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The Argentine economic crisis was part of the situation that affected Argentina 's Economy during the late 1990s and early 2000s. Macroeconomically speaking, the critical period started with the decrease of real GDP in 1999 and ended in 2002 with the return to GDP growth, but the origins of the collapse of Argentina's economy, and their effects on the population, can be found in action before. As of 2005 , the crisis is arguably over, though many challenges remain for the country. ORIGINS Argentina was subject to Military Dictatorship (alternating with weak, short-lived Democratic governments) for many years. Huge debt was acquired for money later to be lost in different unfinished projects, the Falkland/Malvinas Islands War , and the state's takeover of private debts. In 1983, Democracy in the country was restored with the election of president Raúl Alfonsín . The new government's plans included stabilising Argentina's Economy , for which new loans were required. The state eventually became unable to pay the interest of this debt, the economy collapsed and Inflation began increasing. In 1989, Argentina's inflation reached 200% per month, topping 3,000% annually. President Alfonsín resigned six months before ending his term, and Carlos Menem took office. Menem, who had campaigned on a Populist platform, immediately went back on his promises and began a plan, aligned on the Neoliberal Washington Consensus , of Trade Liberalisation , labor Deregulation and Privatisation of state companies which were the source of much spending (such as those providing the telephone, energy and water services). The terms of these privatisations were often rather unfavourable to the Argentine state. These economic policies led to some social unrest, as the new '' Piquetero '' movement. THE 1990S The fight against inflation did not go well. In 1991, under the rule of Minister of Economy Domingo Cavallo , the Argentine Peso 's monetary value was Fixed by law to the value of the United States Dollar . The law (''Ley de Convertibilidad'') stated that any citizen could go to a bank and ask for any amount of cash in pesos to be converted to an equal amount of dollars; in order to secure this "convertibility", the Central Bank was bound to keep its Dollar Reserves at the same level as the Cash In Circulation . As a result of the convertibility law, inflation dropped sharply, price stability was assured, and the value of the currency was preserved. This raised the Quality Of Life for many citizens, who could now afford to travel abroad, buy imported domestic appliances and electronic products or ask for credits in dollars at very low Interest rates. But Argentina had international Debt s to pay, and it needed to keep borrowing money. The fixed exchange rate made imports cheap, producing a constant flight of dollars away from the country and a progressive loss of Argentina's Industrial Infrastructure , which led to an increase in Unemployment . In the meantime, government spending continued to be high and Corruption was rampant. Argentina's public debt grew enormously during the 1990s, and the country showed no true signs of being able to pay it. The IMF, however, kept lending money to Argentina and postponing its payment schedules. Massive Tax Evasion and Money Laundering explained a large part of the evaporation of funds toward Offshore Banks . A congressional committee started investigations in 2001 about accusations that Argentina's Central Bank governor, Pedro Pou , as well as part of the board of directors, had failed to investigate cases of alleged money laundering through Argentina's financial system . Clearstream was also accused of being instrumental in this global financial process. Other countries, such as Mexico and Brazil (both of which also happen to be important trade partners for Argentina) faced economic crises of their own, leading other countries to mistrust Latin America n countries moneywise, and affecting the overall economy of the region. The influx of foreign currency provided by the privatisation of state companies had dried out, and after 1997 Argentine exports were harmed by the devaluation of the Brazilian real and a considerable international revaluation of the dollar. By 1999, newly elected President Fernando De La Rúa faced a country where unemployment had risen to a critical point, and the undesirable effects of the fixed exchange rate were showing forcefully. In 1999 Argentina's GDP dropped 4% and the country entered a Recession (which was to last three years, ending in a collapse). Stability became stagnation (even Deflation at times), and the economic measures taken did nothing to avert it; in fact, the government continued the contractive economic policies of its predecessor. The possible solution (abandonment of the exchange peg, with a voluntary Devaluation of the peso) was considered a political suicide and a recipe for economic disaster. By the end of the century, Complementary Currencies such as the LECOP and the Patacón (bonds issued by the national and provincial states) emerged due to the shortage of cash. THE CRISIS Argentina quickly lost the confidence of investors and the flight of money away from the country increased. In 2001 , people fearing the worst began withdrawing large sums of money from their Bank Account s, turning pesos into dollars and sending them abroad, causing a Run On The Banks . The government then enacted a set of measures (informally known as the '' Corralito '') that effectively froze all bank accounts for twelve months, allowing for only minor sums of cash to be withdrawn. Because of this allowance limit and the serious problems it caused in certain cases, many Argentines became enraged and took to the streets of important cities, especially Buenos Aires . They created a new form of Protest , known as '' Cacerolazo '' (banging pots and pans). These protests occurred especially during the period of 2001 to 2002. At first the ''cacerolazos'' were simply noisy Demonstration s, but soon they included property destruction, often directed at banks, foreign privatized companies, and especially prominent American companies. Many businesses installed metal barriers because windows and glass facades were being broken, and even fires being ignited at their doors. Billboards of such companies as Coca Cola and others were brought down by the masses of demonstrators. Confrontations between the police and citizens became a common sight, and Fire s were also set on Buenos Aires avenues. The violent Protests Of 20 And 21 December 2001 in Plaza De Mayo , where demonstrators clashed with the police, ended with several dead, and precipitated the fall of the government. Fernando de la Rúa fled the Casa Rosada in a helicopter on 21 December . During the last week of 2001, the interim government led by Adolfo Rodríguez Saá , facing the impossibility to meet debt payments, Default ed on the larger part of the public debt, totalling no less than 93,000 million dollars. Rodríguez Saá, utterly incapable to deal with the crisis and unsupported by His Own Party , resigned before the end of the year. The Peronist Eduardo Duhalde was appointed by Congress to take his place. THE END OF CONVERTIBILITY ). The discontinuous red line shows the price of the minimum food requirements. Note the abrupt increase in the first semester of 2002.]] After much deliberation, Duhalde abandoned in January 2002 the fixed 1-to-1 peso-dollar parity that had been in place for ten years. In a matter of days, the peso lost a large part of its value in the unregulated market. A provisional "official" exchange rate was set at 1.4 pesos per dollar. In addition to the ''corralito'', the Ministry of Economy dictated the ''pesificación'' ("peso-ification"), by which all bank accounts denominated in dollars would be converted to pesos at official rate. This measure angered most savings holders and appeals were made by many citizens to declare it unconstitutional. After a few months, the exchange rate was left to float more or less freely. The peso suffered a huge devaluation, which in turn prompted inflation (since Argentina depended heavily on imports, and had no means to replace them locally at the time). The economic situation became steadily worse with regards to inflation and unemployment during 2002. By that time the original 1-to-1 rate had skyrocketed to nearly 4 pesos per dollar, while the accumulated inflation since the devaluation was about 80%. (It should be noted that these figures were considerably lower than those foretold by most orthodox economists at the time.) The quality of life of the average Argentinian was lowered proportionally; many businesses closed or went bankrupt, many imported products became virtually inaccessible, and salaries were left as they were before the crisis. Immediate effects Many private companies were affected by the crisis: Aerolíneas Argentinas , for example, was one of the most affected Argentine companies, having to stop all international flights for various days in 2002. The airline came close to Bankruptcy , but it survived. put restrictions on Argentine food and drugs arriving at the United States. On the entertainment world, producers of Television Channel s were forced to produce more Reality Show s than any other type of shows, because these were generally cheap to produce as compared to other programmes. Virtually all education-related TV programmes were cancelled, including a popular one which was aimed at teenagers, often distributing prizes to the person who could answer through the telephone a series of physics and mathematics-related questions. THE RECOVERY Eduardo Duhalde finally managed to stabilise the situation to a certain extent, and called for elections. On 25 May 2003 President Néstor Kirchner took charge. Kirchner kept Duhalde's Minister of Economy, Roberto Lavagna , in his post. Lavagna, a respected economist with moderate-centre-wing views, showed a considerable aptitude at managing the crisis, with the help of heterodox measures. The economic outlook was completely different from that of the 1990s; the high exchange rate made Argentine exports cheap and competitive abroad, while discouraging imports. In addition, the high price of Soy in the international market produced an injection of massive amounts of foreign currency (with China becoming a major buyer of Argentina's soy products). The government encouraged Import Substitution and accessible credit for businesses, staged an aggressive plan to improve Tax collection, and set aside large amounts of money for Social Welfare , while controlling expenditure in other fields. As a result of the administration's productive model and controlling measures (selling reserve dollars in the public market), the peso slowly revalued, reaching a 3-to-1 rate to the dollar. Agricultural exports grew and Tourism returned. The huge Trade Surplus ultimately caused such an inflow of dollars that the government was forced to begin intervening in order to keep the peso from revaluing further, which would have ruined the tax collection scheme (largely based on imports taxes and royalties) and discourage further reindustrialisation. The Central Bank started buying dollars in the local market and stocking them as reserves. By December 2005, foreign currency reserves had reached $28,000 million (they were greatly reduced by the anticipated payment of the full debt to the IMF in January 2006). The downside of this reserve accumulation strategy is that the dollars have to be bought with freshly-emitted pesos, which may induce inflation. The Central Bank neutralises a part of this monetary emission by selling Treasury letters. In this way the exchange rate has been stabilised near a reference value of 3 pesos to the dollar. The currency exchange issue is complicated by two mutually opposing factors: a sharp increase in imports since 2004 (which raises the demand of dollars), and the return of foreign investment (which brings fresh currency from abroad) after the successful restructuring of about three quarters of the external debt. The government has set up controls and restrictions aimed at keeping short-term speculative investment from destabilising the financial market. Argentina's recovery suffered a minor drawback in 2004 when rising industrial demand caused a short-lived Energy Crisis . Scenarios of energy shortage are not discarded in the near future. Argentina has managed to return to Growth with surprising strength; GNP jumped 8.8% in 2003, 9.0% in 2004, and 9.1% in 2005 (with expectations of 7.5% for 2006). Consumer prices, however, have accompanied this surge, and average wages have barely caught up; though not comparable to the levels of former crises, the inflation rate for 2005 (~12%) has prompted the government to "cool down" some sectors of the economy, restrict benefits for exporters, and put pressure on companies in order to stabilize prices. While Unemployment was considerably reduced in 2005, Argentina has so far failed to reach a more equitable Distribution Of Income . EFFECTS ON WEALTH DISTRIBUTION According to Argentine Agronomist Alberto Lapolla, who has written extensively on the transformation of Argentina from the "granary of the world" to a "soy republic", 450,000 Argentines died of hunger between 1990 and 2003. Citing the Institute of State and Participation Studies (IDEP), a thinktank, Lapolla adds that every day, 55 children, 35 adults and 15 elderly die in the country from illnesses related to hunger. Although GDP has grown consistently and quickly since 2003, it was only in late 2004 that it reached the levels of 1998 (the last year before the recession). Other macroeconomic indicators have followed suit. A study by Equis, an independent counseling organisation, found out that two measures of Economic Inequality , the Gini Coefficient and the wealth gap between the 10% poorest and the 10% richest among the population, grew continuously since 2001, and decreased for the first time in March 2005.
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