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Economics of Crises



1. General Information about Argentina Economy until Designing

Currency Board

2. Argentina Economy between 1991-2001

2. a Convertibility Plan

2. b Macroeconomic Indicators

3. Arguments about Argentina Crisis

3. a Exchange rate appreciation (Eichengreen and Feldstein)

3. b Debt Crisis (Mussa)

4. Conclusion



“Rich as an Argentina.” was so popular epithet before the World War I because before the
First World War Argentina economy had the best times. Argentina was viewed big
opportunity for Europe’s capital. On the other hand, because Argentina supply higher trade
than the other countries migratory wanted to come Argentina. But, in the First World War
time prices of agricultural goods was collapsed. Increasing of export was provided with
devaluation. Argentina economy became again powerful. Coming up to 1982, debt crisis of
Mexico effected Argentina economy very badly. Argentina government did not overcome
with inflation. In the 1989, Carlos Menem was selected as president and Argentina designed
currency board. This included for 10 years period. For the first time, currency board was
viewed well for Argentina economy. But at the end of 2001, Argentina economy was

In this work, we analyze Argentina economy before designing currency board, after 10
years time period which include currency board is analyzed. In the conclusion, we make
general estimation about Argentina crisis.

1. General Information about Argentina Economy until Designing
Currency Board

Until World War I Argentina economy was viewed strong. In those days Argentina
economy was viewed big opportunity for investment. Argentina economy was the popular
country for Europe’s capital. The center of trade is Buenos Aires was the big harbor which
was exported wheat and meat owing to railway which was built by English. In that days
Argentina economy opened to external shocks because Argentina economy was financed by
the foreigner capitals. If we can say that as numerical, in 1914 stock of Argentina’s capitals
%50 was foreigner (Taylor, 1997). Just as they were in that situation during World War I, but
they again overcame until 1929 Great Depression. In 1930s Argentina became a big meat
exporter and their GDP was the same as France’s GDP.

Table I: Argentina Economy (1913-1929)

(Average annual)

Total % Change Growth (%)

1913-17 1917-29 1913-29 1917-29

Real GDP -19.6 116.7 3.5 6.7

Agricultural -13.5 91.1 3.2 5.5

Production and -16.9 146.7 4.6 7.8


Building sector -82.4 749.8 2.6 19.5

Government 14.7 52.7 3.6 3.6


Other services -15 104 3.5 6.1

Resource: Alejandro, 1970, p.52

Alejandro, 1970, p.52.

Argentina’s economy was called “Belle Epoque” before World War I and it depended on
English foreign trade and English capitals (Taylor, 1992). After 1930s Argentina’s economy
had some unbalances. The main cause was growing to be dependent on outside financial
sources. In 1930s rate of real growth was behind population growth. There was depending on
outside financial sources in Argentina economy, Great Depression affected Argentina
economy exceedingly.

Applied wrong policies after World War 2 and disagreements caused inflation, government
deficits and constant crisis. At the end of 1970s and beginning of 1980s Argentina economy
had big chaos. Not only affected prices of domestic inputs but also imported investment
product were affected because of petrol crisis. This costliness affected inflation. According to
IMF (1994) data as from 1975 in Argentina economy inflation was over %100.

Table 2: Inflation and Government Deficit (1975-1992)

Inflation Government Deficit Inflation Government Deficit

1975 100 10.6 1984 688 5.5

1976 550 7.2 1985 385.4 8.1

1977 169.2 2.8 1986 81.9 4.1

1978 171 3.2 1987 174.8 6.5

1979 160 2.6 1988 387.7 7

1980 101 3.6 1989 4923.6 21.8

1981 104 8.5 1990 1343.9 3.3

1982 165 7.8 1991 84 1.8

1983 373.7 14 1992 18.6 n.a.

Resource: inflation: 1975-1983 IMF, IFS, 1994.

1984-1992 Edwards, 1996.

government deficits: 1975-1985 IMF, IFS, 1994

1975-1983 IMF, IFS, 1994, 1984-1992 Edwards, 1996, 1975-1985 IMF, IFS, 1994,
1986-1991 Edwards, 1996.

1986-1991 Edwards, 1996.

Argentina was searching new ways to overcome with inflation. The Austral Plan which
was prepared by one technocrat group which was led by Juan Sourouille in 14 June 1985 was
declared to the public. The new currency Austral was constituted thereby erased three zeros
from Peso. Prices, wages and exchange rate were stabilized. According to Austral Plan The
Central Bank was banned to coin money for closing budget deficit. FED supported Austral
Plan, too. With FED’s support, Argentina agreed with successful external indebtedness
payment plan with private banks and this caused reserve increase over 2 billion $. This plan
aimed to decrease budget deficit under GDP %2.52 to bring new taxes and to increase current
ratio of taxes and to decrease time of collection VAT.

Public opinion has answered the Austral Plan gladly and first results were affirmative
super all expectances. In first nine months when the plan was performed inflation decreased,
effects of program on unemployment weren’t formed as they estimated and economy started
to grow up as from second half of 1985. The success of Austral Plan for decreasing inflation
caused to become austral more valuable. Argentine’s foreign debt interest payments have
required having foreign trade surplus. This situation sensitized the Austral Plan against
exchange rate over –valuation. Upon this, the government put an end implementation of
freezing of wages and prices on April 1986 to remove foreign trade deficit and public sector
deficit and also to clear the depreciation of real wages thereby answer back growing demand
of unions. This attitude of government was perceived as the first signal that starting to give up
the struggle with inflation.

The government changed their policy stance to struggle inflation and that was bad for
Argentina. Inflation raised to 8% for a month in 1987 February. That’s why Alfonsin team
again must be stabilized the wages and prices. Austral plan was left at the end of 1987
because Austral plan did not work well.

In 1988 August, Alfonsin team confronted to public with a new heterodox which called
Primavera but that plan did not work long and inflation kept getting increase.

In 1989 Carlos Menem who called El Turco was selected to be president. Current affairs
were good for Argentina but it could not good for Argentina economy. Inflation was 197% in
July which was selected to president Carlos Menem. Argentina had to get in 1990 with
1350% hyperinflation for a month, collapsed financial position and industry sector which

slide into chaos. In 1991 Domingo Cavallo was appointed by Carlos Menem under economic
crises. Cavallo passed currency board to meet the government deficit and to control inflation.

2. Argentina Economy between 1991-2001

2. a Convertibility Plan

In 21 March 1991 Argentina economy changed over to Convertibility Plan. This plan
included 5 main factors:

1. Monetary Reform
2. Fiscal Reform
3. Public Sector Reform
4. Social Security Reform
5. Trade Reform

Monetary reform aimed to create trust to Peso. Monetary reforms were formed by
Convertibility Law and Central Bank Charter.

Fiscal reform aimed to recover tax system management. The main aim of fiscal reform was
to decline budget deficit and this eliminated need of to print money to finance the budget
deficit. So, this was important to be provided price maintenance.

Public sector reform included restructure of debts and fiscal system and designed product
market and labor market.

The aim of social security reform was to create a social security system which created their
income in their own system.

Trade reform, through the elimination of export taxes and most quantitative restrictions on
imports, and the reduction of the level and range of import tariffs.3

Monetary reform aimed to create trust to Peso. Monetary reforms were formed by
Convertibility Law and Central Bank Charter. First of all, in April 1991 10,000 Austral
equaled to 1 USA dollar, then Peso took Austral place and in January 1992 1 Peso equaled to
1 USA dollar. Thus, in labor market and product market indexation was punished. Extent of

World Bank, 1996.

money base was accepted to limited with amount of international reserve. These rules brought
conclusions that Central Bank worked as currency board. A currency board is a monetary
authority which is required to maintain an exchange rate with a foreign currency. This policy
objective requires the conventional objectives of a Central Bank to be subordinated to the
exchange rate target.4

Inflation was 4923.6% in 1989. Currency board which had an aim to decrease the inflation
succeeded. In 1994 the inflation was decreased to 4% and in 1995 2%.

Table 3. Inflation Rates

1997 1998 1999 2000 2001

Inflation December-
0.3 0.7 -1.8 -0.7 -1.5
(CPI %) 01

rate 1.000 1.000 1.000 1.000 1.000

Another benefit of currency board is to take under control the inflation and to become
stabilized of exchange rate.

Even if currency board was successful to decrease the inflation in Argentina, it had an
important place in crises. In this point to summarize the disadvantages of currency board:

 IMF suggested Argentina to pass floating exchange rate after the second term of 2001,
but Cavallo denied that suggestion of IMF. Because of not abolish currency board
IMF did not give to Argentina credit which IMF should be given.


 With currency board Peso was equaled to Dollar, that’s why Peso over valuated. In
addition Argentina lost its competitive capacity with weak currency of Brazil and
Chili. Argentina was 34th In 1998, then 40th 1999 and 45th 2000 in World
Competition Index.
 Argentina was in recession because of dollarization of market, high real interest rates
and deviation of trade limit which based on prices of petrol. 6

2. b Macroeconomic Indicators

We can analyze the macroeconomic situation of Argentina in Convertibility Term in three

parts: 1991-1994 terms, Tequila Crises and post Tequila Crises.

Argentina economy was developed in the first time of Convertibility Term depending on
Brady Plan. Brady Plan included restructure of external indebtedness, tax reform,
privatization, social security reform and liberalization of financial markets. Argentina was
developed effects of overseas capital flow.

Convertibility Plan was successful between 1991-1994 terms. In 1990 the CPI rate was
1343%, in 1991 84%, in 1992 17.5%, in 1993 it was 7.4% and in 1994 it decreased 3.9%.
Even inflation rate decreased down 2%. Capital inflows started to get in Argentina economy
depending on getting better of financial markets. Capital inflows were 15 billion dollars. On
the one part overseas capital inflows was raising total saving capacity, on the other part
overseas capital inflows caused exchange rate to over valuate as real.

Bouzas (1996) mentioned that there were three main problems about Argentina economy
before Mexico Crises. These were about prices, fiscal discipline and balance of trade.

Increasing of domestic demand delayed adaptation between domestic and foreign inflation.
Abrogation of taxes and promotion for some sectors for export affected fiscal burden in a
increasing way.

Second, between “1991-1993” fiscal discipline was succeeded by the government but it
included only privatization and increasing taxes income. Social security problem could not

Stratejik Analiz, Cilt 2, Sayı 22, Şubat 2002, Barış Çiloğlu.

There was deterioration about trade of balance and current account balance. There was an
over growth in import. Overseas capital inflows financed the current account deficit, also
depending on that international reserve capacity increased from 4.8 billion $ to 16 billion $
from 1989 to 1994. But this was the main reason for Argentina economy instability.

In 1994 Tequila Crises occurred. It affected Argentina economy. It caused capital outflows
from Argentina. That’s why Convertibility Plan was questioned.

After Menem started his second presidential period in July 1995, the economic situation
began to deteriorate. The Mexican crisis of December 1994 --with its massive devaluation,
dramatic capital flight and recession-- had a devastating effect on Argentina whose economic
program was seen as a replica of the Mexican one and consequently prone to similar
problems. The so-called "tequila effect" sowed fears that the Argentine government might
also announce a massive devaluation and, as a result, financial capital flew (an 8 billion
dollars flight), interest rates skyrocketed, and an economic crisis characterized by illiquidity,
fall in investment and consumption, and general recession began to develop (Bouzas, 1996).
As a result, in 1995 the positive economic trends were reversed --the GNP declined 4.4%,
consumption faltered, the fiscal deficit rose as tax revenues diminished, and a financial crisis
emerged-- while he negative ones worsened –declining employment, regressive income
distribution, and external vulnerability.7

Between December 1994- May 1995 international reserves decreased about 4.8 US $. This
situation endangered the financial system. In 1995 nominal exchange rate (peso/dollar)
equaled to 1. As a result of dollarization total export growth increased 28.9%. In addition total
import growth tended to negative way. Overall balance which was -151 billion pesos in 1994,
with effects of Tequila Crises it increased to -2.156 billion pesos.

After Tequila Crises, Argentina economy continued to grow again. Argentina economy’s
growth rate was 5.5 % in 1996, in 1997 8.1 % and in 1998 when Russia Crises occurred the
GDP rate was still positive. It was 3.8 %. After 1998, Argentina slipped into an unyielding
economic recession and rising unemployment triggered by a sudden stop in capital flows that,

Economic Liberalization, Political Democracy, and Social Justice in Argentina, Aldo C. Vacs, September 24-26,

while regional in its origins, was particularly acute and persistent in Argentina after 1999
Brazilian devaluation.8 The GDP rate was -3.4 % in 1999.

According to Perry and Serven Argentina had less capital outflows than the other Latin
American Countries. After 1999 when other region countries had getting capital inflows,
Argentina had the biggest capital outflows and spread increasing in 2000 and 2001. Capital
outflows which Argentina between 2000-2001 had showed that it depended territorial factors
more powerful than local factors. (Perry and Serven 2003)

Table 4: Argentina: Key Economic Indicators (1991-2001)9

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

GDP% 10.5 10.3 6.3 5.8 -2.8 5.5 8.1 3.8 -3.4 -0.8 -4.4

CPI% 84.0 17.5 7.4 3.9 1.6 0.1 0.3 0.7 -1.8 -0.7 -1.5

Nominal Exchange 0.9985 0.9905 0.9985 0.9995 1 0.9995 0.9995 0.9995 0.9995 0.9995 0.9995

Real Effective 140.5 165.5 178.0 169.5 163.2 163.7 176.3 171.2 178.2 185.6 185.7

Exchange Rate
Current Account -0.4 -6.5 -8.0 -11.0 -5.2 -6.8 -12.2 -14.5 -11.9 -8.8 -4.4

International 6.0 10.0 13.8 14.3 14.3 18.1 22.3 24.8 26.3 25.1 14.6

Reserves(in billions of
US $)
Total Exports -2.1 3.4 8.5 17.8 28.9 13.6 9.0 0.7 -10.5 11.8 -0.6

Total Imports 68.3 58.8 30.3 11.3 -4.6 15.8 24.1 3.4 -15.3 0.4 -16.6

Primary Balance (in -483 1.043 3.685 2.890 1.156 -1.420 -1.580 2.388 1.413 -2.672 1.709

millions of pesos)
Overall Balance (in -1.190 -1.464 710 -151 -2.607 -6.224 -7.212 -4.396 -6.418 -12.304 -9.781

millions of pesos)
External Debt/In 32.9 27.4 30.5 33.3 38.2 40.3 42.7 47.3 51.0 51.5 52.2

Percent of GDP

3. Arguments about Argentina Crisis

Living and Dying with Hard Pegs: The Rise and Fall of Argentina’s Currency Board, Augusto de la Torre, 2003.
The Role of the IMF in Argentina, July 2003, IMF.

Argentina passed to currency board against economic crises. This implementation was
different policy than the other countries’ implementation for economic crises. Positive and
negative effects of this implementation are viewed on Argentina economy. Currency board
include period of 10 years. Except 1995 year Argentina’s economy was developed but in 2001
Argentina economy collapsed. About this crash there are some economists who have some
opinion. Eichengreen and Feldstein support exchange rate appreciation and in addition Mussa
supports debt crisis for crashing of Argentina’s economy.

3. a Exchange rate appreciation (Eichengreen and Feldstein)

According to first opinion which was represented by Eichengreen and Feldstein the main
reason of recession and fiscal problems is exchange rate appreciation.

Feldstein supports that crises occurred as a result of foreign debts which increased
depending on exchange rate appreciation. “If Menem and Cavallo’s strategy had succeeded,
Argentina today would be enjoying strong growth, low inflation and financial stability. The
fixed exchange rate could have succeeded, however, only if the peso becomes competitive
enough to generate more exports than imports, so that the net foreign-exchange earnings
could be used to pay interest on the out-standing international debt. Although the one-to-one
exchange rate made Argentine product uncompetitively expensive, this could still have been
remedied if productivity had risen faster than wages, permitting Argentine prices to decline
relative to those abroad.”10 said Feldstein.

Eichengreen lists several issues related with economic crises: poor growth, large exposure
of local banks to sovereign debt and real exchange rate. According to Eichengreen “To lend
credibility to its stabilization, Argentina adopted a dollar-based currency board. While this
maximized the credibility of the commitment to price stability in the short run, it also exposed
the economy to fluctuations in the relative value of the major currencies. The dollar’s
relentless rise in the second half of the 1990s thereby contributed to the country’s
competitiveness problems. Revealingly, the decision in 2001 to increase the flexibility of the
peg in limited ways -- in April to replace the dollar with a dollar-euro basket once the euro
rose to parity against the dollar, and in June to adopt a separate exchange rate for trade

Argentina’s Fall: Lessons from the Latest Financial Crisis, Martin Feldstein, 2002.

transactions until euro-dollar parity was achieved -- had negative effects on confidence that
far outweighed any positive implications for competitiveness.”11

Argentina’s real effective exchange rate (REER) experienced a considerable appreciation

during 1990s. Between 1990 and 2001, the REER rose by over 75 percent. The bulk of the
appreciation developed before 1994. In fact, the REER depreciated after that date and until
1996, but then appreciated again to reach its peak in 2001. This figure shows Argentina’s
actual and equilibrium REER.12

Figure 1: Actual and Equilibrium REER


3. b Debt Crisis (Mussa)

Mussa supports that the main reason of crash is wrong fiscal policy management which
had become chronic. Also, he accepts importance of mistakes of exchange rate policy,

Crisis Prevention and Management: Any New Lessons from Argentina and Turkey?, Barry Eichengreen, 2001.
The Anatomy of a Multiple Crises: Why was Argentina Special and What can We Learn From It?, Guillermo
Perry, Luis Serven, 2003.
The Anatomy of a Multiple Crises: Why was Argentina Special and What can We Learn From It?, Guillermo
Perry, Luis Serven, 2003.

external shocks (appreciation of US $ and devaluation of Brazilian Real) and rigidity of labor
market. These wrong policies caused debt/GNP increasing fast during 1990s. Mussa points to
12 % of GDP public debt increase during the 1993-1998, years of good 5 %+ growth.

Mussa explained the factors of Argentina’s economic tragedy in “From Triumph to

Tragedy”. In general he presented these factors:

1. If Argentina economy had been more flexible for labor markets, it would adapt easily
to Convertibility Plan.
2. If US $ would not been so powerful, Argentina would not been affected about
competitive in a bad way.
3. If collapse of exchange rate regime of Brazilian had not made a negative external
shock, Argentina would not get in recession 1999-2001.
4. If Convertibility Plan’s time period would not be too long, Argentina could be
overcome difficulties between 1999-2001.

Although these factors very important for economic crises, the main problem is that not
to provide permanent budget discipline.

4. Conclusion

Countries can take lessons from the Argentina crises to overcome when they face with
economic crises.

In this way, continuing independent money policy by Central Bank is important. Not only
this independence should not be provided by only public sector, but also it should be
supported according as capital mobility. Moreover expectation of dollarization and
devaluation create a risk for private sector and Central Bank should use money authority to
protect the companies from risky investments.

The one of the most important result is that to decrease inflation with currency hedging
policy includes high risk. Although this policy gains confidence to stability program, it brings
instability in a long term without increasing competition of export.

If real competition level would not be increased, countries would be unprotected against
crises. Argentina had this situation. That’s why IMF model which associated with external
debts is not useful for Argentina.

Argentina which slide into dead end as a result of political disablement for a long time
recession, for a decade first it rescued from inflation but then Argentina had to struggle big
problems. In our point of view, collapse of Argentina economy depends on exchange rate


1) Alejandro, C.D. ( 1970 ). Essays on the Economic History of the Argentine Republic.

2) Çiloğlu B.( Şubat 2002 ). Stratejik Analiz, Cilt 2, Sayı 22.

3) Edwards, S. ( 1996 ). “Public Sector Deficits and Macroeconomic Stability in Developing

Countries” NBER Working Paper no.5407.

4) Eichengreen B. ( 2001 ). Crisis Prevention and Management: Any New Lessons from
Argentina and Turkey?

5) Damill M. , Frenkel R. ( 2002 ). Argentina: A decade of currency board: An analysis of

growthi employment and income distribution.

6) De la Torre A. ( 2003 ). Living and Dying with Hard Pegs: The Rise and Fall of
Argentina’s Currency Board.

7) Feldstein M. ( 2002 ). Argentina’s Fall: Lessons from the Latest Financial Crisis.

8) IMF. ( 1994 ). International Financial Statistics Yearbook 1994.

9) IMF. ( July 2003 ). The Role of the IMF in Argentina.

10) Mussa, M. ( March 2002 ). Argentina and Fund: From Triumph to Tragedy.

11) Perry, G. , Serven, L. ( June 2003 ). The Anatomy of the Multiple Crises: Why was
Argentina Special and What can We Learn From It?.

12) Vacs, A.C. ( September 1998 ). Economic Liberalization, Political Democracy, and
Social Justice in Argentina.

13) World Bank. ( July 1996 ). Argentina The Convertibility Plan: Assessment and Potential

14) http://www.buik.net/subcommittee/ekonomik/showarticle.asp?aid=189

15) http://www.latin-focus.com/countries/argentina/argentina.htm.

16) http://www.nationmaster.com/encyclopedia/Currency-board.