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By Rodrigo Camara Rowe
Imagine you’re on a trip to Argentina for the summer (winter in the Southern Hemisphere). You go to a restaurant and pay 1,000 pesos for a nice meal at a local restaurant. Three years later, you decide to return to this beautiful country, but something looks wrong. When you visit that same restaurant and check the bill, you realize the total is now 8,000 pesos.
Odd as it may seem, this has been the inflationary trend in the Argentine economy for several decades now. Though changes have not been as drastic as in the previous scenario, inflation rates have averaged around 20% a year for the last 20 years. If one looks 20 years further back, one will find that inflation rates were exponentially higher, at one time going over 3,000%.
For the purposes of this article, it’s important to provide some context about Argentina and its economic history. From the end of the 19th century to the Roaring Twenties, Argentina became one of the richest countries in the world. Having opened its markets to international trade, it became a large exporter of meat and soybeans. Thanks to these high levels of growth in the beginning of the 20th century Argentine citizens were as wealthy as French and German citizens at the time. At one point, Argentinians were almost as wealthy as the average American back then. Averaging almost 10% annual economic growth, Argentina saw the sky as the limit.
Nonetheless, this kind of economic growth can’t be sustained for prolonged periods of time, and Argentina was no exception to this rule. When the Great Depression hit the global economy, Argentina saw its exports drop dramatically, and its trade slowed dramatically. As no country was buying meat products from Argentina anymore, Britain offered to virtually become a monopoly-like manager of its meat market, which provoked some unrest in Argentina. Fast forward to the end of World War II, and Argentina’s famous military leader, Juan Perón rose to power. From 1946 onwards, Argentina’s economy went through a series of highs and (concerning) lows. High levels of inflation, nationalization of certain industries and their privatization thereafter, among other important events characterized and fueled the country’s unstable economic development. This instability has led the South American nation to participate in 21 programs of the International Monetary Fund since 1956, default on its debt 9 times, and suffer from long periods of high inflation.
More recently, however, Argentina has tackled its problems by using a seemingly contradictory set of strategies, each plan of attack varying significantly depending on the president in office. This has led the country to generate unstable economic conditions. In the last 30 years, Argentina has gone from enjoying steady growth rates and fostering international trade to pegging its currency to the dollar and suffering drastic changes in economic cycles.
Starting in the 1990s, Argentina, under the leadership of President Carlos Menem, incentivized foreign investment, loosened trade barriers, and inflation was held under control. More specifically, President Menem was able to keep inflation levels low by pegging the Argentinian peso to the dollar. However, as is the case with numerous other Latin American countries, Argentina has a long history of political corruption, and this has played an important role in pulling it down from achieving its full potential. By the end of the 1990s, corruption was so pervasive within influential political circles that foreign investors were scared off. Other factors including economic turmoil in East Asia and Russia caused a capital flight from Argentina. The currency peg between the peso and the dollar became increasingly unsustainable for Argentina’s central bank because as more investors were trading their pesos for dollars, fewer dollars could be found in the country’s coffers. One solution for this was for the Central Bank to push interest rates to higher levels, so that citizens would hold less cash and wouldn’t trade them for dollars. Argentina’s Central Bank, however, was concerned about the damage to the economy caused by higher interest rates, so they did not increase. Additionally, trade unions in Argentina were unwilling to accept lower wages. When combined, these factors increased the current-account deficit. As a result, investors lost confidence in the viability of the fixed-exchange rate and fled the country. With foreign debt growing and interest rates increasing, Argentina found itself again incapable of paying. Finally, in December 2001 Argentina defaulted on $155 billion of central and provincial debt, the largest sovereign debt default in history.
Because of the COVID pandemic, Argentina faces a dire economic outlook. After the pandemic hit in early 2020, foreign investors fled the country once again, devaluing the peso. This meant that imports in Argentina would become more expensive. Indeed, the costs of imported food increased, and inflation overall reached 40%. Of course, this isn’t the only problem that Argentina is facing during the pandemic. High unemployment rates due to the pandemic and rising inflation is leading the country to troubling levels of stagnation, and public finances are stretched almost to their breaking point. The Argentine government now faces a $3.8 billion loan payment this year and over $18 billion next year. Nevertheless, the new administration under President Alberto Fernández, has managed to make progress that previous administrations failed to do. The Minister of Economy, Martin Guzmán, who studied under Nobel Laureate Joseph Stiglitz, is pressuring trade unions to get them to lower wage increases, which is expected to help keep inflation under control. Furthermore, he’s also imposed price controls on food and insisted that companies should keep prices low. All these strategies, however, come with counterproductive monetary policy like high interest rates, which prevent businesses from borrowing money at a low cost, so they can invest in increasing efficiency and improving equipment. It would seem as though the Argentine government’s plan to face the pandemic and the economic situation is to firstly make it through without collapsing, so that it may have the opportunity to focus on growth afterwards.It’s clear that Argentina has faced arduous challenges in the past and no economic plan has yet managed to bring about stability. With over one third of its population living under the poverty line and billions of dollars waiting to be paid from numerous loans, including the IMF’s giant bailout, the South American country is under extreme pressure to solve countless problems. Certainly, the COVID pandemic didn’t improve their situation in any sense, but there are reasons to be optimistic about the economic outlook. With all the experience that Argentina has gained over the past, it seems like the pandemic provides it with a new perspective to reassess their approach toward fiscal and monetary policy and abandon old practices that have proved useless over the years. Without a doubt, it will be interesting to see how Argentina continues to develop in the future. More importantly, it will be intriguing to see whether this country, rich in natural resources, escapes the resource curse and grows to fulfill its full potential to become a dynamic economic power. □