Prologue:

Argentina - From rags to riches to rags

The title by itself, might bring about a thought provocative scenario to confusion. From rags to riches, one can understand. One makes money one day, and is rich. Again, the counter is also possible, losing money overnight. It might seem like, those days of gambling at Macao or Vegas. None the less the fact of the matter lies in the periods that follow rags in the title. They symbolize the fact that this seems like a roller coaster ride, waiting to happen all over again. A series of events that took place over the last century, will help defend the name given to this report. To understand the economic fall or rise of a country, one should understand the main criteria for the drama. Its people. To add on to the saga, we have things like policies, reforms, resources, opportunities and the likes. As if these werent enough, one would dip the matches in gasoline and light them in the form of foreign exchange, foreign investment, foreign debt and the likes. The land of the Soccer Gods, also gave birth to the people who brought it to the ground because of their greed and their need for power. Apparently, the concept of live and let live, was too far ahead of its time in those lands. Many a time have we seen through history, how the wants of a few , slaughters the living of the rest. Let us dive into the depths of this beautiful countrys pitiful history, to understand better, as to why, Argentina stands where it is.

The Saga Begins

Argentina, in the good old days, was home to many hunter and gatherer society based natives. The whole concept of economy, per say, did not exist. To the natives luck, the Spanish found this splendid country. Argentina didnt have gold deposits or any of the other precious metals. As a result, it ended up being more of a back seat passenger when compared with few of the other countries under the Spanish rule. The early days of this colonial inhabitation was found mainly in almost all the areas except the Patagonian Plateau. The people were self-sufficient. The cattle reared and the grains produced were consumed by the producers themselves, let alone some for the nearby town folks. The concept of foreign trade was inexistent until late in the 18th century. It was around this time, that this country was introduced to, national level trade amongst the otherwise very self-sufficient and independent town folks. During these colonial times, countries which actively participated in foreign trade, were better off, when compared with those that werent. Argentina was still not much into foreign trade, and as a result was still lacking on the world colonial scenario. To add to this already miserable story, all of the very little trade that Argentina was doing, was strictly monitored by the Spanish. All of these, along with a few more additional flavours, added to the cooking of the Argentine Independence from the Spanish rule. This eventually happened in 1816.

The Post-Independence Development..

After gaining its independence, Argentina was still in a bit of a mess. There were people who came and added a little to the improvement of the economy, by restoring free trade and the likes. It faced wars, both internal and external, for quite some time, until the emergence of a strong leader, Juan Manuel de Rosas. He was the governor of Buenos Aires until he was delegated some more power. He made few changes in the policies, and gave Buenos Aires complete power of the port. He brought in high import tariffs on luxury goods, some trade barriers on good produced in the country and there were export tariffs on gold and silver. During his period of control, there was a cumulative devaluation of 240% of the peso papel, over 12 years. But, because of the complete control of the port by Buenos Aires, there was still a civil unrest present. During this whole period of civil wars, 1810-1866, the exports grew from 4% to 8%. And this was achieved so because of the increase in productivity of livestock rearing. But, by the end of this period, Argentina was slowly shifting from livestock to crops.

The Boom: Thank you exports.

The British empire were allies with the Spanish empire, during the colonialism period. They used this to their advantage by asking for permission to trade with Argentina. In these present times, inspite of the Spanish leaving Argentina, the British still maintained good trade practices with Argentina. Post 1870, Argentina underwent a lot of economic changes. The convertibility was suspended in order to get the debt under control. Although, the inflation grew by 20% the following year, the debt to GDP ratio fell sharply. Since the shift from just stock rearing to crop growing, the agriculture sector in Argentina grew substantially. It brought in a lot of foreign capital, namely from Britain. This capital was used to improve industries and lay railway lines. This further lead to, more foreign capital into Argentina, from various European countries. The rise in capital further led to an improvement in infrastructure. Livestock was being sent to Buenos Aires using the railway services. Many meat plants were being raised. These led to further packing and shipping of meat to various parts of the world. This led to an annual export growth of 6.8% approximately. Argentina was in its period of riches. Capital flowing in. Thanks to the rise in exports (especially meat), there was a boom in the economy. The rise was of such high magnitude, that it was dubbed as the United States of South America. The wages grew to almost 96% to that of Britain and the per capita GDP grew to 80% to that of the United States. All of these numbers seem nice. But, they are not long lived. This was soon to be changed in the near future.

World War 1 and the Great Depression : Before and After.

In 1889, Argentina went through a financial crisis. The Baring brothers, a merchant bank, was in profitable relations with Argentina. There were few payments which were to be made by the then Argentine government (the Celmans government). The government couldnt pay these debts and it ended up defaulting on the loan taken. This led to a financial crisis. The next man in power was Carlos Pellegrini. He tried to stabilize the situation by reducing on the imports. Although the foreign capital reduced, the exports were still unaffected. There was a stagnation in the growth rate of exports for 9 years. But, eventually the economy was back up and running. It shot up again, GDP was increasing at an annual rate of 7.7% . There was even a time when Argentina even surpassed countries like France and Italy. Then came the World War 1. Recession hit Argentina. The capital inflow declined. Britain reduced its capital outflow after the war, as it had huge debts to USA. The superpower which emerged then, USA, perceived Argentina as threat. Hence, USA did not bother to invest in Argentina, which further kept Argentina in quite a fix. As if this wasnt enough, the countries started to focus at Asia. The prime need became coal, fuel and in short energy. This kept Argentina further outside the loop. Following this came the Great Depression. The only major effect it had on Argentina was that it halted the economic growth that the country had so far seen. The peso was devalued, thus improving the competitiveness of Argentina in the world trade scenario. Although the revenue generated was comparatively less, the devaluation still protected the domestic production. As a result, there were many new reforms coming into being in order to keep Argentina self-sufficient. There were a lot of problems

The Peron Times

Peron Era (1946-55) During the rule of Juan Peron, Argentina followed an isolated foreign policy to boost domestic production and as such Import Substitution was practiced. He being a Labour centric ruler had increased wages and unionized the labours & created the Labour Confederation. His campaigning strategy of distribution of land and social security also added to increased state spending. He followed an expansionary policy as such government spending was high. State intervention was high as such there was increase in state owned property and there was control of rent & prices. To control foreign trade he nationalised foreign owned enterprises. As such he protected imports of Argentina which eventually isolated them from the international trade market. To boost the industrialisation he shifted focus from agrarian to industry as such the Agricultural production suffered. After seeing this dip in agricultural production, Peron favoured back to agriculture during the second five year plan but high wages & industrial growth had expanded domestic demand of the agricultural goods. As such the agricultural output fell and growth was hit. This also created unequal distribution of resources between agriculture & industry i.e. the area of land available for farmer was very low compared to industrial production. This dampened business sentiments and hit the exports. All these contributed to inflation and slow growth. Inflation reached 50% in 1951 and Peso fell by 70% of its value from 1948 to 1950. Eventually during the 50s Peron signed trade agreements with Britain, Soviet Union and Chile to revive the agricultural production. Ad albert Krieger Vasena (1966) In the 1960s stagnation was witnessed because of high unemployment and inflation. To control it there was strict monetary policy which called for increase in taxes, cut in public expenditure. Vasena the new economic minister played a major role in stimulating the growth by control over the money supply, wages (wages were freezed) and prices, and bank credit provided to the private sector and privatisation of underperforming public enterprises. Import substitution policy was dropped and exports were boosted by lifting

trade barriers as such opening the trade to international markets. Exchange rate practice of previous governments was removed. As such Growth increased to 5.2 % between1966-70. Inflation moderated to 7.6% by 1969 and unemployment & real wages also fell. But due to an overvalued currency, meant certain imports were so cheap that domestic industry was falling, and competitiveness of exports in the international market fell. He suspended the Right to Strike Law and labour conventions to reduce the power of unions. These policies led to riots in Argentina and Vanesa were removed. After removal of vasena, Argentina was unable to sustain the above economic policies and as such the per capita fell along with the standard of living. Return of Peron (1973) From 1969-76 there was series of violence between right-wing peronism and left-wing peronism, leading to years of violence and political instability. Peoples Revolutionary Army (ERP) was formed as the military branch of the Trotskyist Workers Revolutionary Army, that kidnapping and killed Argentines. Amid high state of turmoil and violence in the country Juan Peron decided to return to presidency on June 20 1973. Peron tried to achieve political peace through new trade and labour policies and to develop national reconstruction. Currency was devalued and wages were re-structured in order to attract foreign capital and revive the growth. Peron died on July 1, 1974. His wife Isabel Peron succeeded him in office, but her government was unable to stabilise the economy. There were peronist intra-party struggles, and increasing acts of violence by ERP and paramilitary forces. As such Inflation was surged and GDP fell and per capita income fell by 20%.

Martinez De Hoz : Mr. Bane Hyper-Inflation : Eventful

In 1976, The military took over the power from lady Peron. They went about dictating the rules. During these times, the inflation was around 700%. At which point, Martinez de Hoz, was appointed as the finance minister. He brought about many changes in the policies. The first thing that he did was to reduce the trade barriers. He decided that the wage rates also be freezed. These things led to a fall in inflation , but this also led to a lot of the common people, lose their sustainability. A lot of the retailers and builders ended up declaring bankruptcy. The trade deficit was soon turned over. The financial markets were deregulated. The banks could transfer their debts on to the State. The introduction of the Tablita took place as a result of an eventual increase in inflation. The peso was pegged against the US$. The Tablita was a time table which kept track of when to deregulate the peso. This in turn lead to getting goods imported at a cheap price. This lead to the increase in the purchasing power of the peso in the world. It was being called Sweet Money. Because of cheaper imports, there was a fall in the demand for domestic goods in the local market. This lead to a lot of the local companies declaring bankruptcy again. There was a very controversial decision, as many economists call it, that took place. De Hoz decided on absorbing all of these private debts into the national debt. Now, this was done only to companies which were owned by people, who were close to De Hoz. There was the Falkland war, which took place against the British. There was much more money being used. Again all of this time, the inflation has come back on a rise. In the 70s, Argentina had issued Brady Bonds worth $2.1 billion. There was a policy change in the Brady Bonds and this amount of $2.1 billion was re-valued at $6.4 billion. All of these, along with a massive devaluation of the peso lead to a massive increase in the inflation. The cumulative inflation was around 12000% and there was monthly inflation rate of 200%. This was cutely called Hyper Inflation.

The Drum Roll for the Debt Default

The beginning of the 90s gave rise to the so called iconic President Menem. During his term, his finance minister, Domingo Cavallo, the man behind the scenes, was trying to bring about a change in the fortunes for Argentina. Menem was a Peronist. His concept of getting out of a crisis, was to pitch a sellable show, in order to get more debt from the IMF. During his tenure itself, the IMF had lent around $40 billion, through 5 separate lending. This decade was going to bring forward a period in which the whole nation would be shocked. Take a long time to get out of the crisis. Although, it seemed like Argentina managed to get out of the hyper-inflation crisis, it was only temporary. In the initial years of the decade, the austral was eliminated to bring about the peso. The inflation was brought down from 2000% to single digits. This was because of the concept of pegging of the peso with the US$. The problem was, this made the countrys competitiveness fall. Its neighbour Brazil, devalued the real, and as a result, the Brazilian products were in demand over the Argentine products. This further lead to minimizing the methods of gaining money for Argentina. During the Tequila crisis, Argentina showed signs of resilience. Although, the inflation was at around 18%, it was still under control. This lead to a belief that the economic policies of Argentina were better. The interest rates were also fairly high and as a result the popularity for the Argentine bond grew. It went on to become the 2nd most desirable bonds in South America. People kept flooding in with a lot of capital. The interest amounts to be paid kept rising. To pay these debts, new loans were taken from the IMF, the US and the likes. Eventually, when the whole system keeps piling up with a lot of debt and barely any inlets for making money. A financial breakdown is bound to happen.

Debt Default : The Ineviatble and Damage Control

By the end of the 90s, lots of people perceived, that their savings were going to be lost if they kept it in the banks. So they removed all the money. There was capital flight of the magnitude of $2 billion per day. And as if these werent enough, tax evasion was still phenomenally high. Along with the previous mentioned problems and the above mentioned problems, it is clear that this expanding balloon of debt was bound to burst. In December 2001, the country defaulted on its public debt of $132 billion. There were riots all over Argentina. The government was dissolved. Eduardo Duhalde abandoned the peso to dollar pegging. The peso was devalued by about 80%. Although this lead to a fall in the purchasing power, this also meant that the competitiveness of the country improved again. Argentina started exporting again. And it adopted the policy of import substitution to get out of the crisis. In the export scenario, Argentina was exporting Soy beans, which was being sold at good price in the world market, thereby helping Argentina recover by a decent extent. The concept of import substitution also helped. The imports were being reduced, and the domestic product demand was increasing. This eventually lead to an increase in the growth rate.

References : 1> Wikipedia 2> IMF