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Don’t Cry for Me, Argentina

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

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  1. Don’t Cry for Me, Argentina March 18th, 2005 Presented by, Four People Who Are Not John Stiver

  2. 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.

  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 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

  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 • 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

  9. Why the Recession Did Not Happen Corruption Failure of Free Markets The Currency Board Overvalued Peso Provincial Government Finances

  10. Why the Recession Happened • Currency crisis in Russia and Brazil • Tax Increases • 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

  15. Questions??

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