default may not work as well/ Default may not work as well

Property rights as related to Property rights as related to prosperityprosperity

Questions??Questions??