Argentina Economic Crisis

I - In Overture: Argentina вЂ" Economic Status & Early Signs of a Crisis to Come:

Today, Argentina is arguably revered as the second largest economy in South America, after Brazil, and even considered as a considerable economic power in the world. That economy has been measured and weighed heftily, mainly due to a transformation of the political system that governs it. Up until 1983, the country was headed by a succession of military regimes, a state of affairs resulting in the economy being brought under the control of the state. Democracy was restored, but economic problems plagued early presidential terms. In the early 1990’s, then president Carlos Menem, adopted a new approach to public economics and put flagstones in place. Hyperinflation was a key problem and, in 1991, Menem addressed this by imposing a peso-dollar fixed exchange rate. He also aligned his plan on the neoliberal Washington platform and aimed to deregulate labor, liberalize trade, and privatize enterprises. This would lead to much spending on the part of the government, but in many respects, and due in great part to the aid from the International Monetary Fund (IMF), Argentina quickly turned into one of the fastest growing economies in the region.

I A- The Collapse:

In December 2001, as well as 2002, the country’s economy completely collapsed; with the result being a financial meltdown. The crisis was mainly due to the collapse of the Argentinean peso after an announcement by the government that it was to suspend the payment of its public debt. Within nine months, spiking inflation levels had reached several hundred percentage points. In parallel, the peso’s decade-long linkage to the US was scrapped, resulting in a sudden depreciation of the peso. A barrage of presidents were elected in less than a year, some not even lasting the week, in the desperate search for a resolution to the crisis. But such a saving grace was not found and the presidents resigned in quick succession.

I B- The Situation as it Stands:

Since then, Argentina has managed to recover and economic growth has come rather quickly. This occurred in part due to the adoption of a more flexible exchange rate and new policies that focused on re-industrialization and increased exports; fueled mostly by the soybean and cereals boom. Gradually, debts were paid off with the IMF and, by 2002, the economy had begun to stabilize. However, many policies have yet to be implemented, and market failures can still be identified. This means that Argentina could expect to face another crisis in the future should it not avert the danger.

I C- Paper Objectives and Purpose:

The objective of this paper is to map out the principle activities of the Argentinean government within the scope of market failure theory. Furthermore, this paper will comment on the trends in government expenditures and the public reforms policy of the country. Lastly, the paper will analyze the nature of the reforms Argentina has adopted or should adopt in order to avoid any future market failures; which are bound to occur should the state not commit itself to implement successful policies.

II- A Government on a Mission: Structure, Inefficiency, Failures, & Expenditures

The Argentinean government is built on a two-tier structure: The local provincial level where each province is ruled by its own semi-autonomous elected government, and the federal government which takes charge on international affairs. Although existing on two levels, an intertwined relationship exists between the two; a liaison that bases itself on the Co-Participation Pact whereby it is agreed that local governments are responsible for managing their own economic affairs, while the federal government pledges to shoulder the responsibility for the deficits of the former (Eiras, 2002). In this respect, the federal government plays two equally important roles: Firstly, it acts as a welfare government with its main responsibility being to ensure the provinces’ welfare programs are covered and financed; and secondly as an agent of political stabilization pledging to cover local deficits and the economic gap between different provinces. This also has political ramifications, whereby the president and his administration use exploit this system to retain power by appeasing local provinces, hence guaranteeing support for subsequent reelections (Moreno, 2002).

II A- The New Role of the Government:

As of the 1990’s, under the presidency of Carlo Menem, a new role for the government was assumed. Rather than control the economy, the principle duties of the federal government were geared towards an invisible hand ideology. The IMF was a strong backer for this adoption, as were international organizations that wanted in on the action. This encouraged the government to privatize state-owned enterprises in the hopes that economic growth would be stimulated. The government was also driven in this decision by fears that it suffered from inefficient management that would not be capable of adequately running these enterprises (Sennholz, 2002).

II B- The Inefficiency of Government-Controlled Enterprises:

Fears of not being able to efficiently manage its own enterprises were the result of several factors related to the Argentinean government. The most damaging factor was the level of corruption within the administration. Inefficiency came as a result of government failure to tackle the problem, inevitably causing market failure (Cavallo & Cavallo, 1996). To counter this failure, the government aggressively sought to increase its expenditures, especially to cover federal activities that were suffering. This would later prove to be a faulty attempt to amend matters, with increased paralysis in the public administration and internal/external government debts being the result.

II C- Privatization:

With the public administration in disarray and the government fearful of managing its own enterprises, privatization became the order of the day in the 1990’s. Theoretically, passing over ownership of economic activities to the private sector is seen as more managerially efficient. But in the case of Argentina, this did not succeed, leading to more market failures. The principal reason for this failure was that the privatization procedure was operated by corrupt mechanisms. The sale of public enterprises was not conducted on basis of merit, but instead on the basis of corrupt private arrangements and nepotism.