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1. Don?t Cry for Me, Argentina
March 18th, 2005
Four People Who Are Not John Stiver
3. 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.
4. 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.
5. 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%
6. The Crisis (1999-2002) 1999: President De la R?a 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
7. 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
8. The Crisis- Statistical Data Bankruptcies reached record levels
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
9. Why the Recession Did Not Happen Corruption
Failure of Free Markets
The Currency Board
Provincial Government Finances
10. Why the Recession Happened Currency crisis in Russia and Brazil
Lowered Confidence in the Peso
Contamination of the private sector
11. 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
12. What to do now?Short term Dollarize now
Implement tax cuts
Revamp banking system to promote confidence
Set floor price for default debt
13. 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
14. 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