Argentina Economic Crisis of 2001 The Argentina crisis of 2001-2002 exemplifies the economic, social and political upheaval that can occur during a time of economic and financial crisis. During the 1990's Argentina was heralded as a successful in developing its economy. Foreign investors poured billions of dollars into the country, inflation rates were lower than those in the U.S. at the same time, and the economy was one of fastest growing economies in Latin America. Argentina was the darling of international financial lending, strictly adhering to the IMF advice. But in 2001 the Argentine economy reached its breaking point. The government announced that its foreign debt could not be paid back and billions of dollars in government spending would be cut. This translated to government employees receiving a salary reduction of 13% (Pastor and Wise 2001). While at the same time unemployment skyrocketed to nearly 20% (Stiglitz 2002). In one year Buenos Aires fell from being the most expensive city in Latin America to the cheapest city (Latin Trade 2003). How did an A-plus student fail? The exact cause of Argentina' economic melt down is contested. Some argue that it was due to the poor policy advice from the IMF (Stiglitz 2002) and others, the IMF among them, blame the irresponsibility and corruption of the Argentine government (Krueger 2002). Central to all the arguments, however, is the failures Argentina's fixed exchange rate policy. During the 1980s and early 1990's, on the advice from the IMF, the government opted to fix the Argentine peso's exchange rate to the U.S. dollar (1 dollar = 1 peso). The fixed exchange rate was intended to be a stabilizing force for the economy after a period of hyperinflation (up to 200%). This policy essentially made the peso and dollar interchangeable. Both currencies circulated through the economy, ATMs dispensed dollars and pesos and bank loans could be made in either currency. The problem with Argentine fixed exchange rate was it caused the peso to increase in value at the same rate as the dollar during the economic boom of the 1990's. A rising currency value caused Argentina's exports to become more expensive relative to the country's imports. Since Argentina's largest trading partners are Brazil and the European Union, whose currencies were valued much lower than the peso, the Argentine export market was stalled limiting the growth of the economy.
Who was affected? Argentina's economic crisis affected every level of Argentine society and created an air of uncertainty for the future of Argentina. To quell the crisis the IMF recommended that the government dramatically cut spending. These cuts led to reduced public-sector wages and pensions and a delay in pension benefits for over 1.4 million retirees and their families (Lewis 2002). In addition, as the unemployment rate grew, more people sought unemployment insurance and other social services, the very services being cut. Many people were forced to find jobs in the informal sector that paid very little and offered almost no security for the future (see Jeter 2003). Argentine workers began to withdraw their savings in pesos from banks in exchange for U.S. dollars for fear that rising prices would leave their savings worthless. To curb this cash flight the Argentine government limited cash withdraws to $250 per month and freezing bank assets all together for short periods (Krauss 2001). Additionally, for those who took out loans in dollars were faced with repayments that nearly doubled due to the rising interest rates (Lewis 2002). This left people squeezed between rising prices, job uncertainty and limited access to money. Stunned by their nation's economic unraveling Argentines took to the streets in Buenos Aires in a protest that turned violent. The protest was described as a spontaneous demonstration of citizens outraged by the lack of leadership their government exhibited (Evans 2003). The magnitude of the protests and the level of public dissatisfaction with the government's handling of the economy lead to the resignation of the President of Argentina, Fernando de la Rua and the nation's Economic Minister, Domingo Cavallo. References: Bretton Woods Project (2004). IMF's "role put into question": Argentina crisis evaluation. 10th August 2004. Retrieved on 8/17/2004 at <http://brettonwoodsproject.org/article.shtml?cmd[126]=x-126-65659> Evans, Leslie (2003). "The Crisis in Argentina" UCLA Latin American Center, April 2003 Retrieved on 8/17/04 at http://www.international.ucla.edu/article.asp?parentid=3566 Feldstein, Martin (2002). "Argentina's Fall". Foreign
Affairs; Mar/ Apr 2002 vol. 81, i 2, p 8. Retrieved
on 8/17/04 at http://web4.infotrac.galegroup.com/itw/infomark/322/647/53760740w4/purl=rc1_EAIM_0_A82782317&dyn=8!xrn_1_0_A82782317?sw_aep= Hutchinson, Martin (2002). "Where next in Argentina?" United
Press International; Oct. 21, 2002. Retrieved on 8/17/2004
at http://web4.infotrac.galegroup.com/itw/infomark/380/194/53762304w4/purl=rc1_EAIM_0_A93218030&dyn=3!xrn_1_0_A93218030?sw_aep= International Monetary Fund (2004). Report
on the Evaluation of the Role of the IMF Jeter, Jon (2003). "Scrap by Scrap, Argentines Scratch out a meager living. Laid-off workers survive as trash pickers". Washington Post; June 7, 2003; Page A01. Krauss, Clifford (2001). "Argentina Limits Withdrawals as Banks Near Collapse". New York Times (1857 Ð current files); December 3, 2001; ProQuest Historical Newspapers The New York Times; page A3. Kiguel, Miguel (2002). "Structural Reform in Argentina: success or failure?" Comparative Economic Studies. Summer-Fall 2002, p83(20). Krueger, Anne (2002). Crisis Prevention and Resolution: Lessons from Argentina. International Monetary Fund. Retrieved on 8/17/2004 from http://www.imf.org/external/np/speeches/2002/071702.htm Latin Trade (2003). "Living on Less" October
2003 v11 i10 p71(1) Retrieved on 3/31/04 at http://web4.infotrac.galegroup.com/itw/infomark/322/647/53760740w4/purl=rc1_EAIM_0_A109944696&dyn=3!xrn_7_0_A109944696?sw_aep= Lewis, Tom "Argentina's Revolt" International
Socialist Review; Jan-Feb. 2002. Retrieved 3/31/04 at: Maniam, Balasundram, Hadley Leavell, Vrishali Patel (2004). "Financial Crisis in Emerging Markets: Case of Argentina." Journal of American Academy of Business, Cambridge. March 2004 v4; i1/2; p434. Pastor, Manuel; Carol Wise (2001). "From Poster Child to Basket Case." Foreign Affairs; Nov-Dec 2001; v80, i6; p60 Rohter, Larry (2003). "Once Secure, Argentines now
lack food and hope" The New York Times March 2, 2003; Section 1; Column 1; Foreign Desk; Pg. 8. Retrieved
on 8/17/2004 at http://web.lexis-nexis.com/universe/document?_m=31ac83a87111dea6c71717798daa14ad&_docnum=1&wchp= Sorensen, Morten (2001). "Argentina's Crises" Danmarks National Bank 21/21/2001. Retrieved on 8/17/2004 at http://www.nationalbanken.dk/C1256BE9004F6416/side/B464DADA01662394C1256E7B0041037B/$file/2001_MON4_arg81.pdf Stiglitz, Joseph "Argentina, Shortchanged. Why a nation that followed the rules fell to pieces" www.globalpolicy.org/socecon/bwi-wto/imf/2002/0512shortchange.htm
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