Economic Systems

Ohio Wesleyan University

Goran Skosples

23. Argentina

2

Facts

1913: 10th wealthiest nation/capita

• wealthier than Japan, Italy,

2010: 53th wealthiest (IMF)

• Argentina: $14,525 PPP

• US: $45,934 PPP

41m people

Currency: Argentine peso

• $1 = __ pesos

President: Christina Fernandez de Kirchner

3

Economic History settled by Spain in the 16th 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

4

The Golden Age

ended in 1930: global depression

collapse of commodity prices wheat prices fell by 50% by 1933 worsening of the ______________

5

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

6

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

7

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

8

Peronism 3 tools:

• establishment of _________________ supplying certain essentials

• creation of an industrial bank _____________• trade protection: favored and stimulated certain

sectors (chemicals, plastics, pharmaceuticals)

1947-52: 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

9

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

10

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?!?)

11

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)

12

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)

13

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

14

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

15

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)

16

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