The Argentine crisis a year on

In late 2001 the outbreak of a serious economic, social and political crisis in Argentina brought its exchange rate convertibility to an end. This exchange rate regime, based on the parity of the peso with the dollar, was pivotal in eliminating hyperinflation and was the cornerstone of Argentine economic policies during the nineties, the first half of which were marked by a prolonged and sharp economic expansion. This apparent success meant that, during the nineties, the Argentine experience was seen as a model for other emerging economies. But underlying this process were deep-seated problems that remained masked during the upturn. The constraints imposed by a fixed exchange rate were not accompanied either by sufficient headway in terms of reforms, which would have given the economy the flexibility it needed, or by true fiscal discipline. When a series of adverse external disturbances affected the emerging countries and the fiscal position began visibly to deteriorate, under the weight of insufficiently rigorous policies, the economy’s expansionary cycle petered out towards 1998. Difficulties then began to build up and the loss of competitiveness associated with exchange rate parity and with the strength of the dollar made itself felt, particularly following the devaluation of the Brazilian real in 1999. Thereafter, the economy went into recession and the vulnerability of the fiscal position became a cause for alarm. Gradually, a scenario took shape in which a crisis was as inevitable as it was difficult to manage, as is usually the case in highly dollarised economies. The crash was disorderly and accompanied by a grave political and social crisis. This bore on the subsequent management of the crisis, in which a series of measures were taken that involved the abandonment of the legal and economic framework in place: the suspension of payments on sovereign debt; banking, foreign exchange and capital restrictions; the asymmetrical conversion into pesos of bank balance sheets, and price controls. The first part of this article describes how the crisis unfolded during the course of 2002, taking us to the present time when, after a deep slump and several months of stabilisation, a recovery seems to be under way in the economy. Nonetheless, the economy continues to operate under heavy financial, foreign exchange, price and legal restrictions, and against a backdrop of heightened legal and institutional uncertainty, which is exacerbated by the fact that elections are due this year. In the near term, Argentina faces the difficult challenge of bringing its economic environment on to a normal footing and of entrenching the precarious stability attained to date so that the incipient economic recovery may be firmly and sustainably underpinned. The main elements of this complex task are reviewed in the second part of the article.