Don’t Cry for Me,

Argentina
March 18th, 2005
Presented by,
Four People Who Are Not John Stiver
 Background

 Argentina has a history of chronic monetary,

economic, and political problems.
 In 1810, it declared independence from the
Spanish Government.
 No stable government ruled until 1862.
 Background
 Late 1800s: Steady growth and a booming
economy due to beef exports to Europe.
 1890: First large economic downturn as a
nation due to budgetary problems by an
incompetent government.
 Power traded between Presidents and military
dictators.
 Background
 In 1902, Argentina followed a Gold Standard
that had a 100% reserve ratio.
 In 1914, this was abandoned.
 Brought back in 1927.
 Abandoned in 1929.
 In 1945, inflation became a big problem.
 Unresolved political pressures resulted in the
government spending more than it had taken in
in taxes, causing inflation.
 Background

 In the 70’s there was triple digit inflation

 Early 90s: President Menem stepped in with a
reform
 He pegged the peso to the dollar
 Inflation quickly fell to below 4%
 The Crisis (1999-2002)
 1999: President De la Rúa elected
 Federal budget deficit high
 Tax increases attempt to control it
 Tax rates are already substantial
 Caused tax evasion-related corruption
 2000: Economy continues to shrink
 Drastic decreases in government spending causes chaos
 The Crisis (1999-2002)
 Political deadlock between president and senate
 December 2001: freeze on bank deposits
 Recession turns into depression
 People and businesses cannot make payments
 IMF cuts off loans to Argentina: no outside funds
 Five presidents in two weeks
 The Crisis- Statistical Data

 Bankruptcies reached record levels

 From 1998-2002:
 Real GDP fell 28%
 Inflation went from negative levels to 41%
 Exchange rate fell from 1 Peso/$ to 4 Pesos/$
 Unemployment increased from 12.4% to 23.6%
 Poverty rate rose from 25.9% to 57.5%
 Real wages fell 23.7% in 2002
 Real supermarket sales fell 26% in 2002
 Why the Recession
Did Not Happen
Corruption

Failure of Free Markets

The Currency Board

Overvalued Peso

Provincial Government Finances

 Why the Recession Happened
 Currency crisis in Russia and Brazil
 Tax Increases
 Lowered Confidence in the Peso
 Contamination of the private sector
What could Argentina have
done differently?
 Fiscal: cut taxes early, accept more
drastic budget cuts to avoid inflation
 Monetary: dollarize, allow banks to
issue own notes, default on public debt
early
 Systematic: could go strictly floating or
gold standard, but disadvantages to
both according to precedents
What to do now?
Short term
 Dollarize now
 Implement tax cuts
 Revamp banking system to
promote confidence
 Set floor price for default debt
What to do now?
Long term
 Examine structure of law
 Simplify tax strategy
 Improve Federal-Province
relationships
 Reduce unnecessary government
spending
 More flexible labor laws
 Improve health care
 International Policy
Implications
 Determine comprehensive view on
handling financial crises
 Examine US laws on foreign seizure
 Improve IMF recommendations
 Borrow / Bailout / Depreciation /
Default may not work as well
 Property rights as related to prosperity
Questions??