“CAUSES” OF THE ARGENTINE ECONOMIC CRISIS 1998-2002: AN

ACCURATE ANALYSIS

Armaan Gupta, 15A027

Semester II, Managerial Economics

armaan5feb@gmail.com

+91965407440

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 ABSTRACT
In 2002, the economy of Argentina underwent its worst year since 1891, concluding an
economic decline that started in late 1998. This research paper aims at carefully and
correctly analysing the causes of the Argentine economic crisis of 1998-2002. Since there are
various conflicting explanations for the crisis, the paper will study the crisis from an
economic perspective and try to find out which factors supposedly caused the crisis but in
reality did not.

This research paper will try to answer the following question:

 What factors did not cause the crisis in Argentina?

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 INDEX
1) Introduction…………………………………………………………………………...4

2) What factors did not cause the crisis….……………………………………………....5

a. Corruption…………………………………………………………………….5

b. Failure of Economic Policies…………………………………………………5

c. Currency Board System………………………………………………………6

d. Overvaluation of the Peso…………………………………………………….8

3) Conclusion……....…………………………………………………………………...10

4) References……………………………………………………………………………11

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 INTRODUCTION
In the mid-1990s, Argentina was showing strong economic performance, having lowered
inflation that had become equivalent to hyperinflation in the 1980s to single digits.
Growth in output was also good and the economy had successfully faced the Tequila
crisis of the mid -1990s. However, in the late 1990’s the country went into an economic
depression from which it was unable to recover until 2003. In 2001-02, Argentina
experienced a great economic crisis. Its severity can be shown by the following statistics:

o Real GDP fell 28% from 1998-2002.

o Argentina’s Peso, equal to $1 since 1991, was devalued in 2002 and depreciated to
almost 4 Pesos per dollar.

o Inflation was 41% in 2002, compared to low or negative inflation in the 1990s.

o Unemployment rose from 12.4% in 1998 to 23.6% in 2002.

o Poverty rate rose from 25.9% in 1998 to 57.5% in 2002.

o Real wages fell 23.7% in 2002.

o Real supermarket sales fell 26% in 2002.

Argentina has had strong economic performance in the past. Hence the occurrence of
such a crisis necessitates an analysis of its reasons. It is essential to understand the causes
of the crisis in order to prevent or protect from such a situation in various other countries
in present times. A detailed study also helps in giving a deeper understanding of
economics itself.

There are several views on why the Argentine Crisis occurred. This paper will make an
attempt to question some of those views and give reasons on why they may not be
completely correct. This will help in narrowing down what the true causes of the crisis
were.

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 WHAT FACTORS DID NOT CAUSE THE CRISIS
There exist quite a few noteworthy conflicting explanations for the crisis in Argentina.
Among these, the ones that have reached a certain level of popularity are corruption; the
failure of economic approaches and policies; the supposed currency board of Argentina
and the overvaluation of the Argentine peso. Though supported by several scholars and
studies, all fail to clarify important facts.

a. Corruption: While measuring corruption, in 2002, Argentina was ranked 70 th1

out of a total of 102 countries, which was its lowest rank since the first
Corruption Perception Index. Hence, the crisis is often viewed as the result of
widespread corrupt political and economic practices and culture by both
Argentinian and foreign observers. An English observer once commented
“Argentina is one of the most unfortunate victims of
parliamenteering run wild. It is not governed by administrators, but by
professional politicians. Everything in its national life, whether industrial,
commercial, or financial, begins and ends in Politics.” 2 However, instead of
moving in the same direction as one expects, transparency and economic
growth in Argentina moved in opposite directions almost every year (2002
being the only exception)3. This does not imply that transparency led to
stagnation and corruption led to progress of the Argentinian economy, but it
does lead us to the conclusion that corruption was not truly a cause of the
economic crisis.

b. Failure of Economic Policies: Critics also believe that the crisis was the
resultant of introducing and implementing free market policies and approaches
in a rigid and quick manner. According to them, Argentina required an
interventionist approach where the government remained in control of most
enterprises and limitations were imposed on foreign currency, foreign ventures
and foreign possession of Argentinian organisations, companies and institutes.
1
Transparency International (2002) Corruption Perceptions Index, 1995-2002,
<http://www.transparency.org/cpi/index.html#cpi>.
2
Ford, A. G. (1962) The Gold Standard, 1880-1914: Britain and Argentina, Oxford: Clarendon Press.
3
Opacity Index (2001) PriceWaterhouseCoopers Endowment for the Study of Transparency and Sustainability,
<http://www.opacityindex.com/>.
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 However, from 1930-1980, the Argentinian government had a highly
interventionist approach, when it owned enterprise in the field of electricity,
oil, railroads, banking etc. and also controlled prices and foreign currency.
This approach only led to hyperinflation in 1989 and 1990 due to stumpy
growth and recurrent financial complications. Also, Argentina recorded speedy
growth rates in early 1990s, the period of fastest liberalization. Growth slowed
when liberalization was slowed, Growth stopped when liberalization was
stopped and Growth reversed when liberalization was reversed. Thus it was
not free market policies that caused the crisis.

c. Currency Board System: Yet another view that is often taken is that the
convertibility system of Argentina, supposedly as a currency board system,
was a contributor to the economic crisis.

The problem with this view is that the currency board system of Argentina
wasn’t actually a traditional one, and had features of both a central bank and a
currency board. Even Argentine Government officials called the system a
currency board4. The major features of a traditional currency board system are:

 a fixed exchange ratio with an anchor currency;

 no limitations on converting currency board currency into the anchor

currency at that exchange ratio nor any discriminatory exchange ratios.

 net foreign reserves equal to 100% or slightly more of the board’s

liabilities of financial character.

It can be concluded that Argentina’s convertibility system was not an orthodox

currency board system by observing the following facts:

1. In June 2001, Argentina implemented a preferential exchange ratio

offered only to exporters.5 The discriminatory ratio existed until the
convertibility system finished in January 2002.
4
Pou, Pedro (2001) “What Have Monetary Economists Done for Central Bankers? The Argentine Case,” pp. 66-
93 in Axel Leijonhufvud, editor, Monetary Theory and Policy Experience, Houdsmills, England: Palgrave.

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Decree 803/2001.
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 2. Data (table below) shows that net foreign reserves were often far from
100% of the board’s liabilities no matter what method of calculation
was used.

3. Since the foreign reserve ratio was hardly ever equal to 100%, this
implies the exchange rate was intermediate or pegged rather than fixed.

Central Bank Reserve Ratios Under Convertibility System

Year (daily Net foreign reserves Net foreign reserves Net foreign
figures) as a % of monetary as a % of monetary reserves as a % of
base. liabilities. financial liabilities.
1996 116.0 / 139.3 110.0 / 140.1 89.0 / 96.3

1997 128.3 / 149.9 127.4 / 149.4 93.2 / 100.8

1998 136.7 / 171.2 140.1 / 171.1 99.7 / 103.2

1999 153.0 / 178.4 152.8 / 178.2 98.8 / 100.8

2000 155.7 / 195.4 154.7 / 191.1 99.8 / 102.4

2001 109.1 / 193.1 81.7 / 193.0 94.8 / 131.5

Sources: Sources: Banco Central de la República Argentina, Statistical

Bulletin of the Central Bank of the Argentine Republic,
<http://www.bcra.gov.ar/english/estadistica/estad000100.asp>,
“Monetary and Financial Framework,”

This shows that Argentina’s system had features of both a currency board and
a central bank since its system often didn’t have the features of an orthodox
currency board system. Historical analysis of the performance of numerous
currency board systems all over the world lead us to the conclusion that
Argentina went into crisis not because of the currency board characteristics but
because of the central bank characteristics. Certain economic observers had
also warned about the defects of the central banking features at the time 6.
Hence, we can conclude that the currency board system was not a cause of the
crisis.

d. Overvaluation of the Peso:

6
Hanke (1991); Hanke and others (1993), pp. 72-7; Hanke and Schuler (1991, 1999); Schuler (1999).
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 Signs signifying Signs signifying no
overvaluation of the overvaluation.
Peso.
On-the-face impression of high prices of Locals spending contrarily to tourists.
taxis, hotels, meals for tourists.
Comparative calculations of costs of living in Other calculations of similar costs.
Buenos Aires.
Trade and current account deficits. Steady growth in exports, trade surplus in
2000 and 2001.

It has often been claimed that overvaluation of the Peso led to the crisis,
however there are mixed indicators of whether or not the Peso was overvalued
as shown in the above table.

Tourists often found Buenos Aires very expensive which was taken as
evidence of the overvaluation of the peso since prices seemed to be very high.
There was however a difference in the choices of locals and tourists. Locals
would take the $1.30 bus while tourists took the $35 cab ride, locals ate in
cheap and modest neighbourhood outlets and restaurants while tourists ate in
overpriced well known ones and locals lived in outlying houses while tourists
lived in expensive hotels. This led to a much higher indication of prices than
what they actually were.

Certain calculations of costs of living in different big cities showed that

Buenos Aires was extraordinarily expensive taking into consideration the
standard of living, while other studies showed contrary results. For example,
as a result of unlike weighting benchmarks, Buenos Aires was ranked 18 th in
133 most expensive cities by the Economic Intelligence Unit 7 and 22nd in 58
cities by the Swiss Bank UBS8.

7
“Worldwide Cost of Living”, Economic Intelligence Unit, 2000.
8
UBS (2000), “Prices and Earnings Around the Globe: An International Comparison of Purchasing Power,”
Zurich: UBS Switzerland, <http://www.ubs.com/e/index/about/research/publications.Referenz19.pdf>.

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 The trade deficit and the current account deficit that Argentina had when the
convertibility system was functioning were misinterpreted as a sign that the
exporters of Argentina were not gaining nor competitive since the peso was
overvalued. In reality, exports of both commodities and manufactured goods
had grown almost every year of the convertibility system.

Several other indications like measuring bilateral real exchange rates based on
consumer/producer prices, competency of the central bank to pay dollars for
pesos, different models etc. show mixed results for whether the peso was
overvalued or not. Hence the overvaluation of the peso is also not a cause of
the economic crisis.

CONCLUSION
From the above analysis of the factors of corruption, free market reforms, supposed currency
board system and supposed overvaluation of the peso, it can be concluded that these factors
did not cause the Argentine Economic Crisis of 1998-2002.

These factors were in a way simply incidental to the crisis and hence misinterpreted as causes
of the crisis. The view that they are not truly causes is supported by empirical data, several
studies and many economic models. Historical studies also support this view. Therefore, this
paper has been successful in eliminating certain factors that were considered to be causes of
the crisis, and helped narrow down the true causes of the crisis.

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 REFERENCES
 Banco Central de la República Argentina, Memoria anual / Annual Report;
Boletín financiero y monetaria / Financial and Monetary Bulletin (quarterly);
Informe monetario / Monetary Report (monthly), at http://www.bcra.gov.ar
 Ford, A. G. (1962) The Gold Standard, 1880-1914: Britain and Argentina,
Oxford: Clarendon Press.
 Goldstein, Morris (2001) “No More for Argentina,” Financial Times, August
16.
Hanke, Steve H. (1991) “Argentina Should Abolish Its Central Bank,” Wall
Street Journal, 25 October, p. A15.
 Hanke, Steve H. (1999) “Some Reflections on Currency Boards,” pp. 341-66
in Mario I. Blejer and Marko Škreb, editors, Central Banking, Monetary
Policies, and the Implications for Transition Economies, Boston: Kluwer
Academic Publishers.

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 Hanke, Steve H. (2000) “The Confidence Question,” Forbes, September 18, p.
177.
 Hanke, Steve H. (2002) “On Dollarization and Currency Boards: Error and
Deception,” Journal of Policy Reform, v. 5, no. 4, pp. 203-22. (Dated 2002,
but actually forthcoming in 2003).
 International Monetary Fund (1998) “Argentina: Recent Economic
Developments,” Staff Country Report No. 98/38, April,
<http://www.imf.org/external/pubs/ft/scr/1998/cr9838.pdf>.
 International Monetary Fund (2000) “Argentina: Selected Issues and
Statistical Annex,” Staff Country Report No. 00/160, December,
<http://www.imf.org/external/pubs/ft/scr/2000/cr00160.pdf>.
 Joint Economic Committee, US Congress, “Argentina’s Economic Crisis:
Causes and Cures”, Washington D.C., June 2003.

 Opacity Index (2001) PriceWaterhouseCoopers Endowment for the Study of

Transparency and Sustainability, <http://www.opacityindex.com/>.
 Pou, Pedro (2001) “What Have Monetary Economists Done for Central
Bankers? The Argentine Case,” pp. 66-93 in Axel Leijonhufvud, editor,
Monetary Theory and Policy Experience, Houdsmills, England: Palgrave.
 Transparency International (2002) Corruption Perceptions Index, 1995-2002,
<http://www.transparency.org/cpi/index.html#cpi>.
 UBS (2000), “Prices and Earnings Around the Globe: An International
Comparison of Purchasing Power,” Zurich: UBS Switzerland,
<http://www.ubs.com/e/index/about/research/publications.Referenz19.pdf>.

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