By Geopolitical Monitor * By Brenna Owen
Argentina’s economy has long perplexed economists and political scientists studying 20th century Latin American development. At the turn of the 19th century, Argentina, a country both rich in agricultural resources and plagued by labor shortages, represented an attractive destination for central and southern European immigrants. By 1915, it had become the world’s tenth wealthiest country per capita, and its population had outgrown Canada and other ‘developed’ countries as immigrants arrived in droves.
Over the course of the rest of the century, Argentina’s economy experienced modest highs and devastating lows. Though the Great Depression caused the country’s GDP to fall by a quarter between 1929 and 1932, import substitution industrialization (ISI), an economic policy that focuses on domestic production rather than foreign imports, led to a modest economic recovery through the 1930s and 40s. Yet the most catastrophic economic pitfalls were yet to come.
In June 1946, divisive populist leader Juan Peron began his first term as President of Argentina. He quickly embarked on a program of strategic industrial nationalization in an effort to strengthen Argentina’s economic independence and reduce income disparity. The economy indeed grew during Peron’s first presidency, which ended when he was overthrown in a September 1955 military-led, civilian-backed coup. Significantly, Argentina also developed the largest proportional middle class in Latin America, an indication that Peron succeeded in reducing income inequality in the country. However, it was during Peron’s presidency that inflation would emerge as a serious problem, and the resultant loss of purchasing power disproportionately affected low-income Argentinians.
High inflation was mainly caused by ISI and the state’s assumption of an increasingly interventionist and costly role in the economy. The inflation rate continued to rise after Peron was ousted, prompting the implementation of a government stabilization plan that included increasing taxes and slashing public expenditures. Thus, while most of the world benefitted from the post-war economic boom, sluggish growth and bouts of stagnation prevailed in Argentina.
In October 1973, after an 18-year exile, Juan Peron assumed the Argentinian presidency once more. Argentinian politics became dangerously fractious as left and right-wing Peronists were pitted not only against Peron’s opponents, but also against each other. Discordant and highly charged politics compounded the effect of Peron’s death from ill health in July 1974. His death left a political vacuum in Argentina, made worse by his second wife Isabel’s ineffectual tenure as president.
In 1976, Isabel Peron was replaced by an economically disastrous military junta. By the time the junta relinquished power in 1983, the Argentinian economy was in disarray. Real per capital income plummeted, and what little economic progress there had been since the Great Depression was negated. In 1989, inflation peaked at 5000 per cent and President Raul Alfonsin resigned amid riots. Peronist Carlos Menem subsequently assumed the presidency and embarked on a series of neoliberal reforms in an attempt to ‘shock’ the Argentinian economy back to productive levels.
For a brief period of up until mid-1993, the country appeared to be recovering, as GDP and employment rates grew. Inflation was reduced and the value of Argentina’s currency preserved when the Argentinian peso was fixed to the USD, allowing for the free conversion of pesos into dollars at Argentinian banks. However, the fixed exchange rate allowed goods to be imported more cheaply, resulting in loss of industrial infrastructure and jobs. By 1999, a major economic downturn had materialized.
In addition to economic crisis, Argentina was plagued by corruption. The International Monetary Fund (IMF) continually lent the country money and extended its payment schedules, a situation that was taken advantage of by corrupt politicians who laundered money, evaded taxation and moved funds into offshore bank accounts. In 2001, the government of Argentina defaulted on a large portion of its public debt, roughly totaling 132 billion USD.
The 2001 default looms large over the Argentinian economy and its foreign relations today. Argentina’s latest loss in US courts over this default was announced just last week, when a federal appeals court ruled that Argentina must repay a group of bond investors the full amount of their defaulted loans.
Led by hedge funds Elliott Management and Aureluis Capital Management, this small group of investors constitutes about 7 percent of the total value of Argentina’s 2001 debt. The group refused to consent to a deal restructuring the debt at a discount, while Argentina was able to negotiate discounted repayment rates with a number of other creditors. Argentina has vowed not to pay off its loans leading up to 2001 at face value, considering the terms by which they were imposed. “We’re going to keep paying as we have until now, on the same terms,” stated Argentinian Minister for the Economy, who went on to call the court ruling “an attempt to bring the country back to [the economic hardship] of 2001.”
A number of the other 93 percent of creditors, some of whom agreed to accept less than 30 cents on the dollar, have expressed concern that Argentina’s refusal to pay hedge fund investors despite the court ruling could halt payment on restructured or renegotiated bonds as well. The IMF and other international organizations and governments have supported Argentina on the grounds that the ruling could set a precedent making the restructuring of unmanageable debt more difficult for struggling countries.
Close to a century after Argentina welcomed hundreds of thousands of immigrants into its culture and economy and seventy years after Juan Peron’s first presidency, the state of Argentina’s economy remains puzzlingly ambiguous. According to current Argentinian President Cristina Fernandez, the country’s economy rose 7.8 percent between May 2012 and May 2013. However, there’s reason to regard so optimistic a figure with suspicion, as the World Bank and other international financial powerhouses have often criticized the Argentinian government for a lack of credibility in its official statements on the country’s economy and finances.
President Fernandez’s government has been promoting economic growth via consumer spending, a policy that did prompt an upward trend in Argentina’s GDP between 2003 and 2011. However, President Fernandez herself tends to avoid talking about the prices of consumer goods; they have been rising by an average 21 percent annually over the last decade.
It is clear that inflation persists as a significant bane of the Argentinian economy. Through privatization and nationalization, military and civilian governments, populism, fiscal restraint, world recession and the post-war boom, inflation has never failed to rear its head. Until inflation is effectively tackled, it will continue to pose the danger of sending the Argentinian economy back to the brink.
Brenna Owen is a contributor to Geopoliticalmonitor.com