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Don’t Cry for Me, Argentina. March 18 th , 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.

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Don t cry for me argentina l.jpg

Don’t Cry for Me, Argentina

March 18th, 2005

Presented by,

Four People Who Are Not John Stiver

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  • 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.

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  • 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.

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  • 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.

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  • 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%

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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

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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

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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

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Why the Recession Did Not Happen


Failure of Free Markets

The Currency Board

Overvalued Peso

Provincial Government Finances

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Why the Recession Happened

  • Currency crisis in Russia and Brazil

  • Tax Increases

  • Lowered Confidence in the Peso

  • Contamination of the private sector

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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

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What to do now?Short term

  • Dollarize now

  • Implement tax cuts

  • Revamp banking system to promote confidence

  • Set floor price for default debt

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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

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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