ARGENTINA

1. ARGENTINA The Boom and Bust of a Political Economy

2. Overview • Population: 41,769,726 • Literacy: 97.2% • GDP per capita: $14,700 • GDP growth rate: 7.5% • Unemployment Rate: 7.8% • Pop. Under Poverty: 30% • Gini index: 45.8 • Inflation: 9% (official); 25% (unofficial) (221 in the world) • Exchange Rate: 4.30 pesos/$1 US • Corruption Ranking: 100

3. Politics leading up to the Crisis Before Democracy • After Peron, there was a lot of political instability • 1955-1983 military regimes prevailed over the civil ones • Successive military interventions, and 5 military coups in 15 years • Ended after Malvinas The Return of Democracy • 1983 ->Raul Alfonsin (RCU) • $50 billion foreign debt • 1000% inflation • Plan Austral • Set-up a truth commission and went after the Generals responsible for the mysterious disappearance of 30,000 ppl.

4. The Decade of Menem • The Peronist candidate was elected in 1989 • Foreign debt = $70 billion • Promised to restore economy • Privatization of industries • Convertibility Plan • 1 peso = 1 us$ • Middle class began to shrink • Olivos Pact -> re-election • Unemployment began to rise • Corruption & Scandals

5. The Crisis • 1999: Fernando de la Rua, the UCR and Frepaso’s Alliance candidate, won the elections • GDP fell by 3.4 percent • Unemployment: 14% • IMF granted $40 thousand million bailout • 2001 -> Cavallo becomes Minster of Economy • Competitiveness plans • Zero deficit • Capital flight • Corralito • Carvallo & De la Rua resign

7. The Aftermath • 2 weeks = 5 presidents • Eduardo Duhalde was appointed president • Provisional exchange rate of 1.4 pesos per dollar • “Peso-ification” • After months of no regulation, the peso devaluated by 80% • Population outraged Observations • Values of neoliberalism? • IMF’s role? • Convertibility Plan?

8. The Reconstruction • 2003 Nestor Kirchner elected president & Roberto Lavagna, Minister of Economy • Exports boomed • Import substitution • Soybeans • Accumulation of foreign currency reserves • Maintained the peso devalued • 2006: paid debt to the IMF, $9.810 billion • GDP claimed back • 2007 & 2011: Cristina Fernandez de Kirchner

9. Monetary Policy • Buildup of reserves • 95-98% in dollars • Hard currency shortage (coins) • Reliance on external capital to fund projects/investment • Martin Redrando affair • Key goal: return to global credit markets • Use of reserves and pension system to pay for projects

11. Imports/Exports • One of world’s largest food producers, can feed their population 10 times over • Hasn’t developed markets for many goods • High tariffs on some and not others • Struggles because of lagging infrastructure and distribution networks • ISI approach • Restricting goods with domestic equivalent • Coordinated political campaigns against certain sectors • Energy • 100% of export revenue now required as domestic investment • Parallel quasi-governmental companies (ENARSA) • Junk ratings, political tension • Protectionist measures do more harm than good • 2008 and beef export tariffs • Massive consumer spending on food because of inflation

12. King Soja • 3rd exporter worldwide • 55% of soy oil, 18% of beans • In 1997: $3.2 billion • In 2009: $16.3 billion • 95% exported (mostly to China and the E.U.) • Beans and final products make up 25% of total exports • Disputes with Brazil, EU, and China over tariffs • Half of farmland used for soy • No export tariffs on soy products, small tariff on beans • Low start-up cost, no capital, less labor costs • Monoculture; 98% genetically modified • No crop rotation

13. Statistics control • Instituto National de Estadistica y Censos (INDEC) • 2007, Graciela Bevaqua forced out before 2007 elections, due to an inflation rate double of the numbers demanded by the government • Government wants to avoid shortage in liquidity related to bonds • Private inflation and other indexes banned by the government, with large fines • World Bank, IADB, others now use unofficial statistics • Poverty, food prices, investments, government funding all at different rates • Poverty is twice the reported rate

14. Foreign exchange controls • 1/3 of economic transactions “in the black” • Half of GDP tied up in foreign bank accounts • If taxed and official, government can collect revenue • Tax collection rose 30% in 2011 • 80-90% of tested transactions not approved • 2011 controls • Instituted one week after 2011 election, days before going into effect • To buy any foreign currency: • National ID card • Tax code • Transaction must be approved by AFIP (Argentina’s IRS) based on previous tax returns • Intended to stop capital flight, control exchange market • Try to bridge gap between unofficial and official exchange rate

16. Capital Flight • After Forex controls • Bank deposits down 13% in two weeks • $2.4-3 billion withdrawn • Currency trading • Before: $500 million/day • After: $350 million/day • 96% of flight in dollars • Return to global markets hampered • Real estate, big-ticket item sales grind to a halt • Higher domestic material costs, unclear policymaking procedures, rising inflation, byzantine labor and bureaucratic system • Estimated at $25 billion for 2011; $18 billion in first 9 months • More money withdrawn in 3rd quarter 2011 than any in the last 10 years

17. The Future • Foreign investment will remain low • Policymaking decisions will not have a balance • Industrialization will continue, but specialization will not develop • Loss in credibility will continue to hamper the benefits of any social welfare policies • Will continue to question orthodoxy • New Peronist parties will solidify power

21. Foreign Debt