Economic Systems Ohio Wesleyan University Goran Skosples 23. Argentina

1 Facts  1913: 10 th wealthiest nation/capita wealthier than Japan, Italy,  2010: 53 th wealthiest (IMF) Argentina: $14,525 PPP US: $45,934 PPP  41m people  Currency: Argentine peso $1 = __ pesos  President: Christina Fernandez de Kirchner

2 Economic History  settled by Spain in the 16 th century  1816: Argentina declared independence  focus on agricultural products for exports steamships, railways, refrigeration  the Pampas became a great resource  heavy capital investments by the British railroads, utilities, meatpacking  ________________ economic policies  immigration from Southern Europe  the ____________ of the Argentine economy

3 The Golden Age  ended in 1930: global depression  collapse of commodity prices  wheat prices fell by 50% by 1933  worsening of the ______________

4 Falling Behind  Terms of trade (TOT) price of _______/price of _________ how many units of export are needed to purchase a unit of import  Argentina increasingly unable to afford _________________ products from Europe  Argentina focused on agricultural exports and neglected industrialization trade conditions imposed by the trading partners did not allow for infant industry protection  worsening of the working class conditions

5 Peronism  1940’s: rise of the military ________ - government led by a committee of military leaders Juan Peron comes to power - popular with the working class (Eva Peron)  Peronism _______________ policies only institutions sanctioned by the gov’t have a voice and influence in the gov’t - unions had positions of special privilege rise of industry and abandonment of export-led agrarian policies that favored the landed wealthy

6 Peronism  national self-dependence strategic industries and the military  5 year plans industrial policy: measured to favor industries deemed of national importance not like the _______ or _______ style of planning nationalization of the railways and docks (Britain), the financial sector

7 Peronism  3 tools: establishment of _________________ supplying certain essentials creation of an industrial bank  _____________ trade protection: favored and stimulated certain sectors (chemicals, plastics, pharmaceuticals)  : 25% growth in real wages for workers  policies went against the principle of comparative advantage: fall in int’l competitiveness + increase in the balance of payments deficit  1955: Peron removed from power by the military

8 Dependency Theory  economist Raul Prebisch  Wealthy countries rely on natural resources from less LDCs, send obsolete technology to LDCs, and use LDCs as markets for their products. They use whichever means necessary to keep LDCs dependent on wealthier countries  Poor nations are at a disadvantage in their market interactions with wealthy nations  import-substitution industrialization (ISI) trade barriers, promotion of domestic industry

9 The end of the Military Rule  military was in charge until 1983 the “Dirty War” the Falklands War  1970s and 80s: poor economic conditions 1970s: heavy borrowing to finance industrialization  cheap funds (“___________ recycling”) 1980s: inability to repay loans  ______ crisis budgetary deficits financed by printing money  hyperinflation  1990s: pro-market reforms Carlos Menem elected president (Peronist?!?)

10 Liberalization and Reform  emulated British and Chilean policies  Privatization efficiency and incentive motivations fiscal deficit int’l help conditional on privatization mostly sold to strategic foreign investors - private monopolies: prices ________ - wages reduced (power of the unions diminished)  Liberalization: central bank more independent  Openess: creation of _________ – the common market of the South (Arg, Bra, Par, Uru)

11 The Convertibility Plan  a new initiative to improve policy credibility and to establish macroeconomic stability  currency board: pegged peso to US$ 1:1 new currency issued backed by liquid hard currency reserves ended hyperinflation  1990s: period of growth and prosperity high inflow of foreign capital:  end of 1990s, US$ appreciated  made Argentina uncompetitive (Brazil devalued in 1999)

12 The Convertibility Plan  1997 East Asian crisis and 1998 Russian crisis  capital flight from most _________ markets  funds started leaving  need for a monetary contraction in the face of a falling output ___________ of rising unemployment and falling investment and renewed monetary contraction in a recession, wages needed to _____ and they didn’t  Once inflation was tamed, fixed exchange rate should have been floated to help fight external shocks and to restore int’l competitiveness

13 The Convertibility Plan  the gov’t unsuccessfully tried to maintain the currency board loss of ________________ in the currency board flight of capital bank runs freeze of bank accounts mass demonstrations in 2001: fall of the gov’t devaluation

14 Argentina’s Default  in December 2001, Argentina defaulted on its debt  largest default in history ($132b)  Argentina cut out of international capital markets  2003: Nestor Kirchner elected president blamed failures on “_______________” extended gov’t control of the economy  return of the ___________ policies prioritized growth and poverty reduction rather than controlling inflation and fiscal deficit (austerity)

15 Argentina’s Default  2005 debt restructuring – large “haircuts” (35 c/$) $20b refused to restructure  2006: broke away from the IMF (“independence”) issued new bonds which Venezuela bought  taxes on farmers, tariffs on utility companies (foreign), raiding pension fund and central bank foreign reserves, etc.  expansionary monetary policy to finance spending  inflation price controls to fight it + “cooking” statistics  2007: Christina Fernandez new president