Essay about An Overview of the Argentine Financial Crisis

Essay about An Overview of the Argentine Financial Crisis

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The financial crisis in Argentina during the late 1990s and early 2000s resulted in severe issues with foreign debt, inflation, unemployment, and political turmoil for the country. Argentina not only suffered a currency crisis, but also suffered a political crisis. Fallout from the economic collapse was so severe the Argentinean population resorted to civil unrest and protest, which in turn exacerbated Argentina’s problems at the turn of the century. While other issues related to this financial crisis such as the impact on the lives of the Argentinean population or the political turmoil and corruption are certainly worthy of discussion, this paper will focus on the currency crisis and the Argentinean government’s role in this economic catastrophe, primarily discussing the relative fiscal policies and external shocks that led up to the crisis in 2001, followed by a brief examination of the governmental reaction and recovery efforts.
In order to identify the causal factors of this crisis, it may be best to start by looking at the 1980s in Argentina. While the economy of Argentina may have suffered deeply during 2001 and 2002, economic instability was nothing new to the country. During the 1980s Argentina was a victim to the Latin American Debt Crisis and high inflation. In 1989, inflation spiraled out of control, reaching nearly 200% in July alone (Hanke and Schuler, 2002). Not long after, the president at the time, Raúl Alfonsín, resigned due to subsequent protests and riots. As a result, the next elected president, Carlos Menem, took office several months early and appointed Domingo Cavallo as Minister of Economy. Together, starting in the early 1990s, Menem and Cavallo enacted certain major structural reforms—includin...

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...rts. The Argentine administration enacted pro-growth policies and avoided the drain of resources by controlling expenditures. Also, the government firmly negotiated the restructuring of the defaulted foreign debt. Argentina broke with the IMF in making important decisions regarding its economy recovery, despite the International Monetary Fund’s continued borrowing to Argentina during the late 1990s and early 2000s. In the next few years following 2003, Argentina managed to return to growth, as GDP increased foreign currency reserves increased. In the future, other less developed countries can learn from the Argentinean experience. In hindsight, the adherence to the fixed exchange rate system was maintained too long. Other countries should be wary before adopting such a currency board system, since this fixed rate could lead to an overvalued exchange rate.

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