Is there a way out for Argentina? (Monica de Bolle, 11/28/23, PIIE)

To better understand Argentina’s cycle of economic crises, it helps to trace the history of Peronism from its original goal to turn away from the nation’s largely agriculture-based economy, which was overly dependent on international fluctuations of commodity prices, and toward industrialization using whatever means necessary: protectionism and subsidized credit for selected sectors, combined with targeted government social welfare spending for favored population segments. Adopting the advice of so-called dependency theory advocates, Perón also created labor protections for the new urban-industrial labor force, as well as several state-owned enterprises. In a pattern that was to be repeated over many decades, enactment of these policies between 1946 and 1955 increased Argentina’s budget deficits, its external debt, and balance of payments vulnerabilities, laying the groundwork for future boom and bust cycles.

By 1977, the country was suffering its first bout of hyperinflation, with an annual rate of over 300 percent. In 1978, an inflation stabilization plan was attempted, and it succeeded in halving the inflation rate for a short period. But in 1981, the country had a severe balance of payments crisis, which led to a debt default accompanied by a banking crisis. By 1985, inflation had spiked to more than 670 percent, forcing the adoption of the Austral Plan. The currency’s name was changed from the peso to the austral, wages were frozen, the exchange rate was fixed, and spending was slashed for a brief period. Ultimately, the Austral Plan failed, and by 1989, inflation had reached more than 3,000 percent. Argentina’s attempts at stabilization involved several IMF programs generally calling for tough austerity measures, including budget cuts, deregulation, and a floating currency.

In 1991, Argentina adopted the so-called Convertibility Plan following several reforms, including some designed to rein in the budget deficit, which succeeded in eliminating the country’s hyperinflation and restoring stability for a time. Over the next decade, Argentina fared somewhat well despite a banking crisis in 1995. By the late 1990s, other problems associated with growing domestic imbalances were aggravated by external shocks stemming from emerging-market crises of that period. Spurred in part by commodity price fluctuations and financial panics, these crises took their toll on the economy.

When Brazil was forced to devalue its currency in 1999, Argentina’s fixed parity with the dollar accentuated its lack of competitiveness, further weakening its already fragile economic situation. In 2001, Argentina finally faced its demons, abandoned the Convertibility Plan, and suffered its worst financial crisis in modern times. The crisis involved a complex debt default, a collapse of the banking system, and a deep recession. By 2003 the outlook had improved significantly as a result of rising commodity prices in international markets.

During the worst of the turmoil in 2001, Argentina became famous for its revolving door of five presidents in only 12 days. Eduardo Duhalde, appointed as interim president by Congress in January of 2002, would see the country through the aftermath of the crisis, handing the presidency to Néstor Kirchner in 2003 following his victory in the 2003 elections. During his time in office, Argentina grew at an average clip of about 8.5 percent annually fueled by high commodity prices as well as some domestic reforms. In 2007, Néstor Kirchner’s wife Cristina Kirchner was elected president. Néstor had planned a comeback to power, but he died in 2010, one year before Cristina was reelected for a second term.

Cristina Kirchner’s time in office, from 2007 until 2015, became the hallmark of what is now known as Kirchnerism, a mixture of ad hoc government interventions in the functioning of markets—including setting or freezing certain prices—and tinkering with Argentina’s statistics, particularly with official inflation data. Her tenure was plagued by fiscal irresponsibility and corruption scandals. Argentina did manage to avoid a major financial crisis during her time in office, helped by high commodity prices and investments from China, but it remained vulnerable to crises. Cristina’s successor, Mauricio Macri, failed to resolve inherited and newly created problems, helping to lead the economy to its current state.