The standard imperialist history on Argentina: where if not on: BBC? (2 of 2)

Gorojovsky Gorojovsky at
Sat Dec 22 14:11:18 MST 2001

Date sent:      	Fri, 21 Dec 2001 11:11:17 -0300
To:             	garrahan at
From:           	Patricio J Garrahan <garrahan at>
Subject:        	pol-cien : BBC 21 de diciembre 2001 II Parte

Thursday, 20 December, 2001, 14:41 GMT
Q&A: Argentina's economic crisis

In the mid-1990s Argentina was lauded as an economic miracle. Today, after 
three years of stagnation, it represents one of the world's most 
intractable economic trouble spots. Why? BBC News Online maps the country's 
fall from grace.

So Argentina was once an economic force?

Indeed. In the 1930s Argentina was, thanks largely to beef exports, a 
global power, boasting income per capita similar to that of France.

But from the 1940s the country tumbled from the international stage, 
weakened first by isolationism, then military rule and internal conflict.

With the crisis-stricken government printing cash wholesale, inflation had 
soared to 200% a month by the end of the 1980s.

Shoppers would pay more for goods in the afternoon than they had in the 

How did Argentina escape that crisis?

Carlos Menem, on gaining presidency in 1989, liberalised trade, privatised 
many state businesses and cut red tape in a bid to foster industrial growth.

The programme initially failed, undermined by concerns over levels of state 

But a decision in 1991, during Domingo Cavallo's first spell as economy 
minister, to peg the peso to the US dollar restored confidence - investors 
deemed dealing in greenbacks a safer bet.

The move also fostered financial stability - prices denominated in dollars 
could hardly be adjusted so quickly.

With world economic conditions fair, and seeds of recovery sown, Argentina 
became locked in a virtuous circle of foreign investment fostering growth 
which attracted further cash.

 From 1991-94, Argentina's economic output expanded by an average of 7.7% a 

How did it all go wrong?

By linking the peso to the dollar, Argentines adopted a currency whose 
exchange rate bore little relation to their own economic conditions.

This was a boon in times of hyperinflation.

But when stability returned to Argentina, the inability of its currency to 
respond proved more of a burden than a benefit.

Argentina had, in effect, ceded control over monetary policy - consider how 
important cutting interest rates has been to the US and UK this year.

Buenos Aires was left dancing disco when the tango would have been wholly 
more appropriate.

And while Argentina was able to sidestep the fallout from the Mexican 
currency collapse of 1995, the so-called Asian crisis, which began two 
years later, provided a more troublesome beat.

When the Brazilian real plummeted in 1999, the peso was unable to follow 
suit, leaving Argentine exports vastly more expensive than those of its 

A decline in world prices for farm products, and the global economic 
slowdown of recent months, only worsened Argentina's problems.

Lower export takings have limited the country's ability to earn the foreign 
currency needed to repay dollar-denominated debts.

Allowing industrial activity has denied the government the cash to balance 
budgets, while seeing levels of unemployment and "underemployment" top 30%.

So what happens now?

While the government has so far muddled through by, for example, 
redirecting pensions cash towards paying off debt, economists believe 
Argentina has two options - the two 'd's - for re-attaining stability.

The first 'd' - devaluation - would see the peso freed from its dollar peg, 
and allowed to fall to reflect Argentina's true economic conditions.

Argentine firms would be able to compete on level terms with those from, 
say, Brazil.

However, with Argentine debt largely denominated in dollars, organisations 
earning in devalued pesos would find greenback loans onerous to pay off.

So payments would not be met, banks would collapse, with consequent losses 
to investor confidence.

Government spokespeople have dismissed devaluation as "collective suicide".

What is the alternative?

The second 'd' - dollarisation - would see the peso replaced completely by 
the dollar.

The advantage would be that some foreign faith in the Argentine economy 
would be restored - there would be no chance of devaluation if the peso no 
longer existed - raising the hope of fresh investment.

However, the move would still leave Argentina with an unrealistic exchange 
rate, and risk exacerbating economic contraction already running at a rate 
of about 10% a year.

Professor Steve Hanke, former Argentine adviser, is a long term advocate of 

"The only reason Argentina still has its head above water is the fact they 
have a currency board like system. Unfortunately, Domingo Cavallo - the 
father of the convertibility system - has altered it so much and distorted 
it, that it hardly resembles its original form," he told the BBC's World 
Business Report.

"I think they should simply liquidate the peso, eliminate it completely and 
dollarise the economy, that is the only way they can quarantine the 
contagion effect."

However London-based economist Roger Nightingale told the BBC's World 
Business Report that "if they wanted the peso to be fixed, they had to 
loosen up the labour market, they didn't do either, so disaster was 

And that's it?

Other economists have proposed a hybrid solution - devaluing the peso, then 
dollarising a lower rate, in an effort to avoid the worst effects of the 
pure devaluation or dollarisation options.

Either way, a third 'd' - default - looks inevitable as the government runs 
out of sources to raid for cash to meet debt obligations.

And there seems no strategy which will provide the kind of miracle revival 
that Argentina enjoyed a decade ago.

Roger Nightingale, economist
"Argentina was the only country that went demonically down the road of 
linking currencies"


Néstor Miguel Gorojovsky
gorojovsky at

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