Economic history of Argentina

An 1887 impression of a gaucho at ease. Gauchos helped livestock ranching extend through much of Argentina.

This article provides an overview of the Economic history of Argentina.

Historical overview

Argentina's emergence into the world economy

Prior to the 1880s, Argentina was a relatively isolated backwater, dependent on the wool, leather and hide industry for both the greater part of its foreign exchange and the generation of domestic income and profits. The Argentine economy began to experience swift growth after 1875 through the export of livestock and grain commodities, however, as well as through British and French investment, marking the beginning of a significant era of economic expansion.

During its most vigorous period, from 1880 to 1905, this expansion resulted in a 7.5-fold growth in GDP, averaging about 8% annually. One important measure of development, GDP per capita, rose from 35% of the United States average to about 80% during that period. Growth then slowed considerably, though throughout the period from 1890 to 1939, the country's per capita income was similar to that of France, Germany and Canada (although income in Argentina remained considerably less evenly distributed).

The development of land

Since becoming a nation in 1816, Argentina, being the eighth largest country in the world by area, has held an advantage in this factor of production. The rural economy was almost entirely devoted to subsistence farming in the early nineteenth century and above all, livestock raising, which spread quickly in Argentina's mild climate. Moreover, during periods of falling prices for their products ranchers were able to maintain positive returns, proving their resilience in a volatile market. Over the next few decades, cattle and sheep ranchers became the most influential men in Argentina, as their exports became the unstable young country's nearly sole source of foreign exchange.

Labor-intensive crop farming languished for much of this era, the victim of internecine wars, an acute shortage of labor, a lack of qualified agronomists and livestock ranchers' opposition. Following a decade of revolution, however, focus changed toward the development of grain farming and after 1861, during Bartolomé Mitre's difficult presidency, the first institute of Agronomy and the first initiatives encouraging immigration were given life.

Livestock raising required relatively few gauchos and continued to dominate land use; but, in 1875, the first Argentine grain shipment to arrive intact in Europe ignited an agricultural boom that soon replaced vast tracts of lands once devoted to livestock with "waves of grain." The leading outlet of European investment in Argentina after 1875, railways, themselves helped harness the country's vast land resources, reducing a typical journey from the hinterland to port for both crops and passengers from a month to two days. British capital and European immigration quickly followed, easing capital, skills and labor shortfalls without which the development of modern Argentina would not have been possible.

The development of the labor market

Immigration was central to Argentina's development. Prior to the 1860s, there was relatively little migration into the country; the population in 1869 was less than 2 million and, due to the sparse population, vast tracts of land remained unutilized. Labour shortages became widespread, resulting in the growth of real wages and, consequently, an increasing gap between the wage rates of Argentina and Europe. This facilitated a nearly-uninterrupted mass immigration until World War I and by 1914, one third of Argentina's 8 million people had been born elsewhere, mostly in Italy and Spain. Eighty percent of Argentina's population were, by then, European immigrants, their children, or grandchildren.

In all, over 4 million Europeans migrated to Argentina permanently between 1857 and 1950, and another 3 million passed through as seasonal workers, often moving on to the United States. Because the immigrants that stayed were much less likely to be field laborers than those that moved on, immigration helped quickly urbanize Argentina and its urban population tripled to over 4 million between 1895 and 1914, alone. The establishment of a national system of free, universal grade schools by Education Minister (and later, President) Domingo Sarmiento during the 1860s and 1870s raised literacy rates from 22% in 1869 to 65% in 1914 and helped further consolidate a modern labor structure.

Ukrainian immigrants harvesting yerba mate, 1920. Immigrants found rural and urban work, becoming indispensable to both.

This mending of the labor problem facilitated economic development. Immigrants, as an important factor of production, were able to alleviate the labor shortage and so, helped diversify Argentina's commodity exports. The livestock, leather and wool sectors had dominated production since the eighteenth century; but the sudden abundance in labor supply allowed the development of the arable sector.

Argentina's commodity export market became less dependent on beef and quickly diversified into wheat and maize. Accessible education and the relatively capital-intensive nature of Argentine agriculture itself (which, as early as 1895, employed only a third of all labor) helped likewise redirect most of this immigrant labor into the service and industrial sectors and for the most part, this helped fortify the country against market shocks (though certainly not internal, social or political disturbances). Many of the social upheavals during this period of emergence were caused by poor labor conditions and standards of living. Argentina's economy and labor movement developed almost in parallel. The first to organize were the printing workers, in 1872, and the retail workers soon followed. These development later caught the attention of the administration of President Julio Roca, whose hostility against trade unions culminated in an 1888 massacre. These excesses helped lead to the formation of the Argentine Workers' Federation, the first national trade union center in the country.

Resisted by successive administrations, the drive for reform gained momentum following the election to the Argentine Chamber of Deputies of its first Socialist Congressman, Alfredo Palacios, in 1904. Commissioning a study on contemporary urban social conditions, Palacios demonstrated that poverty rates approached 90%, helping lead to the 1905 prohibition of women and children from risky occupations, the establishment of a minimum working age (13), and the introduction of a 60-hour, six-day workweek. These reforms did not improve the lot of most unskilled workers in the then-feudal north, least of all the several hundred thousand sugarcane, cotton and tobacco plantation workers, who began migrating in large numbers to urban areas in their own region and in the more prosperous central areas of the country. The distribution of income largely improved, however, and improving social conditions contributed to the overall, successful level of development the country experienced between 1870 and 1930.

The development of capital markets

In 1857, La Porteña became the first locomotive to operate in Argentina.

Like immigration, foreign investment played a central role in Argentina's economic development. Prior to World War I, it could be said that Argentina's capital investment was foreign capital investment and immigrants as well as foreign investment flocked to Argentina.

The United Kingdom contributed more direct investment into Argentina during this period than all other sources combined, as it did for many other Latin American states in that era. Large-scale British investment began around 1875 and by 1890, British nationals held a cumulative 180 million pounds Sterling (over US$800 million) in direct investments. Argentina had become, by then, the leading destination for British investment in the world. Though most of these funds found their way into productive activities such as rail transport, port development, mortgage banking and public services, fully a third was channelled into Argentine government bonds.

Immigrants themselves became a source of capital formation, as in the case of the Bembergs, who opened Argentina's largest brewery, Quilmes, in 1888.

The boom in foreign capital during the 1880s was able to cover, by some estimates, a current account deficit of 30 percent of GDP. It also financed a dual currency system: gold pesos, for use mainly in foreign trade and financial markets, and paper pesos worth roughly half the former's value, for use as monetary base. Lured by high rates of return, underwriters such as the influential Barings Bank made Argentine and Uruguayan bonds the darlings of London speculators during the 1880s. These instruments began to lose value towards 1890, however, and before most investors could unload them, the pyramid scheme Barings built up collapsed. So serious were these losses (some involving the most prominent British families), only intervention by the Bank of England averted a financial collapse.

A view, c.1890, of the National Mortgage Bank, which contributed to the early development of Argentina's large middle class.

The crisis led to President Carlos Pellegrini's introduction of the first currency board in Argentina, which helped stabilize the currency, and maintain the Investment and thus the economy soon recovered; by 1914, Argentina's public external debt stood at US$784 million in (mostly) 41/2% bonds, with a further US$3.217 billion in foreign direct investment. Argentina stood out among Latin American states in terms of foreign direct investment received during this era; nearly half of all British direct investment worldwide had, by then, been plowed into the Argentine economy.

The relatively sudden modernization in the Argentine economy in the generation until 1914 was achieved through investment from and exports to Europe. Dependent upon beef jerky and hides until the advent of refrigerated shipping in 1876, exports diversified into chilled beef and mutton, to cereals and eventually to some processed goods like flour, lard, canned luncheon meat and linseed oil. These were sent off to Europe, where rising living standards created a booming market for imported foodstuffs and other raw materials. In return, Great Britain, France and Germany invested in the development of Argentina, particularly in sectors that were oriented toward exports (such as Argentina's railways, still the most extensive in Latin America).

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Retiro railway station, c.1920, a landmark from the era of British investment in Argentina.

The most important aspect of foreign investment was its share in Argentina's capital stock relative to the size of domestic contributions. Argentine development, the railways and meat-packing industry in particular, would have been severely limited without these investments. Domestic credit was scarce and start-up costs were often beyond the reach of local investors. Argentina's agricultural sector itself, however, developed into an export powerhouse that alone brought in nearly a billion dollars a year by the late 1920s with virtually no foreign investment and comparatively little domestic credit; in all, foreign investment accounted for one third of the nation's capital stock (buildings and equipment) by 1900, and nearly half by 1913.

Appraisal and the twilight of export-led growth

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Scene in downtown Buenos Aires, c.1925.

frklklklklklklklklegh saw the foreign exchange their booming export sector brought in as central to the development of a national market, export volumes themselves did not outstrip the economy as a whole. Exports averaged 15–20% of GDP during the era between 1870 and 1913 (far less a proportion than, say, Cuba). Growing domestic activity accounted for most of the era's economic growth itself, though the country's financial stability still remained deeply dependent on foreign investment and international economic sentiment.

Foreign investment and the commodity market can be extremely volatile. Because Argentina's economy relied so heavily on foreign credit and a demand for its agricultural products, it was particularly susceptible to these periods of volatility, which brought about severe repercussions for the country's economic growth. Foreign investment for Argentina, then, was a double-edged sword. While it contributed to the long period of growth between the late 19th and early 20th centuries, foreign investment dried up during World War I. Because national markets had not yet matured, the domestic economy was unprepared to make up for losses incurred by the international market shock and the economy, which had grown by an average of about 6% until 1913, shrank by 10% in 1914 and remained in low gear during the war.

The industrial era

The period between 1914 and 1945 challenged the Argentine economy, as it did most of the world's. Foreign investment disappeared during World War I to finance the European war effort, and failed to return after the peace. The Argentine economy retained close links to British trade and investment; but after 1918, a stronger commercial relationship emerged with the United States and Wall Street, which now dominated the international economic stage.

The Gualeguaychú meatpacking plant c. 1940. Cooperatively owned, the plant was emblematic of the food processing boom in the 1920s and '30s.

The now indispensable urban working and middle classes had recently secured universal male suffrage and, in 1916, elected the country's first populist leadership. The new administration of longtime activist Hipolito Yrigoyen extended subsidized loans to Argentina's then-sizable peasant class and translated recently-found oil deposits into the country's first significant experiment with public enterprise, the 1922 creation of the state oil concern YPF. Though it did not become a monopoly in the way Mexico's PEMEX did, YPF yielded about 15,000 barrels (2,400 m³) daily by 1930 (a fourth of Argentina's oil needs) and its success (albeit modest) made it a target of Standard Oil.

Economic growth returned to around 6% annually during the 1920s, making it the richest country in the region on a per capita basis; by 1929, for instance, there were over 400,000 motor vehicles in the country (more than any other in Latin America). The 1929 stock market collapse, however, marked the end of Argentine hopes for a return to the export-led growth model. Suffering the brunt of public discontent (including at least one assassination attempt), the aging Yrigoyen was deposed in a quiet 1930 coup d'état that placed him under house arrest and his point man at YPF, Enrique Mosconi, into exile. Per capita GDP, meanwhile, plummeted almost as quickly as it did in the United States: in 1932 it reached its lowest level since 1902.

Import substitution industrialization

Fighter plane production line in Córdoba c. 1950. On line since 1927, an early milestone in the development of Argentina's heavy industry.

Even before World War II, a new model of economic growth began to emerge. The Economic Census of 1935 counted over 600,000 workers in manufacturing (mostly in firms with fewer than five employees). Import substitution industrialization, or ISI, was adopted into Argentina's economic policy and where the government had adopted a more laissez-faire approach with export-led growth, ISI meant direct government intervention. Though it had been larded with Standard Oil and Royal Dutch Shell lobbyists since after the 1930 coup, the Argentine government took a quick turn and by 1932, for example, it began levying gasoline taxes to fund its new highway bureau and began Argentina's first large-scale hydroelectric projects. The 1933 Roca-Runciman Agreement further regulated monetary and trade policy by tying both more closely to British markets, encouraging Argentine exports to markets in the U.K. and its colonies on condition that these surpluses be deposited in the Bank of England.

Having recovered its lost ground by the late 1930s partly through import substitution, the economy continued to grow modestly during World War II (in sharp contrast to what had happened in the previous World War). Indeed, the reduced availability of imports and the war's beneficial effects on both the quantity and price of Argentine exports combined to create a US$ 1.7 billion cumulative surplus during those years. Benefiting from innovative self-financing and government loans alike, value added in manufacturing surpassed that of agriculture for the first time in 1943, and employed over 1 million by 1947.

Juan and Evita Perón greet their public, 1950.

What followed was one of the most contentious periods in modern Argentine history and the source of many of the political divisions that continue to exist in Argentina. Even before he took office in 1946, President Juan Perón took dramatic steps that he felt would result in a more economically independent Argentina, better insulated from events such as World War II; Perón believed there would be a third. In his first two years in office alone, he nationalized the Central Bank, paid off its billion-dollar debt to the Bank of England while repatriating frozen trade funds therein, nationalized the railways (mostly owned by British and French companies), merchant marine, universities, public utilities, public transport (then, mostly tramways) and, probably most significantly, created a single purchaser for the nation's mostly export-oriented grains and oilseeds: the IAPI.

Soon the central government's chief source of non-tax revenue, the IAPI benefited from the jump in international grain demand and high prices during 1946-47. It helped finance generous social reforms and record public works investments (in particular, the construction of over 4000 hospitals and clinics and of over 8000 schools). Dormant mortgage and development loan programs were revitalized and the economy grew by over a fourth in 1946-48. These programs, among other things, eradicated tropical diseases in the underdeveloped north and the country's recurrent problem with locusts; but the IAPI soon began shortchanging growers and, when world grain prices dropped in the late 1940s, it stifled agricultural production, exports and business sentiment, in general. Argentine exports were, moreover, largely shut out of booming European markets by political pressure from the administration of U.S. President Harry S. Truman (which regarded Perón as an unapologetic fascist) and the resulting trade deficits of 1949-52 brought Argentina its first serious bout of stagflation since World War I.

This crisis as well as the passing of the most influential and populist adviser in Perón's inner circle (his wife, Eva Perón) led the President to adopt more business-friendly policies after 1952. His new policies reinvigorated exports and stimulated badly needed foreign investments in petroleum and the auto industry, while keeping wages high, labor rights strong and investment in public works in high gear; even after a conflict with the Roman Catholic Church resulted in his overthrow (1955), this combination of policies remained (more or less) the general blueprint for economic policy for the next twenty years.

Developmentalism

Economist Rogelio Frigerio encouraged local and foreign investment in energy and industry, making Argentina nearly self-sufficient in both by the 1960s.

Though Argentine conservatives saw Perón's fall as an opportunity to return to the mercantile model, the new regime's Civilian Advisory Board advised against drastic policy changes. This still left the question of the country's chronic trade deficits, which, though a modest US$200 million a year (2% of GDP), proved difficult to finance and was, thus, leading to periodic bouts of inflation. Elections in 1958 brought the moderate Arturo Frondizi to office and with him, two approaches to the problem. The first was a policy shared by Pres. Frondizi and his personal friend, businessman Rogelio Frigerio: developmentalism. Encouraging investment in energy, industry and public works, as well a subsidies for domestic mortgage and business lending, it drew from previous efforts (such as Perón's post-1952 approach), though it was more ambitious in its bid for foreign investment and rather resembled Pres. Juscelino Kubitschek's policies in Brazil. The second entailed an austerity package of wage freezes, curbs on subsidies, credit controls and a sharp devaluation of the peso and was not supported by the president or Frigerio; but was imposed on Frondizi by the military through economist Alvaro Alsogaray, a defense contractor close to the landowing elite.

Bereft of a choice, Frondizi enacted these policies simultaneously and the results largely reflected it: Alsogaray's austerity measures (including a sharp devaluation) led to a sudden doubling of prices (a record at the time) and a consequent recession in 1959, the sharpest since 1930; but a wave of domestic and foreign investment from 1958 to 1962 resulted in three times more oil, steel and cement production, twice as much oil refining capacity and electric output and a several-fold increase in the production of consumer durables (in particular, auto production, which rose fourfold to 136,000 units, covering the domestic market). The combined slowing of domestic demand and sudden industrialization was consistent in one regard: the era of chronic trade deficits, for the time, ended in 1963. Their overcoming this obstacle allowed the new Administration of Dr. Arturo Illia to pursue vigorously pro-growth policies that included record public mortgage and business lending and generous wage guidelines, while balancing the national budget. The working and middle-classes benefited equally: poverty and unemployment fell sharply, while appliance, auto and home sales leapt to record levels. Pres. Illia, however, canceled important oil exploration contracts with foreign oil giants and, as Frondizi had done, allowed Peronist candidates for local and governors' posts to take office — concessions the military had forbidden. Prosperity notwithstanding, these moves threw conservatives and most of the media against Illia, who was deposed in a quiet 1966 coup.

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The National Merchant Marine Bureau (1972). The public sector figured prominently in Argentina's development after 1945, while its middle class grew to nearly half the population.

The new regime tried austerity initially; but strenuous opposition from the newly powerful manufacturers' lobby, the Argentine Industrial Union (UIA), resulted in a general return to developmentalism around 1968. Record public works and business investment reignited economic growth and by 1970, for instance, GDP had grown by 50% from 1963 levels, industrial production by 60% and auto sales had doubled. The boom's resulting rise in imports renewed calls for austerity among inflation hawks which, in 1970, placed the new de facto President, Gen. Roberto M. Levingston, in a position similar to Frondizi's a decade earlier. Like Frondizi, he appointed a conservative Economy Minister; but relied on a pro-industry policy maker, Production Minister Aldo Ferrer. The pragmatic Pres. Levingston, in September 1970, had Ferrer, Frondizi and other moderates draft a "five-year plan" creating a national small-business lender and other new incentives for local investment in energy and industry, as well as regulations on foreign investment designed to encourage reliance on Argentine products and skill. The plan, however, also catered to Levingston's personal political ambitions and resulted in his being replaced the next March. Ferrer's proposals, even so, were left largely intact and were complemented by Social Policy Minister Francisco Manrique's public housing and public health programs — the most comprehensive Argentina had ever seen.

These accomplishments, however, suffered from a background of repression that had resulted in increasing labor and student unrest, particularly since 1969. Skillfully co-opting these movements from exile, Juan Perón pressured the military regime into calling free elections in March 1973, which, won by his Justicialist Party in a landslide, resulted in the aging leader's return from exile that June.

Appraisal

Inflation first became a chronic problem during this period (it averaged 26% annually from 1944 to 1974) and Argentina did not become "industrialized" or fully "developed"; but, from 1932 to 1974, Argentina's economy grew almost fivefold (or 3.8% in annual terms) while its population only doubled. Though unremarkable, this expansion was well-distributed and so resulted in very positive changes in Argentine society, most notably the development of the largest proportional middle class (40% of the population by the 1960s) in Latin America as well as the region's best-paid, most unionized working class.

The modern era

Crisis and coup

Perón's Economy Minister, José Ber Gelbard, attempted to preserve a balance between management and labor needs with a "social pact" entitling labor to generous, though measured, wage hikes, as well as price controls on consumer goods. This resulted in record real median wages about 50% higher than those in 1963 (or in 2008) and a re-acceleration in growth (6% yearly in 1973-74 and 80% above 1963 levels).

Facility making ORBIS water heaters. Having doubled from 1963 to 1974, industrial production stalled for the next thirty years.

Partly owing to the 1973 oil crisis, however, the pact began to unravel (particularly following Perón's July 1974 death). Although Argentina was nearly self-sufficient in petroleum, the oil price shock adversely impacted the nation's delicate financial balance; it, in part, caused the nation's foreign oil bill to jump from US$60 million to US$600 million in 1974 and indirectly helped erase the rest of the nation's record billion-dollar 1973 trade surplus. This adverse turn might have been better managed had it not been that the Peronists were under pressure from their political base (the unions, in particular) to avoid a recession at almost any cost (a consideration painfully denied them by Economy Minister Alvaro Alsogaray in 1959 and in 1962). Refusing to resort to borrowing and unable, by 1975, to control soaring budget and trade deficits, as well as a wave of violence between Trotskyite and fascist extremists, the Peronist government resorted to a chaos of sharp currency devaluations and erratically timed wage hikes and freezes. In a seemingly never-ending tide of near-hyperinflation, strikes, business lockouts and violence, the military took power in a March 1976 coup.

Juan Perón and Economy Minister José Ber Gelbard. The brittle 1973 Social Pact was destroyed by erratic policies in 1975, helping lead to a coup d'état.

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Ultraconservative economist José Alfredo Martínez de Hoz (left) and his boss, dictator Jorge Videla.

Greeted initially with euphoria in the business community, the coup d'état filled policy-making positions generally– and the critical Economics Ministry in particular– with ultra-conservative ideologues, many of them scions of Argentina's old agricultural elites. In touch with the investors' and exporters' legitimate need for stability but quick to order wage freezes that often lasted months, these Cambridge and Chicago-trained economists proved unable to curb the junta's appetite for defense spending and unwilling to discourage speculators from taking advantage of Argentina's financial instability, often themselves profiting through the use of their advantage as insiders.

The dictatorship's chief economist, José Alfredo Martínez de Hoz, advanced a monetarist financial liberalization that increased the debt burden. Critics charged these policies interrupted industrial development and upward social mobility. Buffeted by wage freezes difficult to oppose against the backdrop of massive human rights abuses, real incomes fell by over a third that first year alone and have yet to fully recover. Unusually corrupt among the country's litany of often opprobrious past Economy Ministers, Martínez de Hoz also pursued free trade and a strong peso policy even as inflation ran at over 100% a year, encouraging a wave of imports that helped result in a 20% fall in industrial output Credit markets in New York and Paris meanwhile opened up to Argentina's profligate government and corrupt financiers alike, and by 1981 over US$30 billion in bad debts had piled up, destroying business confidence and forcing a ruinous run on banks and the peso.

Debt and depression

The combination of depressed real wages and financial chaos amounted to a "perfect storm" for the Argentine economy, made all the more difficult by the 1982 invasion of the Falkland Islands. GDP shrank by 12% in 1981-82, the sharpest decline since 1930, and over 400,000 companies of all sizes went bankrupt by 1982 One of the worst contributors to this crisis was probably the Central Bank "Circular 1050." The policy tied adjustable loan rates to the value of the U.S. dollar and consequently caused monthly interest payments to rise over ten-fold between early 1981 and mid-1982; by the end of this period, banks were writing off about 5% of their loan portfolios monthly. Fixed investment, which had weathered instability in the 1970s well, collapsed by almost 40% and stayed in low gear during the rest of the 1980s.

When the Falklands War disaster brought new, more moderate leadership to the junta in July 1982, the new President of the Central Bank, Domingo Cavallo, quickly discarded the hated Circular 1050. More controversial was his initiative to aid manufacturers in debt (facing unaffordable US dollar payments), whereby he extended them a little-known loan guarantee designed to buffer their US Dollar-denominated debts from sharp falls in the Peso. Insiders, including Martínez de Hoz, had been enjoying this exchange rate guarantee since the Peso crisis began and Cavallo introduced limits to the program, such as the indexation of installments. He was, however, sacked the next month and though it's often overlooked in debate, his successors over the next five years unethically extended the costly facility to all manner of debtors, adding up to US$15 billion to the national debt.

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10 australes hastily stamped on a 10,000 peso bill, 1985. Inflation forced four currency changes between 1970 and 1991; ten trillion 1940-era pesos would equal one of today's.

Facing a public howling for their heads, the junta quietly transferred power to a democratically elected administration in late 1983 and though his fellow citizens had great hope in him initially, President Raúl Alfonsín proved unable to translate his considerable political skill and high-minded intentions into economic stability or even fruitful negotiations with Argentina's impatient creditors. Appointing increasingly conservative policy makers who quickly bailed out speculators in debt even as they ordered more wage freezes, he increasingly alienated labor and the working poor (all of whom had fresh, painful memories of the dictatorship's incomes policies). The reinvigorated unions, led by the General Confederation of Labour (CGT), responded to Alfonsín's wage freezes with thirteen general strikes and over 2000 minor ones.

Alfonsín's economists did cut defense spending and budget deficits in 1984-86 and even publicly considered some privatizations as a means of shedding drains on the treasury and restoring business confidence; but these plans were partly the victim of bad timing, as most potential investors saw the prospects as too risky. Slack domestic demand helped create a cumulative US$20 billion in trade surpluses during Alfonsin's term; but, massive tax evasion and the flight of much of this (and other) capital abroad forced the Central Bank to "print" money to cover both foreign debt interest and the estimated US$2 billion in yearly losses the panoply of state enterprises were chalking up, by then. Ultimately, the World Bank, under pressure from the new administration of George H. W. Bush, dealt the suspense a final blow when, in February 1989, it recalled a US$350 million tranche of a loan package agreed on with the Central Bank. Unable to manoeuver because the Central Bank had earlier sold most of its scarce reserves to shore up its new currency (the austral), the shock sent the austral into a tailspin and amid riots, Alfonsín into retirement five months early.

Convertibility and liberalization

When President Carlos Menem took office on July 8, 1989, the economy of the country was in a critical state: Argentina had piled up a US$ 65 billion external debt (with payments in arrears), domestic credit and the monetary base had evaporated, and output was plummeting. Inflation, which had averaged over 220% a year during the 1975-88 period, reached 5000% in 1989; prices tripled in the month of July alone. GDP per capita had fallen from its 1974 peak by nearly a fourth and real median wages by around half.

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The controversial Domingo Cavallo.

To combat the crisis, the President embarked on a path of trade liberalisation, deregulation, and privatisation. Seeing very mixed results at first, he then appointed former Central Bank head Domingo Cavallo as Minister of the Economy. Cavallo implemented radical monetary reforms in April 1991, which pegged the new Argentine peso to the U.S. dollar and limited the growth in the monetary base by law to the growth in reserves; the 1991 "Convertibility Law" (Ley de Convertibilidad) also established a quasi-currency board. The government privatised most state-controlled companies, opened the economy to foreign trade and investment and created workers compensation systems and private, elective pension funds.

Inflation (1300% in 1990) fell to 84% in 1991 and to single digits by 1993; GDP rebounded, growing by 5.5% on average between 1990 and 1998. A boom in the early 1990s was followed by more erratic growth after 1994.

Privatizations yielded mixed results and some became poster children of mismanagement (Aerolíneas Argentinas, notoriously). The structural reforms nonetheless provided stability and boosted confidence after decades of decline and chronic bouts of high inflation. These changes fostered major new investments in services and industry in the 1990s, particularly in the telecommunications, food processing, banking, freight rail, energy and mining sectors.

Menem and Cavallo also cultivated trade relations with Argentina's neighbors, particularly Brazil. Inheriting negotiations begun in 1985, they secured the formal treaty that instituted the MERCOSUR common market in March 1991, and Brazil soon became Argentina's largest trading partner.

Fixed investment more than doubled from 1990 to 1994 and partly as a result, Argentina's exports leapt from about US$12 billion in 1992 to around US$26 billion by 1997. The strong, fixed exchange rate, however, soon made imports a bargain again and the trade balance turned in a cumulative US$22 billion in deficits between 1992 and 1999, including several billion from Brazil (putting strain on MERCOSUR).

Argentine public debt, 1994–2004.

Forced to borrow abroad to maintain the dollar/peso parity under such pressure, the foreign debt quickly ballooned again. The national public debt, now mostly comprised by bonds denominated in dollars, increased continuously, growing by more than 60% between 1994 and 1999.

The opening of the economy to imports, higher productivity and the deregulation of the labour market also fostered unemployment, which went from less than 7% in 1991 to over 12% in 1994 and, propelled by the Mexican shock, to over 18% in 1995. Though recovery soon brought some relief, unemployment had only declined to 12% by the time GDP peaked, in mid-1998.

These problems notwithstanding, Argentina was still considered a model for free market reforms among developing countries and after the successful auction of "Brady Bonds" in 1992, the central government was able to indebt itself entirely through the sale of treasury bonds to support this model. The central bank raised almost US$100 billion this way by 2000 and Argentine debt became the most securitized (or, dependent on free bond markets instead of on direct loans) in the developing world.

International instability

In 1995, the Mexican peso crisis produced capital flight, the loss of banking system deposits and a brief though severe recession; a series of reforms to bolster the domestic banking system followed. Real GDP growth recovered strongly, reaching 8% in 1997.

In 1998, international financial turmoil caused by Russia's problems and increasing investor anxiety over Brazil produced the highest domestic interest rates in more than three years, halving the growth rate of the economy.

While macroeconomics recovered fairly quickly from the effects of the Mexican crisis of 1994-95 (known as the Tequila Effect), Argentina could not return to strong growth after the recession that followed the successive shocks from Asia, Russia and Brazil.

The Argentine crisis

Main article: Argentine economic crisis (1999–2002)

In 1999, following the 1998 international crisis, GDP fell by 3% and Argentina entered into a recession. President Fernando de la Rúa, who took office in December 1999 following the 10-year administration of Carlos Menem, sponsored tax increases and spending cuts to reduce the deficit, which had ballooned to 2.5% of GDP. The new government also arranged a new US$7.4 billion stand-by facility with the International Monetary Fund (IMF) for contingency purposes – almost three times the size of the previous arrangement. The new government passed laws intended to change the country's labour code, and attempted to address the precarious financial situation of several highly indebted provinces.

The issue of Argentina's massive public debt and chronic budget deficits increased market uncertainty, despite a loan guarantee arranged between the Argentine government and the IMF in January 2001. Pres. de la Rúa's March appointment of Domingo Cavallo to the Economy Ministry and a debt swap arranged by Cavallo was interpreted as panic, however, and capital flight increased. Argentine debt, held mostly in bonds, was massively sold short and the government found itself unable to borrow or meet debt payments. The crisis exploded in December after the corralito (an almost complete freezing of bank deposits) caused widespread protests. Following the December 2001 riots, President de la Rúa resigned.

February 2002: Depositors protest against frozen accounts for fear they might lose value, or worse.

On December 23, 2001, interim president Adolfo Rodríguez Saá declared a short-lived debt moratorium. After a few days, Argentina officially defaulted on $132 billion of its debt, mostly the securitized bonds.

In January 2002, the convertibility plan that pegged the Argentine peso to the U.S. dollar on a one-to-one basis was scrapped, after nearly 11 years. The peso was floated and suffered a swift and sharp devaluation (losing about 70% of its value in four months), which in turn triggered a 40% surge in consumer prices.

In 2002, Argentina's GDP sunk by 11%; GDP fell to its 1993 level and on a per capita basis, to that of 1968. Income poverty in Argentina grew from an already high 35.4% in October 2001 to a peak of 54.3% in October 2002; the poverty rate in 2007 returned to levels prevailing in the 1990s and has declined (albeit more slowly) to around 18%, since then. Unemployment, having exceeded 20% in 2002, has also lessened; it has averaged around 8% since 2007.

A measure of financial stability returned after April 2002, and the first sector to recover was manufacturing, where most industries, save food processing (the largest), were operating at below half of capacity. One of the early contributors to this was the recovered factory movement, whereby laid-off workers took over numerous shuttered manufacturers, notably Zanon Ceramics in Neuquén and Brukman Textiles in Buenos Aires, as well as well-known names outside industry, such as Buenos Aires' Hotel Bauen. These arrangements employed around 15,000 workers by 2004, a small but inspiring contribution to the nation's economy.

Debt restructuring and the role of the IMF

In a speech before the United Nations General Assembly in May 2004, President Kirchner asked for "a structural redesign of the International Monetary Fund", which has changed "from being a lender for development to a creditor demanding privileges".

Shortly afterwards, at the meeting of the IMF and the World Bank, leaders of the IMF, the European Union, the Group of Seven industrialised nations, and the Institute of International Finance (IIF), advised Kirchner that Argentina must come to a debt-restructuring agreement, increase its primary budget surplus to pay more debt and impose "structural reforms" to regain the trust of the world financial community.

The debt restructuring process was long and complex. Argentina offered a steep discount on its obligations (approximately 70%) and finally settled the matter with over 76% of its defaulted creditors (the default did not include the IMF, which has continued to be paid on time).

In December 2005, Kirchner decided to liquidate the Argentine debt to the IMF in a single payment, without refinancing, for a total of $9.8 billion. The payment was partly financed by Venezuela, who bought Argentine bonds for US$1.6 billion.

In 2006, Argentina reentered international debt markets selling US$500 million of its Bonar V five year dollar denominated bonds, with a yield of 8.36%, mostly to foreign banks and Moody's boosted Argentina's debt rating to B from B-. However, the reliance of Argentina on Venezuela for a large portion of its financing needs has not been well received in Wall Street circles. On July 18, 2006 Goldman Sachs Emerging Markets Research noted: "Instead of trying to restore its credibility with the broad capital markets, the government keeps on relying on Venezuela as its main credit supplier" (as quoted in the Wall Street Journal on July 28, 2006). The total amount of Argentina's debt held by Venezuela is estimated at around US$6 billion, as of mid-2008.

Continuing her husband's policy of debt cancellation, President Cristina Kirchner announced the initiation of the repayment of Argentina's US$6.7 billion debt to Paris Club creditors in September 2008, and in April 2010, Economy Minister Amado Boudou prepared a debt swap package for the holders of over US$18 billion in bonds who did not participate in the 2005 Argentine debt restructuring prepared by a Economy Minister Roberto Lavagna. These holdouts include numerous vulture funds which had eschewed the 2005 offer, and had instead resorted to the courts in a bid for higher returns on their defaulted bonds. These disputes had led to a number of liens against central bank accounts in New York and, indirectly, to reduced Argentine access to international credit markets.

Economic expansion

President Néstor Kirchner savors the moment in a reopened cookie factory, 2004.

The Argentine economy has been growing again with surprising strength: 9% annual growth, sustained for five consecutive years (2003 through 2007). This stability was initially due to a surge in trade surpluses (over all previous historical records) and the sustained growth has been led by an over three-fold jump in business investment since the 2002 low. This reflects the return of local and international confidence, as well as record public works investment and a vigorous incomes policy on the part of former Economy Minister Lavagna and as general policy in the two Kirchner Administrations. Private sector employers have, since then, created over 3 million jobs and recovered median pay to over US$800 a month (about US$1,600, in purchasing power parity terms), a level closer to Argentina's historical average. This has boosted local consumption by two-thirds in real terms, though foreign investment has increased only modestly.

The Kirchners have also addressed deficiencies among certain public services privatized during the 1990s, revoking licences granted to private interests at the time; among these, some of the most notable have been: the national postal service (2003), the San Martín Railway line (2004), the water utility serving the Province of Buenos Aires (2006) and Aerolíneas Argentinas (2009). Private pension funds, which were first licenced in 1994, suffered large losses during the 1998-2002 crisis and by 2008, the state subsidized 77% of the funds' beneficiaries, including 40% whose annuities could not cover minimum monthly pensions; of the funds' 9.5 million affiliates, nearly 6 million had stopped making contributions. The 2008 financial crisis exacerbated the problem and on 20 October, Pres. Cristina Kirchner announced plans for the nationalization of the funds' investments of nearly US$30 billion, while leaving contributors the freedom to invest in private pension funds, which the central bank plans to purchase a minority stake in. The plan's congressional passage a month later was accompanied by a package of incentives designed to make credit more accessible and to stimulate slowing domestic growth, as well as expanded export and loan subsidies and a US$32 billion public works program for 2009-2010 (a record). The program has helped stave off recession, though the effects of the international crisis have had a serious impact on the local economy. Following six years of the fastest, sustained economic growth since the 1880s, GDP slid by 1.5% from July 2008 to July 2009, and domestic, private sector demand fell by around 4%. Sharp increases in public spending in the first half of 2009 and an incipient recovery in the second half of the year resulted in growth of 0.9% for 2009 as a whole, though a spike in inflation rates in early 2010 may have dampened growth appreciably.

Benefiting from an undervalued local currency that allowed industry to produce goods with competitive prices in the international market, exports soared from US$26 billion in 2002 to US$70 billion in 2008, though a drought and weaker international demand caused exports to fall by 20%. Manufacturing in Argentina has also recovered quickly from the 2002 crisis. Led by higher domestic demand, manufacturing in general has grown by over 80% since 2002 and some long-suffering industries, such as textiles, furniture, machinery, construction materials and publishing have more than doubled their output. Motor vehicle output, in particular, has jumped from a depressed 159,000 units in 2002 to a record 597,000 units in 2008 (auto sales have risen even more); amid the nation's relatively mild recession, output eased to 513,000 units in 2009. While local home values remain well below international prices, the nation's real estate market has also remained strong.

Criticism

According to the Heritage Foundation, a Washington-based conservative think tank, the state's role in the economy has expanded since the start of the Kirchner administration, primarily through price fixing in some industries and the creation of a state-owned airline and a state-owned energy company. The Heritage Foundation assigns Argentina a score of 3.3 (mostly unfree) in economic freedom on a scale of 1 to 5 of, which places the country in the 109th position of the 157 evaluated at the Index of Economic Freedom.

Though nothing new to Argentina, inflation has also proven difficult to contain. Price stability returned quickly after the 2002 crisis and President Kirchner inherited annual inflation in the 3-4% range. The robust recovery that followed has been accompanied by growth in median incomes averaging 17% (including a 25% jump in the year to April 2008, alone); but it has also seen a 26% average expansion in the monetary base.

The Kirchner Administration began pursuing a price truce with retailers as early as 2005; but, with macroeconomic pressures at these levels, the initiative soon failed. To make matters worse, in early 2007 the administration began interfering with inflation estimates and, as of mid-2009, continues to do so (by how much, of course, remains a subject of debate; but, where the Economy Ministry has refused to acknowledge inflation greater than 10%, their own measure of implicit private consumption prices (a factor in GDP estimates) suggests inflation had reached nearly 20% by mid-2008, and remains in the order of 12%).

References

• Bulmer-Thomas, Victor. The Economic History of Latin America since Independence (New York: Cambridge University Press). 2003.
• The Crisis that Was Not Prevented: Lessons for Argentina, the IMF, and Globalisation, Jan Joost Teunissen and Age Akkerman (eds.), Fondad, 2003, book, pdf
• Who Shot Argentina? The Finger Prints On the Smoking Gun Read ‘I.M.F.', Greg Palast, Guardian (London) Sunday, August 12, 2001,)