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Argentina: Economic Crisis of 2001

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    Argentina: Economic Crisis of 2001

    Argentina-An Overview

    Argentina is one of the world renowned countries of South America. It is positioned in the southern part of country and is the second biggest country of the same. Argentina was regarded as the “Land of Silver” by some of the travelers in 16th century, who supposed the nation was abounding in silver reserves. The expectations of the surveyors almost immediately evaporated when they came across that the fine-looking silver embellishments put on by the native inhabitants turned up from the far-away kingdom of Peru. Even though affluent in many possessions, the purported realm of silver established as comparatively indigent in minerals, but its expressive title has undergone.

    In the western hemisphere, Argentina is said to be relatively more developed. Though, repeatedly being in a state of economic crisis from around the middle of the 20th century, it still possesses the second largest economy of Argentina Its economy has slowly moved from an elite reliance on the significant output of cattle and farming produce to an economy in which the there is a clear supremacy of industrial and service sectors. Argentina turned into a main trading country of the world in the 1950s and expanded the majority average income level social order in South America. However throughout the intensity of an early-21st-century downturn, its per head returns was fewer than it was in 1900 and half of the inhabitants facing low income hardships.

    The Colonial Economy: During the peaceful days of the mining of precious metals in what are now Peru and Bolivia, the relatively few settlements made by the Spaniards in the northern parts of present-day Argentina were economically significant principally for the breeding of mules. These beasts of burden and traction were widely used in the mining operations but could not be bred at the elevations of the high Andes. Hence, horses and donkeys were mated in the relatively low-lying regions of northern Argentina, and their offspring were walked up the mountains to be worked to death.

    During this early period, small urban centers were developed in northern Argentina. With the decline of the Andean mining industry in the 18th century, they and their immediate hinterlands tended to become largely self-sufficient, with local handicraft manufacturing and the cultivation of nearby rural areas producing most of the things the people needed. The port of Buenos Aires, which grew slowly until the last half century before independence, imported from Europe the relatively modest quantities of goods that the Argentine interior required. The Pampa remained largely outside the effective control of the colonial authorities and was of significance to the general economy only by providing some leather and dried and salted beef for export.

    This situation largely persisted for some decades after independence was declared in 1816. One of the great causes of political controversy during those years centered on the desire of the commercial interests of Buenos Aires to flood the interior with machine-made manufactured goods from Europe and on the counter desire of powerful interests in the interior cities to protect their artisan workshops from such competition.

    The Agricultural Revolution: The “conquest of the desert” (the Pampa and Patagonia) by 1880, accompanied by the invention of barbed wire and of refrigerated shipping, ushered in the third phase of Argentina’s economic development. Barbed wire enabled the Pampa to be fenced off, which in turn permitted the scientific breeding of cattle. Bulls were brought in from Britain, and in a few bovine generations breeders created a type of meat cattle specifically designed to satisfy the tastes of the British meat-eating public. Refrigerated ships promoted the growth of large slaughterhouses and meat-packing plants around Buenos Aires and Rosario and the export of beef instead of cattle “on the hoof.”

    The opening of the Pampas to scientific cattle breeding and to the cultivation of grain, particularly wheat, vastly increased the volume of Argentine trade. These products were exported to Europe in return for European manufactured goods. Trade both required, and was stimulated by, improved transportation facilities. During the last decades of the 19th century railroads were built, principally to bring the grain and cattle of the Pampa to the port cities of Buenos Aires and Rosario. Argentina thus came to have one of the world’s most extensive railroad systems. At the same time, the port facilities were modernized and expanded.

    Argentina’s new economic opportunities encouraged a massive immigration from Europe, which began in the 1880s and continued with some interruptions until the Great Depression of the 1930s. Some of the immigrants worked on the cattle ranches and in the wheat fields, but many more settled in the cities, particularly Buenos Aires.

    New commercial enterprises arose to handle the export-import trade and to provide the goods increasingly demanded by the urban population, which was rapidly expanding and whose income was growing at even a faster rate than its numbers. Banks came into existence to finance both export-import activities and domestic commerce. The general expansion of the economy made room for increasingly large numbers of small artisan industries to provide locally manufactured goods that could compete with imports. Finally, the increased population and prosperity of the coastal cities, together with the expansion of the public education system, promoted publishing, the fine arts, music, and the theater.

    By World War I, the economic flowering of the nation’s Great Plains had brought into existence or had stimulated the expansion of other economic activities, which produced largely for the people of the central region rather than for the export market. In the foothills of the Andes, in the provinces of Mendoza and San Juan in particular, irrigation was employed to foster the cultivation of grapes and their conversion into wine, a taste for which the numerous Spanish and Italian immigrants had brought with them from the “old country.” Sugar production in the Northern provinces of Tucumán, Jujuy, and Santiago del Estero was increased, mainly to serve the needs of the residents of Buenos Aires and other cities. The production of yerba mate and the exploitation of tannin bark, both in the northeastern provinces, also supplied the domestic economy centered on Buenos Aires and the Pampa.

    One important result of these developments was that by World War I almost the whole of the Argentine economy was monetized that is, almost everyone in it earned a money income. In that respect, Argentina was virtually unique in Latin America at the time.

    Industrialization: Also by 1914, the economy had clearly developed to the point where at least modest industrialization was possible. Indeed, World War I itself gave stimulus to industrialization, for Argentina had difficulty importing from Europe the range of manufactured goods to which its people had become accustomed. However, policies leading to deliberate industrialization were hard to adopt and did not occur until three decades later.

    Until 1916, the Argentine government was dominated largely by the rural aristocracy, whose welfare was tied to the export-import economy and particularly to trade with Britain. This group saw little to be gained from industrialization. It saw much to be lost if government protection of manufacturing brought into existence industries that would compete in the Argentine market with those of Britain, because they feared that Britain would retaliate by limiting its importation of Argentine meat and grain. Even when in 1916 the essentially middle-class Radical party came to power, the government did not take any notable steps to foster industrialization. During the first Radical government of Hipolito Yrigoyen (1916–1922), the president was concerned largely with the immediate wartime and postwar economic problems. His Radical successor, Marcelo T. de Alvear (1922–1928), was himself a large landowner who shared the outlook of his class.

    Two other factors undoubtedly were important. The new industrialist class, whose firms had grown modestly in spite of lack of protection, was largely immigrants. As such, they hesitated to challenge the power or the ideas of the native rural oligarchy. In addition, the labor movement, which in other Latin American countries tended to support protectionism, opposed it in Argentina, arguing that protective tariffs hurt the great majority of workers by raising the prices of goods they had to buy.

    Nevertheless, industry continued to expand, especially in the 1930s, even though in that decade the government was once again dominated by the rural landed interests. The Great Depression of the 1930s stimulated industrial growth by markedly curtailing Argentina’s exports and hence its ability to import manufactured goods. Expansion was considerable in sectors such as textile manufacturing, cement production, and metalworking.

    However, not until the advent in June 1943 of the military regime in which Juan Peron soon emerged as the principal figure did the government deliberately encourage the growth of industry. A cabinet-rank position of secretary of industry was established for the first time. During the next dozen years scarce foreign exchange was directed toward the importation of capital equipment for industry; relatively strong tariff protection was mounted; and the Industrial Bank was established to help finance the domestic currency needs of manufacturing firms.

    As a result of these policies, along with the economic disruption caused by World War II and the prostration of European economies in the years right after the war, Argentine manufacturing had grown dramatically by 1955. The country was largely self-sufficient in light consumer goods and had a vigorous durable consumer-goods sector. It also produced most of the requirements of the construction industry, such as cement, paint, and steel bars for reinforced concrete. In the early 1950s a beginning had been made in establishing a steel industry and an automobile industry, although neither was yet adequate to national needs.

    The governments that came after the fall of Perón in 1955 tended to zigzag in their attitudes toward industrialization. The regime of Gen. Pedro Aramburu (1955–1958) followed on the whole a pro-agricultural rather than a pro-industrial policy. In contrast, the administration of President Arturo Frondizi (1958–1962) strongly supported industrialization, bringing about an expansion of the auto industry large enough to make the country self-sufficient in that area. In addition, a large heavy-chemical sector was established. During the 14 years following Frondizi, governments did not tend strongly to favor or to discourage industrialization, and the manufacturing sector continued to grow modestly.

    However, the policies of the military regimes of 1976–1983 were disastrous for industrialization. The economic policymakers of the period believed that protection brought about “artificial” and “inefficient” industries, and that protection should thus be greatly reduced if not abolished entirely. They put into effect policies designed to do exactly that. As a consequence, large numbers of small manufacturing firms were driven into bankruptcy, as were several of the largest domestic industrial enterprises.

    Experiments and Crises: In spite of the disastrous policies of the military regimes after 1976, Argentina continued to have one of the most diversified economies of Latin America. Still relying overwhelmingly on the products of the soil for its exports, Argentina nonetheless had a wide economic base that made it largely capable of meeting its needs for food, clothing, construction materials, and household appliances, and even many of its requirements for heavier industrial products.

    However, by the 1980s, the Argentine economy faced some very severe difficulties. For one thing, its patterns of foreign trade had changed drastically. The growth, although modest, of the Argentine population, plus its enormous capacity to consume meat and grain products, had resulted long before in domestic consumption of most of the output of the Pampa. Moreover, varying governmental policies of the frequently changing regimes after 1955 had often discouraged further expansion of grazing and grain production.

    Of equal significance, Argentina’s traditional markets for the products of the Pampa had largely disappeared. Britain had long been the chief buyer of Argentine goods, but much of that market was lost when Britain joined the European Economic Community (later, European Union) in the 1970s and diverted foreign purchases from Argentina to continental Europe. By the late 1970s the Soviet Union had, to a considerable extent, taken the place of Britain as Argentina’s principal customer—particularly for grain, as in 1980 when the United States refused to renew Soviet wheat-purchase agreements. However, Soviet (and, later, Russian) grain purchases tended to be erratic. Also, prior to the collapse of the communist regime in 1991, some Argentines were uneasy about the possible political consequences arising from too great a dependence on the Soviet market.

    A major problem facing the Argentine economy was the wearing out of a considerable portion of its infrastructure. This was particularly the case with the railroads and highways. The railroads were already in bad shape in the late 1940s, and their condition declined further. Except for the short period of the Frondizi administration, no government had undertaken an overall program to attempt to deal with the situation. Roads became central because a growing percentage of goods moved to ports by truck, yet only 29% of roads were paved. The response of the Menem government in the 1990s was to privatize railroad operations, although the fixed assets remained in government hands. Railroad rates fell by 40%–50% as a result, but the condition of the infrastructure remained a problem. The Kirchner government increased investment in railroads, roads, and ports in the early 2000s.

    Another continuing problem was the attitude to be taken toward foreign investments. When Argentina finally entered World War II in 1945, the government took over as “enemy property” German and Italian firms engaged in manufacturing and other activities. In the late 1940s the Peron administration nationalized the railroads and public utilities, which constituted the largest number of foreign holdings in Argentina. On the other hand, Peron encouraged foreign investment in the auto industry. He also made a liberal contract with Standard Oil of California to operate in Patagonia. This unpopular arrangement went ungratified by his usually compliant Congress and was canceled by his successor.

    The Frondizi regime strongly favored foreign investment in manufacturing, particularly in heavy chemicals and autos. It also worked out arrangements for new contracts between foreign oil companies and the national oil firm, YPF. Subsequent governments canceled those contracts, negotiated new ones, and generally made the national oil policy a question mark. The political crisis of the late 1960s and the 1970s did not present a favorable background for extensive foreign investment.

    By the early 1980s the Argentine economy was faced by the most severe crisis since the 1930s. When President Raul Alfonsín took over from the military regime in December 1983, Argentina had the world’s highest rate of inflation and the third-largest foreign debt in Latin America. Carlos Saul Menem succeeded to the presidency in 1989 and confronted an inflation rate of 3,000%. A Peronista who diverged from his party’s populist economic orthodoxy, Menem’s priorities were the containment of inflation, privatization, and deregulation. Menem privatized water, telecommunications, and electricity companies; the postal service; and YPF, the national oil firm, which was long a symbol of sovereignty and self-sufficiency. Other key elements of the program were tying the value of the Argentine peso to the U.S. dollar and maintaining foreign-exchange reserves equal to the entire money supply. He also increased taxes and opened the economy to foreign trade. By 1996 the Menem plan had reduced the inflation rate to 1%. Private investment and economic growth followed.

    Over time, however, the link to the dollar caused the peso to be overvalued, and Menem increased borrowing and government spending to counter political resistance to privatizations. Provincial governments increased spending even more. Locally produced goods became uncompetitive, production fell off, and unemployment grew while international investment funds dried up in response to unrelated fiscal crises in other countries. The establishment of the Southern Common Market (Mercado Comun del Sur, or Mercosur) with Paraguay, Uruguay, and Brazil had helped for a time, but only until Brazil suffered its own economic crisis. In 1998 the Argentine economy entered into recession. By 2001 Argentina was suffering the worst depression in its history. The economic crisis stirred political instability, with the presidency changing hands four times in less than two weeks in December 2001. One of those interim presidents enacted history’s largest default on sovereign debt. In the following year the link to the dollar was broken and the peso was devalued substantially.

    The economy recovered at a rapid pace under Nestor Kirchner, a more orthodox Peronista, supported in part by bond purchases by the leftist government in Venezuela. Growth averaged 9% a year for several years after 2003. Argentina paid off its debt to the International Monetary Fund in 2006. Amid growing complaints about the quality of privatized services, Kirchner resumed control of the postal service, a telecommunications company, a water company, and a railroad line. He also established a new state-owned airline and joint private-state energy.


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