Argentine Financial Crisis - Bader Al Mulla

In 1998, Argentina entered what turned out to be a four year depression, during which its economy shrank 28 percent. Argentina’s experience has been quoted as an example of the failure of free markets and fixed exchange rates, among other things. The evidence does not support those views. Rather, bad economic policies converted an ordinary recession into a depression. Three big tax increases in 2000-2001 discouraged growth, and meddling with the monetary system in mid-2001 created fear of currency devaluation. As a result, confidence in Argentina’s government finances faded. In a series of mistakes that made matters even worse, from December 2001 to early 2002, succeeding governments undermined property rights by freezing bank deposits; defaulting on the government’s foreign debt in an inconsiderate way; ending the Argentine peso’s longstanding link to the dollar; forcibly converting dollar deposits and loans into Argentine pesos at unfavorable rates; and voiding contracts. Achieving sustained long-term economic growth will involve re-establishing respect for property rights.

Argentine’s Financial Crisis (1998-2002) in Statistics:

• Real gross domestic product (GDP) decreased 28% from peak (1998) to trough (2002).

• Argentina’s currency, the peso, equal to US$1 since April 1991, was devalued in January 2002 and depreciated to nearly 4 per dollar before partly recovering.

• Inflation, low or negative since the early 1990s, was 41% in 2002.

• Unemployment, excluding people working in emergency government relief programs, rose from 12.4% in 1998 to 18.3% in 2001 and 23.6% in 2002.

• The poverty rate rose from 25.9% in 1998 to 38.3% in 2001 and 57.5% in 2002.

• In real terms (that is, adjusted for inflation), wages fell 23.7% in 2002.