1

ARGENTINA CASE STUDY

BY

MARIAPENADES

INDUSTRIALTECHNOLOGY&MANAGEMENT

Submittedinpartialfulfillmentoftherequirementsforthedegreeof

MasterinIndustrialTechnologyandOperationsintheIndustrialTechnology&Managementdepartmentofthe

IllinoisInstituteofTechnology

SupervisedbyKamyarJabbariAdviser

Chicago,Illinois04/24/2017

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1. INTRODUCTION........................................................................................................1

2. AGRICULTURE...........................................................................................................42.1. Agriculture’sroleinArgentina....................................................................................42.2. ArgentineAgriculturespecialization...........................................................................52.3. Argentina’spoliciestowardsagriculture....................................................................7

3. MANUFACTURING..................................................................................................123.1. AgroexportmodelandtheFirstPhaseofIndustrialization(1880-1930).................123.2. SecondPhase;JuanPeron’sImportSubstitution(1930-late1970s)........................15

3.2.1. Importsubstitutionmodel:Firstsub-stage(1930-1955).................................163.2.2. Importsubstitutionmodel:Secondsub-stage(1955-1976).............................19

3.3. MilitarydictatorshipandtheThirdPhaseofIndustrialization(1976-1990).............193.4. Convertibilityand“De-industrialization”(1990-2002).............................................213.5. Kirchnerism(2003-2010)..........................................................................................22

3.5.1. PresidencyofNéstorKirchner(2003-2007).....................................................223.5.2. PresidencyofCristinaFernándezdeKirchner(2007-2015).............................25

4. BANKINGANDFINANCE.........................................................................................294.1. Themilitarydictatorship(1976-1983)......................................................................30

4.1.1. TheFinancialReformof1977...........................................................................304.1.2. LaTablitaCambiaria,1978...............................................................................33

4.2. FromtheMilitarydictatorshiptoAlfonsín................................................................344.3. RaúlAlfonsín’sfinancialpolicy:TheAustralPlan(1983-1989).................................364.4. TheConvertibilityPlan(1990-2001).........................................................................37

4.4.1. FirstevidenceoftheweaknessesoftheConvertibilityPlan............................394.4.2. CavalloasMinisterofEconomy.......................................................................41

4.5. DefaultandCollapseoftheConvertibilityRegime...................................................434.6. TheRecovery.............................................................................................................45

4.6.1. Renegotiationofthedebt................................................................................454.6.2. Argentina’sreturntointernationaltrading......................................................48

5. DOINGBUSINESSIN2017.......................................................................................495.1. Strengths...................................................................................................................495.2. Weaknesses..............................................................................................................505.3. Opportunities............................................................................................................515.4. Threats......................................................................................................................52

6. Conclusion..............................................................................................................54

7. References..............................................................................................................56

8. Bibliography...........................................................................................................64

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LISTOFSYMBOLS

- INDEC:NationalInstituteofStatisticsandCensures.

- OEC:ObservatoryofEconomicComplexity.

- OECD:TheOrganizationforEconomicCo-operationandDevelopment.

- FAO:FoodandAgricultureOrganizationoftheUnitedNations.

- GDP:GrowthDomesticProduct.

- CEPAL:EconomicCommissionforLatinAmericanandtheCaribbean.

- BCRA:CentralBankoftheRepublicofArgentina.

- WTO:WorldTradeOrganization.

- IMF:TheInternationalMonetaryFund.

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LISTOFTABLES

- Table1:ArithmeticAverage,years2011-2015.Source:WorldTradeOrganization

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ABSTRACT Theaimoftheprojectistoanalyzeandunderstandtheeventsthathavetaken

placethroughouthistoryinArgentina,whichhavemadeacountrythathadincredible

potentialsufferdevastatingeconomicandpoliticalsituations,endinginoneofthemost

serious defaults in history. Additionally, the project summarizes in a SWOT Analysis

(Strengths, Weaknesses, Opportunities and Threats) the situation that Argentina is

currentlyliving,underthenewgovernmentthatstartedin2015withPresidentMauricio

Macri.Thankstorecentlyinstitutedpolicies,Argentinahasbeenabletointroduceitself

again inthe internationaltradingmarketand isnowoneoftheemergingeconomies

withabrighterfuture.

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1. INTRODUCTION AccordingtoanarticlepublishedbyTheEconomist(2014):“In1914,Argentina

stoodoutasthecountryofthefuture.ItsGDPperheadwashigherthanGermany’s,

France’sorItaly’s.Itboastedwonderfullyfertileagriculturalland,asunnyclimate,anew

democracy(universalmalesuffragewasintroducedin1912),aneducatedpopulation

andtheworld’smosteroticdance. Immigrants tangoed in fromeverywhere.For the

youngandambitious,thechoicebetweenArgentinaandCaliforniawasahardone”.

Theaimofthisprojectistoanalyze,explainandunderstandtheevolutionofthe

pathtravelledbyArgentinathroughoutthiscentury,fromafutureofunlimitedgrowth

andwellbeingtoeconomicandpoliticalchaos.Thereportanalyzeskeyeventsofthree

selectedareasconsideredofimportance:Agriculture,ManufacturingandBankingand

finance.Moreover,theprojecttriestodescribeArgentina’scurrentoutlookaswellas

the expected behavior of the economywithin the near future. In order to do so, it

providesananalysisofArgentina’sStrengths,Weaknesses,OpportunitiesandThreats

(SWOTAnalysis).

Section1,Agriculture,beginswithanexplanationoftherolethatAgriculturehas

played in Argentina. Compared to its neighbors in the region, Argentina has had a

comparativeadvantagewhenitcomestoAgricultureasithasbeenendowedwithvery

fertile lands and favorable climatic conditions. Therefore, the sector has allowed

Argentinatoentertheinternationalmarketandhasbeenaveryimportantsourceof

income for the country. The Section continues with a description of the Argentine

Agriculturespecialization,highlightingitsmaincropsandmostfertilelands.Thechapter

closes with the evolution of Argentina’s policies towards agriculture, how have the

differentpoliticalregimesfavoredorhinderedthesector.

ThesecondsectionoftheprojectisdedicatedtoManufacturing.Startingwith

theAgro-ExportmodelandthefirstphaseofArgentina’sindustrialization(1880-1930),

theperiodwasmarkedbyinvestmentinindustrialinfrastructure,significantmigration

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fromEuropeandastrongdependenceontheEuropeancontinent,whichwasthereason

why the period ended. The second Phase, Juan Peron’s Imports Substitutionmodel

(1930-late to1970s), influencedbyPeron’sadmiration for the rapid industrialization

thatMussolini carried out in Italy. During this period,manufacturing became a very

importantplayerinArgentina’seconomy.Policieswereaimedtofavorthesectorand

boosttheinternalproductionofgoodsthatwerebeingimportedfromtheoutside.In

1976 came theMilitary Dictatorship and the Third Phase of Industrialization, which

lasteduntil1990s.Themainfeatureofthiserais,incontrastwithPeron’strends,the

openingofthecountrytotheinternationalmarket,eliminatingdisincentivestowards

imports. In 1991 starts the so-called “Convertibility Plan” and with it the de-

industrializationofthecountry.Next,theKirchnerismthatstartedin2005withelection

ofPresidentNestorKirchner.Overall,hebroughtinamoreregulatedperiod,withthe

introductionofexporttaxesagainandtherefusalofPresidentNestorKirchnertobe

partoftheFreeTradeAreaoftheAmericas(FTAA),apropositionforthecreationofa

freetradezonefromAlaskatoTierradelFuego.

Banking and Finance, the third part of the project explains the different

monetary regimes throughouthistory, startingwith theMilitarydictatorshipand the

FinancialReformof1977underMartinezdeHoz,theMinisterofEconomyatthetime.

Because the reformdid notmeet itsmainobjective of decreasing inflation, another

attempt called the “Tablita” took place in 1978, which consisted of a programmed

devaluation of the peso based on a conversion table. The measure led to the

propagation of speculative capitals and the “financial bicycle”, a period where

Argentinesmadealotofeasymoney.Theprojectthencontinuesexplainingthe“Austral

Plan” under Raúl Alfonsín’s presidency and the measures and consequences of the

Convertibility Plan, which led to Argentina strongly depending on the inflows and

outflowsofforeigncurrency.Becauseofthis,duringthe1990s,duetoseveralexternal

shockssuchastheAsianCrisisof1997,theConvertibilityPlanstartedtoshowitsfirst

evidenceofdecayandendedin2001,afterthethirdDefaultofArgentinaonitsexternal

debt.Fromthatpoint,thethesisexplainshowdifferentauthoritiestriedtoreactivate

theeconomy.A very importantpartof the study is thedebt renegotiation,which is

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explained in detail. The section ends with Argentina’s return to international

tradingin2015,underitscurrentPresidentMauricioMacri’sgovernment.

The last Section of the project, Section 4, contains a SWOT analysis of the

situationthatArgentinaiscurrentlyliving,afterallitscomplicatedpast.Itisacountry

with a lot of advantages (Strengths), generally marked negatively by its past

(Weaknesses),withalotofpotential(Opportunities)butneedstobecarefullymanaged

toavoidrepeatingitshistory(Threats).

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2. AGRICULTURE

2.1. Agriculture’sroleinArgentina

Theagriculturalsectorhasalwaysplayedandcontinuestoplayaveryimportant

roleintheArgentina’seconomicgrowthandevolutionbecauseofitshighimpactonthe

GDP, employment and regional development. It is also a key reason for important

positioningofArgentineinternationallyasasupplierofaliments(beingthissectorits

mostcompetitiveconglomerateproductionasawholeandineachofitsregions).

Ithasbeencritically importantthroughoutthehistoryofArgentina.Deepand

richsoils,temperateclimate,adequaterainfallandgoodaccesstomaritimetransport

giveArgentina an exceptional potential for agricultural production. This has allowed

agriculturetoperformwelldespitemorethan50yearsoflargelyunfavorablepolicies

bythegovernmenttothedetrimentofagricultureandforthebenefitofmanufacturing.

Afterthethirddefaultin2001,theagriculturesectorhasplayedaverysignificantrole

in the recovery of the economy. According to the INDEC (2017), the country has a

continental surface of 2.8 million square kilometers and a 37.2% is dedicated to

Agriculture.In2003,thesectorwasresponsibleforthe11%ofthetotalGDP.(TheWorld

BankGroup).

OneofthekeyfeaturesofArgentina’sagricultureisthatithasthepotentialto

notonlyfeedthecountryitselfbutexportaroundtheworldtoo.Forinstance,on2014,

a 42%of theworld exported soymeal came fromArgentina (David E. Bell andMary

Shelman, 2015). The INDEC estimated that for the years 2013 and 2014, the total

productionofthemostimportantcropstotaled53,000tonsconstitutingthe60%ofthe

country’stotalexports.

The agricultural sector is one of the few industries in Argentina that has

presentedapositivetradebalancethroughoutthepastyears.Thefollowingtableshows

theaverageofexportsandimports(inmillionsofdollars)betweentheyears2011and

2015ofdifferentsectorsandtheirtradebalance.

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Agricultureisalsoanimportantbutalbeitsmallsourceofemploymentforthe

Argentines. The Argentine agriculture tends to be technologically advanced and

productiveanddespitethesmallemploymentnumbers, itcreatessignificantvaluein

economic production. The World Bank Group estimates that in 2011, the total

populationofArgentinawasof41.6millionand3.1%workedintheagribusinesssector

(Statista:TheStatisticsPortal),sothatisapproximately1.29milliongeneratedpositions.

Moreover, it also carries a lot of indirect jobs with it such as transportation and

commercerelated.

2.2. ArgentineAgriculturespecialization

The agro-industrial production has an extensive geographical coverage

throughout the country, therefore the conservation of a lot of its natural resources

depends on these activities. Also, the poorest regions of Argentina practically only

dedicatethemselvestothissectorsoitseconomicandsocialdevelopmentdependon

ittoo.

ThemostimportantagriculturalregionistheorientalPampaandthesouthof

Mesopotamia,withfavorablesoilsandclimateforthecultivationofcereals,oilseeds,

fodder,fruitandvegetables.Tropicalcropsfinditsfavorableconditionstogrowinother

areas like theNortheastof Formosa, theNorthof Salta and theareas around Jujuy.

Therearealsolargeareaswhereagricultureisonlypossiblewiththehelpofartificial

irrigation, and the land is used for high-value crops such as fruit and vegetables.

Table 1: Arithmetic Average, years 2011-2015. Source: World Trade Organization Indicator Exports Imports Tradebalance

Agriculturalproducts 202,86 11,9 190,96Fuels 18,1 46,77 -28,67

Manufactures 113,6 269,42 -155,82Machineryandtransportequipment 58,04 152,53 -94,5Officeandtelecomequipments 521 29,05 -28,53

Textiles 1,06 5,72 -4,66

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ExamplesofthesearethearidprovincesCuyanas,theNorthwestandthePatagonian

zone.

Duetothevolumeofproductionandcultivatedarea,cerealsandoilseedsare

consideredthemaincropsofthecountry.Cerealsincludewheatandmaizeproduction

andoilseedsconsistofsoybeanandsunflower.TheOECestimatedthatin2015,soybean

mealrepresented16.6%ofthetotalexportsofArgentina.Duringthelastfourdecades,

its production has been increasing and in 2016, the total productionwas of 34.350

millionmetrictons,thehighestvolumesince1977(IndexMundi).Accordingtoastudy

publishedbytheOECD(2008),theproductionofsoybeanbecameimportantbetween

2005and2007,whenpricesnearlydoubled.Asforcereals,themostgrowniswheat,

withacultivatedareaofapproximately6.3millionhectaresandfollowedby3.1million

ofmaize.(FAO)

IndustrialcropsarealsoveryrelevantintheArgentineagricultureandtendtobe

cultivatedinthenorthofthecountryduetotheirneedofhotandhumidclimates.These

includecotton,sugarcane,tobacco,yerbamateandtea,amongothers.Theyarecalled

industrialbecause,unlesstheyaresubjectofanindustrialprocess,theyhavenoutility

freshlyharvested.

Nowadays,Argentina istheworld’s leadingexporterof lemonsandpearsand

occupiesaminorplaceintheexportofapplesandothercitrusfruitssuchasoranges

andmandarins.Theexportationofappleshasfallenduetothepoorofferedvariety,

specializingtheirproductionintwotypes;RedandGranny.Perastudycarriedoutby

theDepartmentofPomologyofRioNegro,appleexportsdeclineda46.83%from2009

to2014.

HorticulturalcropsaregownaroundsomebigcitiessuchasBuenosAiresand

MardelPlata.Thehighestproductionofwintervegetablestakesplaceinthevalleyof

RiverSanFrancisco(Jujuy).Also, thetomatocrop inMendozashouldbehighlighted,

whichismainlyintendedforpreserves’production.

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Fodderisusedtofeedlivestock.Theyareusuallydevelopedinareaswith

lessabilityforothercrops,astheyareresistanttodifferenttypesofwaterstressand

climate(suchasthosecausedbyfloodsordroughts)andadapttoawiderangeofsoils.

Together, forage farmers occupy the largest area of land planted with crops in the

country.Mostof the fodder isdirectly consumedbyanimals,whilea smallerpart is

harvested.

In recentyears,mediumandsmallbusinesses, trying to findnewexportation

alternativeshavedevelopedtheproductionofnon-traditionalcropssuchasstonefruits

(apricot,peach…),finefruits(alsocalledberries),tropicalfruits(mango,papaya…),kiwi

anddriedfruit.Theseproducts,becauseoftheirvolume,representasmallpartofthe

Argentine agribusiness production and exports. Because they are different, they are

considered tohaveagreatervalue than traditional cropsbecauseof specificnatural

attributes.

2.3. Argentina’spoliciestowardsagriculture

There is a relationship between agriculture and economic growth and in

Argentina,forseveraldecadesofthelastcentury,thisrelationshiphasbeendistorted.

Theindustrialization/manufacturinghasbeenemphasizedattheexpenseofagriculture,

underminingthepotentialofagriculturetocontributetothenationaldevelopment.The

national goal of industrialization was adopted by Juan Peron and was followed by

successive governments forquite a long time. Theemphasisonmanufacturing also

made subsidizing it a common practice, at the expense of the taxpayer and other

sectors.

Until1930Argentinahadundergonealargeperiodofagriculturalexpansiondue

tothelaborinputsupportedbyEuropeanimmigrationandahighlevelofinvestments,

both in agricultural holdings and infrastructure. This periodwas characterized by an

important development in basic products. Until then the economy was very open,

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international trade of great importance for the economy and there was no direct

taxationonagriculturalexports.

TherallyendedwiththecollapseofpricesduringtheGreatDepressionin1930.

Duringtheseyears,largeoutflowsofforeigncapitaltookplaceandtherewasasharp

internationaldeclineinagriculturerelatedproduct’sprices.Thissituationwasfollowed

byWorldWar II during which, because of the blocking of themaritime commerce,

Argentinaaccumulatedhugequantitiesofcerealreservesthatcouldnotsell.

Becauseofthedisappointingexperiencewiththeinternationaltrade,pessimism

lead to questioning the role of the sector in the economicmaintenance. This trend

marked the growthof a policy that promoted the industrial development to reduce

imports and the impositionof taxeson theagricultural sector (overvaluedexchange

ratesmadeexports of grains difficult andexport duties on cereals andbeef, among

others), pushedArgentina back from the internationalmarket. The protectionism in

favor of manufacturing also created a domestically oriented industry with high

productioncostswithinefficienttendencies.

Inthelate1980s,Argentina’seconomywascharacterizedbyinstability.Inthe

year 1989, inflation rate reached 3,071% (TheWorld Bank Group). President Carlos

Menem’sgovernmentembarkedina“freemarket”path.Withtheconvertibilityplan1,

whichpeggedtheArgentinepesoto theU.S.Dollar,economic reformstookplace in

order to stabilize economy and create a more liberal policy regime favorable to

agriculturalinvestment,productionandexports.Thesepoliciesincludedeliminationof

quantitativeexportrestrictions,eliminationofdistortingtaxesinfuelsandremovalof

inefficienciesandmonopolyprofitsinthetradechannels(transportation,elevatorsand

ports).Thismorestableenvironmentencouragedfarmertoinvestinbetterinputsand

moreefficientmachinery.

1 The Convertibility Plan will be discussed in Section 4.3

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During the years of 1991-2001 the Argentine governments continued

liberalization,privatizationandthedollarizationprocess,bywhichArgentinaadopted

theU.S.Dollarasitsonlycurrencyclosingthepeso-dollar interestratespreads.Also,

thestartofMERCOSUR{theCommonMarketoftheSouthAmerica}tookplace.Allof

themhelpingtheagriculturalsector’seconomicandpoliticalwell-being.

In 2001, a federal budget crisis led to public debt default and devaluation.

Argentinawasmarked bymacroeconomic imbalanceswith the overvaluation of the

currencyandthelackofcredit.Thesefactschangedthesituationforthevastmajority

ofagriculturalproducers.In2003,PresidentNestorKirchnerre-introducedexporttaxes

onagriculturalproductsaspresidentMenemhadeliminatedthem.Despiteofthehigh

exporttaxes,whichforexamplereacheda35%insoybeansin2007(WilliamN.Dowd,

2009), new investorswerewilling to openbusiness in farming. Most of themwere

motivatedbytheirlackoftrustinthebaking/financialsystemandvaluedtheabilityto

sellindollarstermsoverseasratherthanpesos.

The fall in Argentine Pesos in the 21st Century, turned Argentine products

cheaperinaninternationalmarketand,aswellasArgentinaisknownforconsumingthe

samegoodstheyexport,pricesinthedomesticmarketsandinflationrosealongwith

declineinPesoexchangerate.Forexample, intheperiodof2000to2005exportsof

soybeansincreasedform4.1billiontonesto9.96billiontones,respectively,whichisan

increaseof141.6%(FAO).

PresidentCristinaKirchner’s,whohadtakenoverfromherhusbandaspresident

of thecountry in2007, increasedexport taxestotakeadvantageof thesuddenhigh

revenuecomingfromexportsandwiththeaimofcontrollinginflationtomakegoods

moreaccessibletodomesticbuyers.

In March 2008, Cristina Kirchner made an executive law that rose taxes for

soybeans again from35% to 44.1% (WilliamN.Dowd, 2009). She introduced a new

sliding-scale tax system that generated major protests and strikes from farmers

nationwide,itwasthefirsttimethatthefarmershadgatheredagainstthelaw.Thenew

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taxationputaceilingonfarmers’incomenomatterhowhighinternationalpricesrise.

Threemonthslater,inJune2008,KirchneraskedtheCongresstovotefortheproposal

tolegitimizethesystem.Tothesurpriseofall,thegeneralvotewasagainsttheproposal

so Cristina had to lower the soybean tax to its original value, a 35 percent. It was

consideredbythefarmersavictoryagainstthegovernment.

Althoughfarmerswonthatbattle,theyfacedotherconditionsatthesametime.

Argentinasufferedadrasticdrought,theworstinthepast100years,thatresultedina

very low crop yield so prices rose again. Crop yield ofwheat decreased by a 30.6%

between2008and2009,soybean’syieldalsodeclinedbya35.5%inthesameperiod.

(FAO)

Motivatedby their last success, farmerdemanded for anewdecreaseof the

export taxes. The government did not succumb to their demands but, instead, they

offeredthemtoshare30percentofthetaxexportrevenuewiththeprovinces.

Given thepolitical andeconomicenvironment, agriculture took itsownpath.

Beneficialtechnologicaladvancesweredevelopedandmarkedaneweraforthesector;

productivity,mechanizationandincreasedscale.

Theyears2010and2011wereexcellentyearsforArgentina’sagriculture.Even

though export taxes were still high, cultivated area was expanded thanks to new

technologies,ahighlycompetitiverealexchangerateandtheglobalrisingofcommodity

prices.Argentinabecameoneofthetopexportersofseveralproducts.

Argentina’s income from exports was reduced in 2014 due to the drop of

commodityprices.Argentina’seconomyremainedheavilydependentoncommodities.

Agriculturalproductsandagriculture-relatedmanufacturingwereabout60percentof

totalexports.Capitalgoodsandintermediateinputscompriseabout70percentoftotal

imports, making the economy highly dependent on the foreign exchange revenues

generatedbythecommoditysector.Thepriceofsoybeans(soyproductsaccountedfor

30percentofArgentina’stotalexports)droppedby30percentsinceearly2014,and

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otherimportantexportcommodities,suchascornandwheat,sawsignificantprice

declines.

In2015,assoonasPresidentMauricioMacritookoverhearrangedanewpolicy

to liberalize the agriculture sector. This new trendwas opposed to the one that his

predecessor, Cristina Fernández, had clung. During her presidency, she established

severe restrictions on imports. For example, it becamemandatory to associatewith

companies thatexported inorder to import anotherproductof the samevalueand

manyoftheimportpermitswereparalyzedforweeks.Theseobstaclesdisappearedwith

Macri.

Thenewpolicy includedeliminatingexportpermits for grains andoilseeds, a

decreaseonexporttaxforsoybeansfrom35%to30%,andabolishingmostotherexport

taxesforagriculturalcommoditieslikebeef(itwastaxedat15%),corn(20%)andwheat

(23%) (David E. Bell, Forest Reinhardt and Natalie Kindred, 2016). Macri propelled

Argentina intoanewcurrencyeraby liberalizing thepesoand letting it float freely.

Argentina’spesodevaluatedforasmuchasa30%(CarolinaMilan,2015).Eventhough

theriskof inflationincreasingwashigher,thispolicywasseenbyhissupportersasa

moveforArgentina’sregainingcredibilityintheglobalfinancialsystem.Thesereforms

madeArgentina’sagriculturalexportsmorecompetitive.

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3. MANUFACTURING Themanufacturing sectorhistory inArgentina shows itsdependenceand the

correlationwithitshistoricexperienceofthetwoworldwars,andincidentallyshowsit

highdegreeofdependencewithBritaininparticular.

Theprocessof industrialization inArgentinacanbecategorized in three large

periods. The first one started around 1880 when the country entered into the

internationalmarketsbyadoptingthe“Agroexportmodel”andendedwiththeGreat

Depression2,in1930.Thesecondperiodischaracterizedbytheadoptionoftheimport

substitutionindustrialization,formallyadoptedbyJuanPeronin1946,whichlasteduntil

thelate1970s.Thethirdofthembeganbythefailureofthepolicyopening3,carriedout

bytheMilitaryDictatorship4in1976,andwasextendeduntil1990.

3.1. AgroexportmodelandtheFirstPhaseofIndustrialization(1880-1930)

The“agroexportmodel”wasbasedontheexistenceofcomparativeadvantages

inagriculturalproductionderivedfromtheexploitationofvirgin landsinthePampas

region,whichwas converted into the axis of an expansion that seemed to knowno

limits;endowmentof landprovedtobeendless,whilesoil fertilitymadeagricultural

productionhighlyefficient.Argentinajoinedtheworldthroughexportingitsmeatsand

grains, and achieved significant Balance of Goods account. The model required

significantinvestmentinindustrialinfrastructureinprocessing,railroads,andpackaging

particularly in the interior of the country to get the food products to the ports and

eventuallytotheexportmarkets,primarilyontheEuropeancontinent.

TheArgentineagro-exportboomwaspartofaprocessofinternationalizationof

trade. The more developed economies in Europe were undergoing an industrial

2TheGreatDepression,alsoknowasthecrisisof29,wasaglobaleconomiccrisisthatlastedduringthe1930s,intheyearsbeforetheWorldWarII.Itsdurationdependsonthecountriestobeanalyzed,butinthemajoritybeganaround1929andextendeduntilthelatethirtiesorearlyforties.ItwasoriginatedintheUnitedStates,fromthefallofthestockmarketofOctober29,1929,andwasthelongestanddeepestdepressionintheworld3TheMilitarydictatorshipadoptedanopenpolicymaterializinginafreemarketplan.ThemaninchargewasJoséAlfredoMartínezdeHoz,theministerofeconomyatthetime.Itconsistedoftheeliminationofallpricecontrols,freeforeignexchangemarket,freetrade,freeexports,freeimports,openingthemarkettocompetition,eliminationofsubsidiestocertainprivilegedsectorsandfreedomforforeigninvestments.4TheMilitarydictatorship’spolicyopeningbeganin1976andwillbeexplainedlaterinthissection.

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revolutionleadingtoexcessproductionofmanufacturedgoodsandhencetheir

willingnesstoexport,andanincreaseindemandforfoodandrawmaterialsneededfor

its factories, which they had to import. Argentina’s exports of wheat in 1885 were

100,000tonsandin1913theyreached2,800,000tons(AlfredoM.Irigoin).Themodel

allowedArgentinatoinsertitselfintotheinternationalmarketandwasknownforits

exportingofrawmaterialsandfoodstuff,andimportingofexternalcapitalandheavy

machinery for investment. The double dependence of Argentina on the European

ContinentandinparticularGreatBritainasitsbiggesttradingpartnerexposedArgentine

totheeconomiccyclesofEurope.

The trade was not the only growing segment in this period. There were

significant migration of people to Argentina from Europe as well as significant

investmentcapitalfromEuropetoArgentinatospendonindustrialization.Forinstance,

intheperiodof1890to1920nearlythreemillionimmigrantstravelledfromEuropeto

Argentinaseekingforbettersalariesandthepossibilityofsocialmobility(RafaelDiTela

and IngridVogel,2001).Also,becauseof the industrialization, theoldcontinenthad

capitalsurpluswhichbecameavailableasforeigninvestment.Forexample,attheend

of1913,GreatBritainhadinvestedapproximately£319millioninArgentina(WilliamN.

GoetzmannandAndreyD.Ukhov,2005),especially intherailwaysystem. Itradiated

fromBuenosAiresandcommunicatedthecitywiththeperiphery.Thesystemplayeda

very important role in the integration of the interior provinces into the national

economy and the development of the export sector as it ensured the rapid and

inexpensive transportationofexportableproducts fromtheseareas toBuenosAires,

wheretheyweresenttoEurope.

The conditions for the country's incipient industrialization began to emerge.

Amongthemcanbementioned:

• Theexistenceofcompetitivegoodsoftheprimarysectorthatrequiredsome

typeoffinalindustrialtransformationtobeexported(refrigerators,leather,

wool,flour,etc.).

• TheEuropeanimmigrationflowwithpreviousqualificationsintheindustrial

sector.

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• Theavailabilityofarailnetworkallowingtransportofproductsatlowcost.

The golden era for Argentina did not last long. The country became heavily

dependentonEuropeand itsupsanddownsaffectedArgentina’s localeconomytoo

much.In1914,TheFirstWorldWarbrokeoutand,eventhoughArgentinawaspolitically

neutral, itseconomydrownedwith thatofEurope.Thewar interrupted trade flows,

demandofexportsdecreasedandthecountrywaspreventedfromthesupplyofawide

rangeofproductsthatitacquiredabroad.

In addition to the warfacts that contributed to the end of the “Agro export

model”are:

• TheconflictiverelationbetweenArgentina,theUnitedStatedandGreatBritain.

Asithasalreadybeenmentioned,ArgentinaandGreatBritainhadhadaclose

relationshipthroughouttheyears.DuringandaftertheFirstWorldWar,Britain

lostitsroleoffinancialpoleofArgentinaastheUnitedStatesbecameagreat

power.AmericancapitalsstartedtogainimportanceintheArgentineeconomy

displacingtheBritish.

• Also, the beginning of the internationalGreatDepression crisis in the 1930s,

transformed the behavior of the international order. As it has already been

explained,thecrisiswasoriginatedintheUnitedStates,afterafallinstockprices

(theDowJonesIndustrialAverage5dropped25%(KimberlyAmadeo,2017)).The

declineinUSeconomicactivitycausedthecollapseofthemultilateraltrading

andpaymentsystemandwasaccompaniedbyasharpcontractioninworldtrade

(decreasing approximately 30% between 1929 and 1932 (Jacob E. Madsen

(2001)) and a resurgence of protectionist practices in industrial economies.

Countries began to close their economies through tariffs and production

intendedprimarilyforthedomesticmarket.Thisradicallychangedtheposition

of theArgentineeconomy in theworldorderas theexportdemanddeclined

significantlyandsoitsexportpricesfelldramatically.

5 The Dow Jones Averages are stockmarket indices that represent theU.S. economy in three sectors: industry,transportationandutilities.

15

• However, themodelnotonly lost itsmomentumdue toexternalevents.The

Argentineeconomyhadconsiderablygrownaswellasitspopulationandcould

nolongerbemaintainedsolelyonthebasisofexports.

3.2. SecondPhase;JuanPeron’sImportSubstitution(1930-late1970s)

JuanPeronspentafewmonthsinItalybetweenthetwoworldwars.Whilehis

missionwasmilitarytraininghewasimpressedwithMussolini’srapidindustrialization

ofItalytosubstitutefortheneedofimportingheavymachineryandequipmentandfor

therestofhislifeandcareerhetriedtoemulateItaly’sexperience.

During the import substitution process, themanufacturing sector occupied a

privilegedplaceintheArgentineeconomy.Asitsnamesuggests,theindustrialgoods

thatusedtobeboughtfromtheoutsidestartedbeingproducedbythecountry.The

modelwasaimedatself-sufficiencyinfoodandindustrialproducts.Inthisperiod,the

industrial production surpassed the agricultural production and textile, food and

metallurgicalindustriesfacedagreatincreaseinsizeandoutput.

Therewerethreemainpillarofimportsubstitutionmodel;

1. Anactiveindustrialpolicythatprovidedsubsidesanddirectionofstate

toproduceimportsubstitutes,

2. Barrierstofreetrade(protectionism)suchashightariffsonimports,and

3. Under-valuingthePeso.

Themodelof importsubstitutioncanbedescribed intwosubstages.Thefirst

one, from theendof the “Agroexportmodel” in1930until theendofPeron’s first

government,in1955.Thesecondsubstageextendsfrom1955untiltheendofthe70s.

16

3.2.1. Importsubstitutionmodel:Firstsub-stage(1930-1955)

Inthisnewsub-stage,industrializationdeepenedinanacceleratedway.Itwas

basedonanexpansionofexistingactivities,throughtheintensiveuseoflabor,anda

wideningofthedomesticmarket.TheStatehadaveryactiveroleintheproductionof

basicinputsandintheapplicationofawiderangeofpolicyinstruments:administration

ofimportquotas,financing,sectorpromotion,etc.

ThefirstprotectionistmeasuretookplaceonOctober10,1931,thecreationof

theExchangeControlCommission.Itintervenedinthemarkettodistributetheforeign

currenciesenteringtheeconomy(earnedbyexporters),respondingtothepurposeof

giving foreign currency to those who were considered to have a greater collective

benefitthroughimports.Thisdistributionofchanges,inthefaceofexcessdemandfor

foreignexchange,impliedarationing.Theestablishedparitywassuchthatthecurrency

was overvalued, implying a stimulus to imports and a disincentive to exports. The

objectivewas precisely that the currency should not be depreciatedbut to improve

Argentina’sbalanceofpayment.

Asmentionedbefore,becauseoftheFirstWorldWar,GreatBritainabandoned

itspositionasArgentina’slargertraderandstarteditsfinancialbeingreplacedbynew

investors in the territory such as theUnited States.OnMay 1, 1933, to protect the

ArgentineeconomyandguaranteeitstradewiththeBritishcountry,the“PacoRoca-

Runciman”wassigned.Asitsnamesuggests,theagreementwassignedbytheBritish

TradeMinisterSirWalterRuncimanandthevicepresidentofArgentina,JulioRoca.By

this,EnglandwascommittedtocontinuebuyingArgentinemeatsaslongastheirprice

was lowerthantheothersuppliers.Ontheotherhand,Argentinareducedthetaxes

levied on English products and granted preferential treatment for British companies

basedinArgentinaamongwhichwastheconcessionofallmeansofpublictransportin

the city of Buenos Aires to a British company called Transport Corporation.

Concurrently,theCentralBankofArgentinawascreatedwithsuchimportantfunctions

asmonetaryissueandinterestrateregulation,withalargepresenceofEnglishofficials.

17

UponarrivaloftheSecondWorldWar,Argentinefacedthedualproblem

ofbeingunabletoimportneededindustrialproductsandlosingitsexportmarketsfor

foodstuff. Peron’s import substitutionwent into full swing to allow the country to

withstandthewarfarawaybutimpactingitseconomysoclosely.

In1939, theWorldWar II changedthepicture formostof thecountries.The

Argentineeconomy,again,wasaffectedbytheconflict.Asmentioned,forArgentina,

the progressive closure of European markets, resulting from the German victories,

drastically reduced agricultural exports. The shortage of imports during the war

promotedaprotectiontowardsArgentineindustries.

Asaresult,Argentinastartedexportingitsindustrialgoodstoherneighborsintheregion

tomaintainitsgrowthintextiles,clothing,foodandbeverages,footwearandchemical

productsintheArgentineindustrialsector.

In 1946, with election of Juan Domingo Perón, a five-year plan aimed for

economicindependencewasenacted.Themeasures’goalwere:

• Expandtheinternalmarketinsteadofboostingtraditionalexportstoreduce

foreigndependence,

• raiseproductivity,

• improvethedistributionofwealthand

• accelerateindustrialization.

Hisgovernmentalsoreactedtoshort-termeconomicandpoliticalpressures.For

example,heestablishedpoliciesthatprotectedpost-war industries,hesavedprivate

companiesfrombankruptcyandgrantedcredittocertainsectorsofthemanufacturers.

Incontrast,theagriculturalsectorbecameaplatformtosustaintheindustrialization,it

was used to generate resources for welfare programs and protected industries.

President Perón lost the support from the landed elite6 as they feared the adopted

measureswouldbeadisadvantageoftheirbusinessduetothediversionofresources

totheindustrialsector.

6FamiliesthatconformedtheconcentrationoflandownershipinthePamparegion.

18

Atthebeginning,thepolicywasworkingandshowingresults,farmproduction

was exceeded by industrial production for the first time and industrial products

constituteda20%ofArgentineexports.Also,between1943and1948,realwagesfor

industrialskilledworkersroseby27%andforunskilledworkersby37%.(RafaelDiTella,

2001)

Itwasintheperiodfrom1949to1952whenthepicturegotdistorted.Inflation

rose over 30% and industrial output began to point to the decline of the economy

(RafaelDiTella,2001).ThePresidentrespondedwithausterityrestrictionssuchasthe

freezingofwages.Also,inordertocontinuewithhisindustrializationprocess,hehad

nooptionbuttostartattractingforeigninvestment.

Withinafewyearsaftertheelection,Peron’sgovernmentstartedtobemore

and more totalitarian. In 1953, the government began to imprison opponents and

censoredallmeansof theopposition, theyweresystematically terrorized.Education

tookabackseatanditsbudgetwasusedinpropagandaactivity.Anti-Peroniststerrorist

actsbegan,liketheattackthe15thofApril1953inthePlaceofMay.ATerroristattack

thatconsistedofthedetonationoftwobombswhilethepresidentwasgivingaspeech

nearthelocation.Inresponsetothebombs,Perónprovokedsupporterstoburndown

several buildings belonging to the opposition. In 1954, Perón approved a Law that

includedthedivorceandthisprovokedtheconfrontationwiththeCatholicChurchthat

hadactivelysupportedthePeronismuntilthatyear.

OnSeptember16,1955,thenavyrevoltedwiththesupportofarmybattalions

intheinterior.GeneralEduardoLonardiproclaimeda“LiberatingRevolution”.Amilitary

juntainBuenosAirestookcontrolofthegovernmentonSeptember18,andPerónfled

intoexile(until1973).Lonardiwasnominatedprovisionalpresident.

19

3.2.2. Importsubstitutionmodel:Secondsub-stage(1955-1976)

In this time span, and centered in the petrochemical and metal-mechanical

complexes,theindustryhaditsmostoutstandingperformancebecomingtheengineof

economicgrowth,employmentcreatorandaccumulatingcapital.Between1964and

1973, themanufacturing sector enjoyed a continuous growth, presenting a peak in

1969,wherethesectorhadanannualgrowthof11.55%.(TheWorldBankGroup)

Within this period, there was an entry of subsidiaries of transnational

corporations. Thesewere small investments, basically inmachinery and equipment,

aimed to produce the essential for the internal market. Also, there was a strong

oligopolisticstructureinthemainmanufacturingactivities.

Thesechangesgeneratedanacceleratedtechnologicaldevelopmentprocessbasedin

theincorporationofthetechnologiesfromdevelopedcountries;forexample,theFord

productionassemblylinewasadopted.

3.3. MilitarydictatorshipandtheThirdPhaseofIndustrialization (1976-1990)

In 1976 the armed forces tookover the government as inflation reached the

incrediblelevelof3,000%(RafaelDiTelaandIngridVogel,2004).Duringthisperiod,the

principal aim of the economic managers was to brake inflationary price increases,

improve industrial productivity, and promote competitive potential of theArgentine

exports.

In1977,theTariffReformPlanwasimplemented,whichbyeliminatingimport

barriers,soughttoenablethecountrytoentermorevigorouslyintoworldmarketswhile

introducinghealthyexternalcompetitiontodomesticproduction.

Butmilitary’smeasureswerenotveryeffectiveandleadtoa40%dropinrealwages

fromthepreviousfive-yearaveragewithoutappreciabledropininflationrate(RafaelDi

TelaandIngridVogel,2001).TheyalsoledtoadropintaxrevenuesandtheMilitary’s

impositionoftaxesonagriculturalsectortosupportthemanufacturingsector.

20

In1979,thegovernmentthenchangedtoafixedexchangerate.Severalwage,

pricecontrolandfiscalpoliciesaimedtocontrolinflationfailed.Importsincreasedand

drownedlocalindustriesthatwerelefttofail.Foreigncapitalstartedtorunoffandthe

Pesoexperiencedaseriesofdevaluations.Inthefollowing18months,theU.S.Dollar

wentup100%,therewasa20%averagemonthlyinflation,reducedactivity,realwage

decreases,drops in investmentandthefiscaldeficit reaching16%ofGNP. (RafaelDi

Tela,2001)

ThesurpriseinvasionoftheFalkland-MalvinasIslandbytheArgentinemilitaryin

1982gavewaytochaos.Foreigninvestorlostconfidenceinthecountryandstartedto

withdrawtheirfunds.Becauseofthecapitalflight,thegovernmentcouldnolongerpay

its external debt. This situation led to growing uncertainty that resulted in the

withdrawalofskilledworkersandcapitalfleeingthecountry.

In1986,giventhedifficultsituationfacingthecounty,JuanVitalSourrouille,Raúl

Alfonsín’s Minister of Economy, prepared an economic plan in which the central

objective was to develop the industry through a process of expansion and

manufacturingrestructuringbasedonthegrowthofexportsandtheinternalproductive

investment.Thegoaloftheprocesswasthetransformationoftheindustrialstructure

towardsamodelspecializedininternationaltrade,asinthepasttheexternalmarkets

weretosopthecontractionoflocaldemand.Vitalrecognizedthaninordertoachieve

its objectives it was indispensable to modernize the industry and incorporate new

technologies.

Hismainmeasureswere:

• Exportpromotion.

• Tariffprotectionandselectiveimportsubstitution.

• Industrialrestructuring.

• Industrialpromotionandregionaldevelopment.

• Technologicaldevelopment.

• Promotionofsmallandmedium-sizedenterprises.

21

3.4. Convertibilityand“De-industrialization”(1990-2002)

In1991,theConvertibilityPlanwaslaunched.Asanattempttocontrolinflation,

itpeggedthelocalcurrencyatafixedexchangerateof1totheU.S.dollar,atwhichthe

CentralBankwasobligatedtoconvertcurrency (itwillbemoredetailed furtheron).

Thesenewpoliciesachievedeconomicstabilitywithlowinflation,itfellfrom1,344%in

1990 to84% in1991,and to international levelsby1992. Foreign investmentswere

attractedproducingaGDPgrowthbut,incontrast,industrialparticipationrateinGDP

declined. For instance, between 1995 and 1999, while Argentine GDP increased an

82.55%, its industrial participation decreased from 21.29% to 19.2%, respectively.

Economic stability generatedanatmosphere in theArgentinepopulationofwelfare,

whichmanyArgentines interpretedas adisincentive towork,becauseof this,many

factoriesandindustrialestablishmentswereclosed.Industriesalsobrokebecauseofthe

cheapproductsthatwerebeingimportedfromChina.(RafaelDiTela,2001)

TheeconomicpolicyundertheConvertibilityplanbelievedontheself-regulation

ofthemarket.Accordingly,barrierstotradewereremoved(exporttaxes,importduties

andmostquantitativerestrictions)andthefreeflowofcross-bordercapitalleadtothe

openingoftheArgentineeconomy.Thegovernmentencouragedtheentryofforeign

firms into the market as it allowed free entry and exit of portfolio capital and

investments.

Foreigncompetition,aresultoftheindiscriminateopeningofimports,achange

inrelativepricesresultingfromtheapplicationof1to1parityagainstthedollarandthe

modificationsintariffsledtothedestructionoflargesectorsoftheindustrythatwere

notabletocompetewithimportprices,speciallythetextile.

TherapidpaceoftheConvertibilityPlancametoanendwiththeTequilacrisis7

thattookplaceinMexico,1995,andcausedmassivewithdrawalsofbankdeposits.Bank

7TheTequilacrisiswastriggeredbythelackofinternationalreservesinMexico.Thisledtothedevaluationofthepesothatcausedeffectssuchasinflation,highinterestrates,economicactivitycollapse,localandforeigncurrencydebt services increasedandbanks collapsed.Thepriceof thedollar increasednearly300% immediately, causingbankruptciesofthousandsofcompanies,unemploymentandmanydebtorswerepreventedfrompayingtheirdebts.

22

depositswhichhadgrownatanaverageannualrateof57%between1991and1994,

declinedatanannualrateof62%inthefirstthreemonthsof1995(MartinUribe,1996).

Bankshadtostopnewloansinordertofulfillitsdepositors’withdrawalsandentereda

liquiditycrisisthatledtoariseininterestrates.Argentinareceivedanemergencyloan

fromtheInternationalMonetaryFund(IMF)toputanendtothesituation.

In1999,FernandoDelaRúawontheelections.Hismandatewasmarkedbya

rapideconomicdeterioration.Unemployment,aresultofthedeindustrializationroseto

19% (La Nación, 1999), factories remained closed and companies continued to fail.

Starting in 2000, industrial activity began to fail and so did its contribution to the

country’sGDP.De laRúaresignedonDecember21,2001,and for the followingtwo

weeks,Argentinawasruledbysevendifferentpresidents. OnJanuay2002,Eduardo

DuhaldewaschosenPresidentandjustonedayafterhiselection,Argentinadeclaredits

defaultwhenitwasnotabletopayalira-denominatedbondofUS$28million.

3.5. Kirchnerism(2003-2015)

TheKirchnerismisaPeronistpoliticalmovement,foundedin2003,whichbrings

together themain ideological postulates embodied in the governments of President

NéstorKirchner(2003-2007)andCristinaFernándezdeKirchner(2007-2015).

3.5.1. PresidencyofNéstorKirchner(2003-2007)

Theperiodof2003-2007wasastageofgreatadvanceoftheArgentineeconomy,

recording positive rates of annual growth throughout the years. Productive

performancewasenergizedduetotheimprovementinprivatedomesticexpenditure

(consumptionandinvestment)andexports.

OnMay25,2003,PresidentNéstorKirchnertookoveraspresidentwhenthe

countrywas still suffering the consequences of a serious economic and social crisis

triggeredbythe2001default.Inthemiddleoftheyear,almost60%ofthepopulation

lived below the official poverty line, the unemployment rate stood at 17.4% and

23

production was paralyzed (The World Bank Group). Kirchner initiated a

governmentthathadasprotagonistthepublicsector.Positioninghimselfas“Manof

thePeople”,hetriedtomaintainpeacefulrelationswiththepoorestsectorsofsociety8.

WhenPresidentKirchnertooktheoffice,therichest10%ofthepopulationaccounted

for39.3%ofthenational income,andonly0.7%was lefttothepoorest10%.(Pierre

Salama,2012)

Bytheendof2003,theeconomicrecoverythatwasmeanttobeprogressive

turned into a boom,while economic analyst expected a growth of only 2% in 2003

(RafaelDiTelaandFernandaMiguel,2015),theeconomygrewat8.8%(TheWorldBank

Group).Thisoutstandingbehaviorwasduetotwocauses.Ontheonehand,thegrowth

ofcommodityprices,whoseindex9experiencedthefirstupwardtrendsincehittingits

lowestlevelinthesecondquarterof2002.Ontheotherhand,therestorationofpublic

confidence was very important. President Kirchner promoted people’s trust by

announcinga50%increaseintheminimumwage(paidbyboththeprivatesectorand

thegovernment)andbyreopeningthecasesagainstthepreviousmilitaryleaderwhich

had committed human right violations during their mandate. (Rafael Di Tela and

FernandaMiguel,2015).

In2004,Argentinakeptongrowingandfiscalrevenuescontinuedtoincrease.

Thegovernmentwasbeingmanagedeffectivelyandachievedabudgetsurplus from

2.3%ofGDPin2003to3.9%in2004.Thegovernmentincreasedexporttaxes,notonly

tobenefit from its collection,but to keep inflation stable. Lowering thenetpriceof

exports wouldmake goodsmore accessible to domestic buyers. Taxes of unrefined

petroleumwere set at 25%, grain and soy items at 20% andmilk products at 15%

amongstothers.(RafaelDiTelaandFernandaMiguel,2015)

8Forinstance,hecontinuedwithDuhalde’sHeadsofHouseholdprogram,“Elplandejefesyjefasdehogar”,bywhichaneconomichelpwasgrantedtofamilieswithakidunder18yearsoldorakidwithadisability.9IndexofCommodityprices:anindexthattracksabasketofcommoditiestomeasuretheirperformance.Inthiscase,the index includes thepricesof themost importantcommodities forArgentineexports:maize,wheat, soybeans,soybeanoil,soybeanmeal,beef,crudeoil,metals,primaryaluminumandcopper.

24

OnNovember5,2005,PresidentNéstorKirchnerparticipatedintherefusalto

the Free TradeArea of theAmericas (FTAA), led byU.S. PresidentGeorgeW. Bush,

knownas“NototheFTAA”.TheFTAAproposedthecreationofafreetradezonefrom

Alaska to Tierra del Fuego, with the elimination of tariff barriers, liberalization of

services,intra-zoneforeigninvestmentprotectionagreements,andlimitationofstate

capacitytoguidepublicprocurement.Itwouldhavebeenthelargestfreetradeareain

theworld,withamarketofnearly800millionpeople,withaveryfavorableframework

for theUnitedStates,whichwas thecountrypushing for its formation.Someof the

reasons for Nestor’s opposition and that affected the manufacturing sector are as

follows:

• Theeffectsofthefreeimportationofgoodsthreatentocondemnthelocal

industrial sector to a complete disappearance, thus deepening the high

unemploymentratesthathadalreadypunishedthecountryyearsbefore.

• Theeliminationoftariffbarriers,theprohibitionofanystatepolicyaimedat

favoringtheuseofnationalgoodsorprivileginginanywaylocalorsectorial

development, among other things, threaten abolish medium and small

companiesaswellastopromotethedeindustrializationoftheeconomy.

Because in the years prior to 2005 the economy had experienced a very

acceleratedgrowthrate,almosteliminatingthedifferencebetweencapacityandusage

(the “output gap”)10, Argentina’s inflation accelerated and by the end of December

2005,ithadreached11%.(TheWorldBankGroup)

During 2006 and 2007, growth in the manufacturing sector continued,

presentinganannualgrowthof9.1%in2006andof7.53%in2007.(TheWorldBank

Group)

In 2007, Nestor contributed to the Latin American unity and integration by

promoting the creation of the Union of South American Nations (UNASUR). It is an

internationalorganizationthataimstobuildaSouthAmericanidentityandcitizenship,

10 Difference between the actual output of an economy and the maximum potential output of the economy,expressedasapercentageofGrossDomesticProduct.

25

aswell as to develop an integrated regional space. It is formed by the twelve

independentstatesofSouthAmerica11.

3.5.2. PresidencyofCristinaFernándezdeKirchner(2007-2015)

At the end of his term,Nestor Kirchnerwas a respectedman, known for his

commitmenttoArgentinaandhisactions,whichhadmanagedtogetArgentinaforward.

Because the Argentine Constitution does not allow a president to return to being a

candidateifhehasalreadyhadthemandatefortwoconsecutiveterms12,theKirchners

decidedforCristinatoruntopreservetheabilityofNestortorunagaininthefuture

withoutrestriction.Thus,theturnofCristinaFernandezdeKirchnerarrivedonOctober

28,2007,afterthefouryearsofmandateofherhusband.

OneofthefirstmeasuresofCristinaKirchnerwasthecreationoftheMinistryof

Science,TechnologyandProductiveInnovation.ItwascreatedinDecember2007and

itsmissionwastoguidescience, technologyand innovationtowardsstrengtheninga

new production model that generated greater social inclusion and improved the

competitivenessofArgentinianeconomy.

Thegovernmentwassoonshakenbymajorcommotions.First,theconflictwith

thecountrysidethattookplaceinMarch2008andthathasalreadybeenexplainedin

the2.1.1Agriculturesector.Second,theinternationalcrisisinthesecondhalfof2008

andmostof200913.

ThecrisisbegantoimpactArgentinaataverybadmoment,duetothesevere

droughtthataffectedthecountrywithproductionlossesinkeyexportsectors14andto

the internal instabilityprovokedby theprevious stated conflictbetweenagricultural

11Brazil,Argentina,Colombia,Venezuela,Chile,Perú,Ecuador,Uruguay,Bolivia,Paraguay,SurinamandGuyana.12However,ifonlyoneisserved,hecanoptfortheofficeasmanytimesashewants13Thefinancialcrisisof2008wasdirectlytriggeredbythecollapseofthehousingbubbleintheUnitedStatesin2006,whichtriggeredtheso-calledsubprimemortgagecrisis inOctober2007.Therepercussionsofthemortgagecrisisbegan to manifest extremely seriously since early 2008, first infecting the US financial system and then theinternationalfinancialsystem,resultinginadeepliquiditycrisis,andindirectlycausingothereconomicphenomenasuch thestockmarketcrashof January2008and theglobal stockmarketcrashofOctober2008and,overall,aninternationaleconomiccrisis.14Explainedin2.1.1Agriculturesector.

26

basedregionsversusCristinaKirchner’sgovernment. Intheseyears,Argentinacame

back to liveon the savingsand theexternalproduction. From there, it continued to

deepen,becomingnotonlyaflightofcapital,whichwouldriseto$10.9billion(Lucía

Gallo,2010),butagreatdifficultyinimportingallthenecessaryproducts.Forexample,

merchandiseimportsdeclinedfrom$57.46billionto$38.79billionin2008and2009,

respectively.(TheWorldBankGroup)

Giventhenecessitytoaddressthecrisisinsuchconditions,Argentinadeveloped

an“AnticrisisPlan”inNovember2008.Theplanwasbasedonaseriesoffiscalmeasures

to promote investment and employment through public spending. For example,

benefits for those who brought their capital from abroad to invest locally in

infrastructureortheambitious$21billionpublicworksplantosustaintheeconomyand

doublethenumberofjobsinthesector.However,thelackofconsumerconfidencelead

to a decrease in domestic spending 57.48% of GDP (TheWorld BankGroup),which

normallyaccountedformorethan65%ofGDP.Thisraiseddoubtsabouttheplanas

somebelievedthattheproblemwasnotthepublicspendingbuttheprivatespending’s

contraction.Argentinawasfacingasituationinwhichmostoftheeconomiststartedto

think that zero growth was an optimistic number of growth rate given the

circumstances.(DamiánWroclavsky,2008)

Anotherexampleofmeasurewasthe“ArgentinaTrabaja”program,launchedin

2009. Itwascreatedunder themotto“EsArgentina trabaja,noArgentinadescansa”

(Argentinaworks, Itdoesnot rest)and itwasaplantogenerateemployment in the

more depressed neighborhoods and to carry out basic infrastructure works in

municipalities. The program involved approximately 150,000 workers. (Sandra

Guimenez,2011)

Thankstomixofthenewpoliciesandinstitutions,Argentinagraduallyovercame

thecrisisincreasingthetotalGDPby27%in2009of$334.49billionto$425.92billionin

2010,accordingtoTheWorldBankGroup.

27

InOctober2010NéstorKirchnerdiedfromaheartattackandthecouple’splanto

take turns faded away. Presidential election took place in December 2010 and the

country, supporting the grieving widow, chose Cristina Fernández again as their

President.

Theyears2010and2011presentedveryalikesituationsineconomicterms.After

therecessionin2009,Argentinagrewsimilarlyin2010and2011,withanincreaseof

27%and26%respectively(increasecalculatedwithdataprovidedbyTheWorldBank

Data). Most manufacturing sectors regained pre-crisis activity levels. Basic metal

manufacturingexpanded22%andtextileproduction,15%(CEPAL,2011). Incontrast,

petroleumrefiningandpaperandpaperboardwereexamplesofsegmentsofindustry

thatdidnotexperiencegrowthatallorfailedtorecoverpre-crisislevels.

Just a week after the President was reelected, she announced a series of

currencycontrolsaimedtostemcapital flightandpreserve theCentralBank’sdollar

reserves. The established currency controls limited the power to buy or sell foreign

currencies, especially American dollars. This drove many Argentines to keep their

savings indollarsasahedgeagainst inflation.Becausetherulesseemedunclearand

opaqueandtheirimplantationwasonerous,manycurrency-exchangehousesclosed.

In June2010, thePresident announced theBicentennial Productive Financing

Program,withtheaimoffinancingproductiveinvestmentsthatgeneratedemployment,

substituting imports, encouraging regional development and increasing exports and

competitiveness.Sheensuredthat10,000millionpesoswouldbeinvestedforSMEsand

largecompanies.(Télam,2014)

In October 2011, access to dollars became more complicated due to the

introductionofmorerestrictionsbythegovernment.ThePresidentimplementedthe

“CepoCambiario”inNovember2011,ameasurethatrestrictedthesaleofdollarsinthe

country.Also,purchasesmadeabroadwithcreditcardspayedanadditional15%.These

restrictionsalsohadanimpactontherealstatesector,wheretransactionsdeclineda

34%inthefirstsevenmonthsof2013.(RafaelDiTelaandFernandaMiguel,2015)

28

Commodity prices experienced a drop during 2014 and consequently,

Argentina’sincomefromexportswasreducedby$4.5billionrelativeto2013(RafaelDi

TelaandFernandaMiguel,2015).Modificationsregarding lawsof industrialproducts

also took place. Some sectors experienced advantageous reforms, such as the

automotiveindustrieswhosequotawasincreased.Incontrast,othersectorswereless

favored.However,whattheseindustrieshadincommonwasthegovernmentbeganto

requirethemtoreportexcessiveinformationabouttheirtransactions.Now,companies

notonlyhadtoprovideannualprojectionsindollarsofexportsandimports,butalso

hadtopresentinformationonsales,financing,investmentprojectsandprofileofthe

companyandtheworkforce,amongothers.Thisrequirementincreasedpressurefrom

thegovernmenttothecompanies.

29

4. BANKINGANDFINANCE Before explaining the main events that marked the history of banking and

financeinArgentina,itisimportanttoelaborateontheoilcrisisthattookplacein1973

and consequences of it in the development of Argentina's financial sector and its

externaldebt.

Asitsnamesuggests,theoilcrisisof1973beganonOctober16,1973,following

the decision of theOPEC andOrganization of Arab Petroleum Exporting Countries15

(OAPEC)toembargooilexportstocountriesthathadsupportedIsraelduringtheYom

KippurwarbetweenIsraelagainstSyriaandEgypt.TheembargoincludedtheUnited

States and its Western European allies, industrialized countries that were heavily

dependentonoilexportfromAraboilproducers.OPECmembersalsobeganaseriesof

productioncutsthatledtoanincreaseoftheworldpriceofoil.In1973,thepriceofthe

barrel increasedfrom$3.5to$5.5 (MiguelGarcíaandGerardoRonquillo,2005),and

reached$11.56abarrel inJanuary1974(MichaelCorbett,2013). Theincreaseofoil

prices generated inflationary spiral and lower production in oil importing countries.

Most of the importing countries reacted with austerity policies, reducing public

spendingandfomentingsavings.Incontrast,countriesoftheMiddleEasttookcontrol

ofacommodityandsoonbegan toaccumulateanenormoushoardofcash that the

pressreferredtoaspetrodollars.

In March 1974, the embargo was lifted but, as it will be explained, the

consequences of the crisis spread throughout the world until 1980s. Although the

embargowasnotdirectlyappliedtoArgentina,duetoitsrelationshipofdependence

withtheaffectedcountries,itwasalsoinfluenced.

15Atthetime,theOAPECincludedSaudiArabia,Algeria,Bahrain,Egypt,Syria,Tunisia,UnitedArabEmirates,Iraq,Kuwait,LibyaandQatar.

30

4.1. Themilitarydictatorship(1976-1983)

Argentina’sfinancialsystemwasexposedtonumerouschangesduringthe1976-

1983period. Theeconomy’sunevenpatternsof growthand the frequent changeof

governments gave rise to pronounced shifts in financial policy. During this period,

Argentinahadsevendifferentministersofeconomy.

As it has previously been mentioned in other Sections, beginning in 1976

Argentinawasruledbyamilitarydictatorship.Thecoup,thattookplaceinMarch24,

1976,wasaresponsetotheeconomicchaosthatArgentinawasexperiencingtheprior

year,1975.Thecountrywasmarkedbyapublicdeficitthatreacheda17%ofitstotal

GDP,therewasacriticalsituationinitsbalanceofpayments,anexternaldebtof$10

billionandanannualinflationthatexceeded400%(NoelMaurerandAldoMusacchio,

2006).

To end this situation, especially the high inflation, the military left the

managementoftheeconomyinthehandsofAlfredoMartínezdeHoz,whoservedas

MinisterofEconomyuntilMarch29,1981.

4.1.1. TheFinancialReformof1977

MartínezdeHozandhisteamthoughtthatuntilthenthegovernmenthadhad

a very interventionist behavior: regulating economic activities, arbitrating labor

relations,favoringthebusinesssectorthroughpreferentialtariffsandsubsidies…They

blamedthistypeofpracticeofhavingcausedsuchahighinflation.Hencetheyadopted

thepolitical-economictheoryoftheneo-liberalism,whichwasbasedonthelimitation

ofthestate’sinterventioninlegalandeconomicmatters.

Accordingly,theyannouncedtheFinancialReformof1977,apolicyoffinancial

liberalizationmore focused on deregulating than regulating. Its aimwas to create a

capital market that would appeal to foreign investors to reactivate the Argentine

31

economy.Also,MartínezdeHozthoughtthatincreasedexposuretodomesticand

foreigncompetitioncouldfostertheoverallefficiencyoftheeconomy.

Measuresofthisreformwere:

• Interest rates were freed and left to be defined through supply and

demand,resultinginhighinterestrates,

• controlofpublicexpenditure,

• Freezingofworkers’wages,

• restrictionsoninternationalcapitalmovementswereeliminated,

• and financial institutions were given complete freedom to expand

geographicallyandopennewbranches.

TheReform1977wantedtostopmanufacturingfrombeingthesolecoreactivity

oftheeconomyand,instead,triedtofacilitatetheshiftfromindustrytofinance.

Indeed,MartínezdeHoz’sreformwasreactivatingtheArgentineeconomy.That

year,totalGDPhadanannualgrowthof6.934%(TheWorldBankGroup)andexports

experiencedagrowthof50.7%,reaching$5,610million,accordingtotheBCRA.This

favorableevolutioninexportswasbasicallycausedbythechangeintradepolicyasthe

disincentivesforexportsweretakenout.Incontrast,importsremainedrelativelyflatat

$4,100million.Thus,thebalanceofpaymentsreactedinafavorableway,closingthe

yearwithasurplusof$1,510million(GuillermoO’Donnel,2008).

Atthesametime,theworldwasundergoingtheconsequencesoftheoilcrisis

causedbythepreviouslymentionedconflictbetweentheoil-exportingcountriesand

theUnitedStatesanditsallies.Bythistimetheembargohadalreadybeenliftedand

theincreaseinthepriceoftheoilbarrelscontinued.In1977,thepriceofabarrelof

crudewasof$14.40(TimMcMahon,2015).Thus,oil-exportingcountrieshadsignificant

surplusesofpetrodollars(itiscalculatedthatby1980thesurpluswasofapproximately

$90billion (PierreTerzian,2017)) thatwerechanneledby thebanks tooil-importing

countries,especiallytobanksintheUnitedStates,JapanandEurope.MartínezdeHoz’s

model of open economy encouraged the public and the private sectors to borrow

32

heavily in these international financial markets. Moreover, foreign currency-

denominatedloanswereextremelyattractiveastheycouldbeacquiredwithaverylow

interestrate,ofapproximately4%.

The public sector used these loans to make adjustments in the balance of

paymentsandincreasethereservesoftheCentralBank,whichattheendoftheyear

reached$4.048million,aconsiderablylargeramountthanthe$1,812millionattheend

of1976 (GuillermoO’Donnel,2008).Theeconomywasexpandedwithexternal funds

coupledwithlargepublicexpenditures.Thetotalpublicdebtin1978equaled$8,127

million.(MarioRapoport,2017)

Asfortheprivatesector,themoneyobtainedfromitsdebtoverseaswasnotall

used to fund production expansion. A large portion was directed to financial

speculation.Companiespreferredtoborrowmoneyabroadatalowinterestrateand

theninvestinpesosinArgentinawherelocalinterestrateswereexaggeratedlyhigh.In

October1977, they reached135% (RioNegroDiary).At theendof theyear,private

externaldebtof$3,635million.(MarioRapoport,2017).

ThemassiveindebtednessoftheArgentinestatewasjustifiedbytheeconomic

leadersofthedictatorshipandbytheIMF,asawaytoincreasetheirreservesinforeign

currencytosupportapolicyofeconomicopening.TheIMF'ssupportallowedArgentina

toimproveitsinternationalcredibilityintheeyesofthemainindustrializedcountries,

especiallytheUnitedStates.

DespitealltheachievementstheReformhad,itdidnotmeetitsmainobjective,

whichwasreducingtheinflationtonormallevels.Althoughinflationratedecreasedto

176%in1977from443.97%incomparisontothepreviousyear, itwasstillhighand

sporadic.(TheWorldBankGroup)

33

4.1.2. LaTablitaCambiaria,1978

MartínezdeHoz’scommitmenttostabilizetheinflationwasverystrongand,in

1978, he did another attempt and proposed a measure to solve the problem, the

“Tablita”.Itconsistedofaprogrammeddevaluationofthepesobasedonaconversion

table(“tablita”)thattendedtoastableexchangerateinthenearfuture,itcontained

thedevaluationsfromJanuary,1978toAugust,1979.

What Martínez de Hoz did not expect was the speculative capitals taking

advantage of the known exchange rates. What happened was that, once again,

companiesmademoney from the difference in the interest rates. Foreign currency

debtswereconvertedintopesostobedepositedintheshortterminArgentina.Once

theinteresthadbeenobtained,andthankstotheovervaluationofthecurrency,the

conversiontodollarswasthenmadetotransferthefunds.Thedifferencewasthat,this

time,thankstothe“Tablita”,companiesknewwhenthenextdevaluationwasgoingto

happenandofhowmuchitwasgoingtobe,sotheytooktheobtainedsurplusabroad

beforethenewdevaluationoccurred.Thisformofspeculationreceivedthenameofthe

“bicicleta financiera” (“financialbicycle”)and theperiodwasknownas“platadulce”

(“sweetmoney”),referringtotheeasywayofmakingmoney.Themotto“demedos”

(“givemetwo”)becametypicalofthetime.Itwasthephraseusedbythemiddle-class

Argentineswhentheybegantotravelabroadandstartedbuyingthingsinpairs.

All in all, the implementation of thismeasure caused financial savings being

primarilyintheformofshort-termdepositswithamaturityof30daysorless,private

sectorfirmsbecominghighlyindebtedintermsofbothpesoandtheUnitedStatesdollar

andaconstantleakageofcapital.Itonlymanagedtodecreaseinflationbylessthanten

percent, but annual inflationwas still higher than a 100%. Also, therewas shocking

increaseinprivateexternaldebtof110%,reaching$9,074millionin1979.Publicdebt

alsoincreasedbutinamoremoderateway;itgrewnearlya20%(GuillermoO’Donnel,

2008).

34

In 1979, once the eightmonths of the “Tablita” were over, the government

shiftedtoafixednominalexchangerateaswellasintroducedvariousfiscalpoliciesand

wage controlsdesigned to contain inflation that failed. Thus, the real exchange rate

appreciatedrapidlyappreciatedandleftthepesoseriouslyovervalued.Inconsequence,

imports increased and local industries were left to fail. The situation became

unsustainable.

4.2. FromtheMilitarydictatorshiptoAlfonsín

The late 1970s and early 1980s was a difficult period for the international

financialmarkets.Realinterestrateswerehighandmostindustrialcountrieswerein

deeprecessions.IntheUnitedStates,theFederalReserveincreasedtheinterestrates

InternationalcreditbecameexpensiveandscarceforArgentina,making itdifficultto

obtainfundsandfacingthepaymentofhigherinterests.Thus,capitalflightincreased,

andforeignreservesdecreasedbymorethan$2billion(RafaelDiTelaandIngridVogel,

2001).

Roberto Eduardo Viola became president on March 29, 1981. Under his

presidency,therewerefiveMinistersofEconomywasdistributedasVioladidnotwant

to put someone powerful in charge of that portfolio in order to avoid presidential

authoritybeingquestionedoreroded.Ofthefivemenincharge,LorenzoSigautwasthe

one who stood out. On April 1, 1981, as an incentive to agricultural and industrial

productionand todiscourage speculativemovementsof capital, Sigautannounceda

30%devaluationofthepesoagainstthedollar(KlausFriedrichVeigel,2009).Healso

triedtoreactivatethepublicfinancebystablishingexporttaxes,raisingpublictariffs,

andfreezingthesalariesofthepublicemployees.Atthebeginning,hisprogramseemed

tobeeffectiveasattheendofAprilreserveshadrisenbymorethan$1.5billion(Klaus

FriedrichVeigel,2009).However,theinflationcontinuedat104.48%.(TheWorldBank

Group)

35

The Argentine military embarked upon a surprise invasion of the Falkland-

MalvinasIslandsonApril2,1982,anarmedconflictbetweentheArgentineRepublicand

theGreatBritain.Itdidnotlastlong,byJune14,1982,theU.K.hadquicklyrepelledthe

assault.However, it disturbed theArgentine economyas foreign investors lost even

more confidence in the country and withdrew their funds. Consequently, the

governmenthadtosuspendpaymentsonitsexternaldebtandtheprivateforeigndebt

ranoutofexternalsourceofrefinancing.Bankruptcyoflargepartsoftheprivatesector

wasjustaroundthecorner.

TheadministrationthattookoverinJune1982,underthemandateofReynaldo

Benito Bignone, found the Argentine economy at the edge of the abyss. A severe

financialandforeignexchangecrisisabouttoexplode,agrowingpublicsectordeficit

thatcauseda rising inflationandtheconsequencesof theFalkland-Malvinas Islands’

war.Toaddressthesituation,thethenPresidentoftheCentralBank,DomingCavallo,

introduced a financial reform that refinanced the peso indebtedness of the private

sectoronalong-termbasisatreducedinterestrates,promotedmedium-termandlong-

termsavings,andattemptedtoimprovetheoverallefficiencyofthebankingsystem.

Also,thegovernmentincreasedthelegalreserverequirementondepositsfrom15.5%

to100%inorderto improvetheCentralbankcontroloverthemoneysupplyandto

financetheprivatesectordebt.(BernhardFischerandPeterTrapp,1985)

If1982hadnotyetbeenacomplicatedyear,inAugustbegantheso-called“Lost

decade”forLatinAmerica’sdevelopment,themosttraumaticeconomicexperiencethat

Latin America has undergone. On that month, Mexico declared the temporary

moratorium on its foreign debt. At the same time, several countries thatwere also

experiencing difficulties, which were expressed in arrears in payments andmassive

outflowsof financial resources,weresubjecttostrongtensionsascommercialbanks

reactedtoMexico’sdefaultbyreducingnewloanstoLatinAmerica.Becausemosttheir

loanswereshort-term,thesecountriesstruggledtorefinancetheirdebtandsoonhad

to suspend their payments threatening the solvency of major international banks,

especiallyAmericanbanks.ThisisthecaseofBrazilandArgentina.Attheendof1982,

36

Argentina’sexternaldebttotaled$40billion.(RafaelDiTela,TarunKhanaandHuwPill,

2003).

4.3. RaúlAlfonsín’sfinancialpolicy:TheAustralPlan(1983-1989)

Following thedisastrousdefeat in theMalvinasWar, themilitary junta called

electionsandRaúlAlfonsínbecamepresidentonDecember10,1983.Bythen,Argentina

wasfacingaseriesdifficultieswere:

• Inflation,whichwasofapproximately343.81%(TheWorldBankGroup),

• Thepublicdebt,whichwasof$45,079millions(CarlosAlfredoRodríguez,

1989).

• a fiscal deficit that represented the 15% of the country’s total GDP

(BernhardFischerandPeterTrapp,1985).

Asidefrominternaldifficultiestheexternalfactorsdidnothelp. Interestrates

were high and the price of Argentine export products decreased, whichmeant less

revenue.

Thenewauthoritiesmaintainedthesystemof regulatedand indexed interest

rates on medium-term and long-term deposits. In order to prevent small financial

institutionsandthose in lessdevelopedregionsfromdefaulting,Alfonsínestablished

lessrigidlendinglimitsandloweredthelegalreserverequirement.

InJune1985,thegovernmentannouncedtheAustralPlan,namedafterthenew

currency it instituted and that became the legal tender of the country. One Austral

equaled1,000ArgentinePesos.Themainobjectiveoftheplanwastocurbtherising

inflationofthe1980s,whichhadclimbedtouncontrollablelevels,reachinga672.18%

in1985,asestimatedbytheWorldBankGroup.Theplaninvolvedstructuralreforms

(cutting subsidies and deregulating and privatizing state industries), economic

liberalizationtocontrolinflationaryexpectations(reductioninprotectionistpoliciesand

freezingwages)anddebtrenegotiations.Theprogramwas initiallyverysuccessful in

stoppinginflation.Inflationfellfrom672.18%in1985to90.1%in1986.Unfortunately,

37

asmoststabilizationefforts inArgentina, theAustralplanalsofailed.Afterone

yearofrelativestability,inflationroseagain,reachinghyperinflationlevelsof3,079.81%

in1989.(TheWorldBankGroup)

4.4. TheConvertibilityPlan(1990-2001)

Afterseveralyearsofeconomicandfinancialdifficulties,thefirstofApril1991,

theConvertibilityPlanwasenacted. Itreferstothevariouseconomicmeasuresthat

weretakenbytheMinistryofEconomyofthemoment,DomingoCavallo,duringthe

presidency of Carlos Saúl Menem, who became president on July 1989. The

ConvertibilityPlan’smainobjectivewastofightinflation,butitwasalsoconcernedfree-

marketreformslikeeliminationofwageandpricecontrolsandtradeliberalization.

Themainmeasure,originofitsname,fixedthepeso’sexchangerateatparwith

theU.S.dollar,inthiswaytheconversionbetweenthetwocurrencieswasfree.Trying

toavoidinflationfromincreasing,theplanmadeitillegalforthecentralbanktoincrease

thenation’smonetarybaseorissuecreditunlessithadbackinginU.S.dollars.Thus,the

Statecouldnotbe financedbythecentralbankanymore, ithadto look forexternal

capital.AspartoftheConvertibilityplan,legalreserverequirementsofbankdepositsin

localcurrencywerereduced,whilethosedepositsinforeigncurrencywereincreased,

tryingtostimulatetransactionsinpesosinsteadofcurrencies.

Withthissystem,moneysupplybecameanexogenousvariable,whichmeans

thattheincreaseinthemonetarybasewassubjecttoforeigncurrencyinflows,itcould

notbecontrolledbyeconomicpolicy.Inthiscontext,thepesowastransformedintoa

voucher for a dollar, appliedwithin national borders, acting exclusively as a unit of

account.Theotherfunctionsofmoneyweresatisfiedbythedollar,asitwasalsomade

legaltender.

Inadditiontothismajormonetaryoverhaul,thegovernmentcarriedoutalarge

numberofprivatizations.Between1991and1994,about90%ofallstatecompanies

38

wereprivatized(RafaelDiTelaandFernandaMiguel,2015).Privatizationswereaway

to balance the budget as public enterprises were generally losing money and its

privatization entailed reductionof expenditure and generationof funds. In addition,

buyershadthepossibilitytopaythroughdebtsecurities,whichreducedtheexternal

publicdebtandwithit,futureinterests.

The problem of the Convertibility Plan was that, as it has already been

mentioned,moneytocovertheimbalancescouldnotbeissued.Thus,thedeficitledto

thetakingofnewloans,whichimpliedhigherinterestratesand,consequently,larger

deficits.OnApril7,1992,ArgentinajoinedtheBradyPlan,whichwasastrategyaimed

to restructure the debt incurred by developing countries with commercial banks,

especially in the context of the Latin American debt crisis. The plan allowed the

restructuring of the debt with private banks to 15 years for interest arrears (about

$8,300million)and30yearsforprincipal(about$20billion).Theserestructuringswere

collateralizedbyzerocouponU.S.Treasurybondsthatmatchedtheprincipalmaturities

ofthegovernmentdebt.

Overall,duringitsfirstyearsofimplementation,theplanseemedtoachieveits

immediateobjectives.Theeconomyseemedtorecoverata rapidspace. (TheWorld

Bankdata)

• TotalGDPincreasedfrom$189.72billionin1991to$257.44billionin1994,

anincreaseof36%.

• Duringthesameperiod,inflationdecreasedfrom171.67%to4.18%.

• ForeignDirectInvestment(FDI)in1990wasofapproximately$35millionand

in1994itreachedapproximately$1,01billions.Itreachedlevelshigherthan

thoseof the restof LatinAmericaandmost countries inemergingworld.

(IndexMundi)

39

4.4.1. FirstevidenceoftheweaknessesoftheConvertibilityPlan

As the Argentine economy depended somuch on external capital, problems

begantoarisewhentheinternationalcontextbecamemoreunfavorable.Thefirstcrisis

that hit the Convertibility Plan was the Mexican financial crisis, also known as the

“TequilaCrisis”.OnDecember1994,theMexicanCentralbankranoutofdollarsand

was force to float theexchange rate. Thepesodevaluated its value, fromabout5.3

pesosperdollartoover10pesosperdollarbetweenDecember1994andNovember

1995 (Also Musacchio, 2012). Foreign investors, anticipating further currency

devaluations, began to withdraw capital from Mexican investments. To discourage

capital flight, the Mexican central bank increased interest rates but only ended

accelerating the collapse of the economy. The central bank could notmeet its debt

obligationsandletthegovernmentfacinganimminentsovereigndefault.

As Argentina was seen as an emerging country similar toMexico, inevitable

distrustwasalsogenerated.Thecrisis causedamassive reversionof capital flows,a

sharpriseininterestrates,acollapseofthestockmarketandasacrificeofreservesin

the attempt of saving several financial entities from bankruptcy. As previously

explained,becausebanksdidnothaveaccesstoemergencyfundsfromtheCentralBank

anymore,thecapitalflightresultedinacrisisofilliquidity.AloanfromtheIMF,forwhich

Argentinareceivedaccesstocreditsfor$7billion,putanendtotherun.(JavierArnaudo,

LuisQuerolandGustavoPérez,2003)

OnMay14,1995,Menemwasreelectedandannouncedarestructurationofthe

nationalfinancialsystem,focusedonaconcentrationandanincreaseinbanks’foreign-

ownership.Infact,9ofthe10biggestbanksinArgentinaweretakenoverbyforeign

banks.

Duringthe1990sthreemoreexternalshocksoutlinedbelowtookplaceandonce

more, they encouraged investors to distrust Argentina’s ability to overcome the

recessiveperiods.Historyrepeateditself.Capitaloutflowsledtohigherinterestrates

40

andmoreprogressiveindebtednesswhoseperversedynamiceventuallyledtodefault

inDecember2001.

• TheAsianCrisisof1997.AperiodoffinancialdifficultythatgrippedAsia

andraisedfearsofaglobaleconomicdisasterduetofinancialcontagion.

ItstartedonJuly2,1997,withthedevaluationoftheThaicurrency.Due

toadominoeffect,therewerenumerousdevaluationsinothernearby

countrieslikethePhilippinesandMalaysia.Oneoftheconsequenceswas

thatinternationalinvestorswerereluctanttolendmoneytodeveloping

countries.Also, therewasa reduction in thepriceofoil thatcauseda

financialhardshipinOPECmembercountriesandotheroilexporters.

• TheRussianDefaultof1998.Itwasexacerbatedbythedeclineinworld

commoditypricesduetotheAsianCrisisof1997.OilwasoneofRussia’s

resourceto increasethegovernment’srevenueanditsdeepfall inthe

pricehadsevereconsequences.

• Brazil’s currency devaluation in 1999. Russia’s economic crisis crossed

landand sea to contaminateBrazil. To try to stop themassive capital

flight,therewereaseriesofmonetarypoliciesincludinginterestrates’

increase.AsofSeptember1998,reserveshadfallenbymorethan$50

billion.Thegovernmentdevaluatedthecurrency,theReal,arounda30%

inrelationtotheU.S.Dollartocurbtheexitofreserves,attractcapital

andincreasenationalexports.(LeonardoLanotti,2010).

AfterMenem’spresidency,in1999FernándoDelaRúabecamePresident.Once

heandhisteamgottotheoffice,theyfoundtheeconomicsituationworsethanthey

expected.Foreigndebtreachedanexplosivefigureof$144,657million,equivalentto

almost52%ofGDP,whichwasof$279,511million.However,theydecidedtocontinue

withtheconvertibility.(LaNación,2000)

DelaRúa’seconomicteambelievedthatthepreviousfiscalmismanagementwas

thecauseofthecountry’seconomicproblemsandthattorestoreeconomicstabilization

he had to address the public-sector deficit. Therefore, in 2000, he implemented an

increaseoftaxes,knownwasthe“Impuestazo”(“bigtax”):thenon-taxableminimum

41

incomewasloweredfrom4,800pesosto4,020pesos(LaNación,2006).Also,on

May29,2000,thegovernmentinstatedmeasurestocut$1billioninpublicspending

(RafaelDiTelaandFernandaMiguel,2015).Forexample,statesalariesweredecreased.

TheadoptedreformsduringhispresidencyonlyaggravatedthesituationasArgentines

hadlessdisposableincometospend,factthatdelayedtheeconomicrecovery.Alotof

proteststookplace.

Neartheendoftheyear,inDecember2000,DelaRúa,hisMinisterofeconomy,

JoséLuisMachinea,andinternationalanddomesticfinancialinstitutionsnegotiateda

$40billionloanpackage(RafaelDiTelaandFernandaMiguel,2015).Thegovernment

agreed to use this money to pay off debts and at the same time boost investor

confidence.Thiswouldreducecountryriskand,consequently,lowercostoffinancing

fortheGovernmentandtheprivatesector.Theloanreceivedthenameofthe“blindaje”

which,according to thedictionaryof theSpanishRoyalAcademy,means“toprotect

externallywithvariousmaterials,especiallywithmetalplates,thingsorplacesagainst

theeffectsofbullets,fire,etc.”.

The new targets exceeded the governments capabilities and in early 2001, it

became apparent that the operation was far from being productive. It increased

mistrust, themeasures deepened recession and the resourceswere directed to the

capitalflight.InFebruary2001,Argentinaswapped$4billioninbondsthatweredueto

maturesoonforlonger-termbonds.(RafaelDiTelaandFernandaMiguel,2015)

4.4.2. CavalloasMinisterofEconomy

InMarch 2000, therewas a strong rise of the country’s risk premium,which

surpassed1,000basispoints,afallininternationalreservesby$3.2billionandaleakage

of deposits by$4.4billion (Enrique Szewach, 2001). In this context,MinisterCavallo

assumed the economic lead and quickly adopted emergency measures. The most

importantonesweretheapprovalofataxonfinancialtransactionsandtheso-called

CompetitivenessLaw.Theformertaxedthemovementsincurrentbankaccountsand

checkingdepositsinsavingbanks.TheCompetitivenessLawconsistedofadelegation

42

of powers from the Congress to the Executive Branch. But it explicitly excluded the

possibilityofreducingpublicwagesandpensionsandtheprivatizationofcompaniesor

stateentities.

Despite these attempts to clean up image of Argentina, the perception of

international financial agents was still that the country was not ready to meet its

financial commitments in the future. The high external indebtedness, the low

competitivenessandthestrongfiscalimbalancewerethemainargumentsused.

Inthesecircumstances,thegovernmentannounced,atthebeginningofJune2001,a

“Megacanje”(“Megaswap”),whichextendedthematuritiesof$30billionindebtbut

atahigherrateofinterest,around15%peryear(RafaelDiTelaandFernandaMiguel,

2015). The amountwas significant and removed the risk of default in the short and

medium term. However, in the longer term the problem of indebtedness was

aggravated. TheArgentine economyhad to find a pathof growth that allowed it to

generate sufficient resourcesanddemonstrate that it could recover its financial and

fiscalsolvency.

Thegovernmentpublicallyrecognizedthatthefiscaldeficitcouldnolongerbe

financedandintroduced,inJuly2001,a“zero-deficit”policy.Thepolicywasaimedto

enddeficitspendingthroughmeasureslikeareductioninpensionsandstatesalariesof

upto13%(RafaelDiTelaandFernandaMiguel,2015).Thegovernmentwasthenable

tonegotiateanewagreementwiththeIMFandthatwasapprovedinthelastweekof

August2001.Itwasessentiallyasupportforatotalamountofabout$8billion,ofwhich

$5billionwerereceivedimmediately.(RafaeldiTelaandIngridVogel,2002)

Attheendof2001,inacontextofsuddenfallofdepositsandmonetaryreserves,

theauthoritiesarrangedaseriesofmeasuresaimedatavoidingorat leasthindering

boththeoutflowofforeignexchangefromthecountryandthewithdrawalofcashfrom

financialinstitutions.Thesetofadoptedmeasureswascalledthe“corralito”andareas

follows:

• Setalimitof$250perweekperpersonforcashwithdrawals,

43

• Forcedbankingthroughtheuseofcreditcards,debitcards,checksand

banktransferswithinArgentina,

• Newbankloanscouldonlybenominatedindollars,

• Controlofpaymentsandtransfersabroadandlimitationtotheexitofthe

countrywithdollarsincash.

Althoughthe“corralito”managedtodecreasecapitalflight,ithadanegativeimpacton

economicactivitybecauseitparalyzedthedailybuyingandsellingoperations.

Soonafter,onDecember5,2002,theIMFsuspendedthepayoutoffundsasthe

country was not keeping up with the condition they asked for, which was the

continuation of the austerity measures. Consequently, on December 17, the

governmentannouncedanewplanwithlargespendingcuts.Theintentionwastocut

spending a 20%. This, added to the record of 16.4% of unemployment since 1990,

causedadiscontentinthepopulationthatdidmarchestothepresidentialtoshowtheir

rage.(RafaeldiTelaandIngridVogel,2002)

DelaRúawasforcedtoresignonDecember21,2001.Thefollowingtwoweeks,

Argentinahadfivedifferentpresidents,untilJanuary2,2002,whenDuhaldetookthe

power.

4.5. DefaultandCollapseoftheConvertibilityRegime

Theyear2001endedwithaveryunstablepoliticalandeconomicsituation.The

realGDPgrowthwasnegative-4.5%,theforeigndebtwasof$148.5billionsandthe

internationalreservesequaled$25.2billions(HuwPill,2002).OnJanuary3,2002,just

onedayafterDuhaldehadbecomepresident,Argentinadefaultedonitsforeigndebt:

• $81.8 billion in private debts, debt held by private investor globally

(RafaelDiTelaandFernandaMiguel,2015),

• $6.3billiontotheParisClub(MichaelH.Moffet,2016),anassociationof

creditorgovernmentsworkingtoreorganizesovereigndebt;and

• $9.5billiontotheIMF.(MichaelH.Moffet,2016)

44

Inreality,itwasalmosttheformalrecognitionofasituationthathadbeendraggingon

forsometime,whentheinternationalcredithadbeencuttothecountry.

In these circumstances, the new economic authorities launched a program,

which established as basic principles the pesofication of the economy and the

devaluationoftheexchangerate.Pesoficationwasthechosenalternativeagainstthe

fulldollarizationoftheeconomy,whilethecorrectionoftheexchangeratemeantthe

endof themonetaryConvertibility regime,whichhad governedduring theprevious

decade

Thecurrencydevaluationwasset,withanewfixedparityof1.40pesosforeach

U.S.Dollar for commercialoperations,andallowedadualexchange rate to float for

othertransactions.Finally, inthefaceofexternalpressureandtheconstraintsofthe

IMF,theauthoritiesdecidedinFebruarytomovetowardsasinglemarketandwithfree

flotation.Theexchangerateincreasedfasterthanexpected.OnOctober8,2002,the

priceofthedollarreached3.76pesosandsettledattheendoftheyearat3.39pesos.

(RafaelDiTelaandFernandaMiguel,2015).

Thedevaluationcaused:

• Arise inpovertyduetotherise inthepriceof trade-ables (like food),which

nearly doubled. In 2002, according to the World Bank Group, the

unemploymentrateincreasedto19.6%anditwasreportedthatnearlya54%

of thenationwas livingunderthepoverty line. (RafaelDiTelaandFernanda

Miguel,2015).

• A problem regarding debts. 70% of bank deposits and a 79% of loanswere

denominatedinDollars,butduetothepesoficationtheyhadtobeconverted

at a depreciated exchange rate and therefore were increased. Duhalde

establishedasasolutionthatallthedebtssuperiorto$100,000couldstillbe

convertedtopesoswiththe1peso1dollarexchangerate.(RafaelDiTelaand

IngridVogel,2004).

• Aproblematicsituationforbanks.Thereweredepositorswhohadkept“dollar”

accounts but now insistedon recovering their deposits adjustedby the new

45

exchangerate,allowingthemtorecovertheinitialamountofdollarstheyhad

deposited.Theproblemwasthat,thoseaccountshadalreadybeenconverted

topesofollowingthenewadministration’spolicies,sobankscouldnotcomply.

Duhalde’sresponsewasthatpublic’sbankdepositshadtobeconvertedata

rateof1.4pesosperdollar. Incontrast,bank loanshadtobeconvertedata

one-to-onepeso-to-dollarrate.

In2003,Argentina’ssituationstartedtogetabetter(TheWorldBankGroup):

• Inflationdecreasedfrom25.87%in2002to13.44%.

• Unemploymentwentfrom19.6%in2002to13.52%.

• Theexchangeraterelativelystabilizedataround2.8pesosperdollar.(Rafael

DiTelaandIngridVogel,2004)

• Consumerconfidencewasrisingasthecountryriskpremiumwasfalling.

4.6. TheRecovery

In2003,withthemonthofAprilcamenewpresidentialelections.Nowitwas

time for Néstor Kirchner tomanage the country and he decided to do so with the

economicteamofDuhalde.

4.6.1. Renegotiationofthedebt

PresidentNéstorKirchnercarriedoutthelargestsovereigndebtrenegotiation

sofar,ofnearly$100billion.OnSeptember22,2003,basedontheargumentthatthe

Argentinedebthadexplodedsincethedevaluationofthepesoagainstthedollar,he

offereda75%“haircut”16withnorecognitionofpast-dueinterests.Heassuredthatthe

countrycouldonlyafford topay25%of thedebt.Healsoarguedthat theofferwas

consistentwiththeirtargetofaprimarybudgetsurplus17of3%ofGDP.(RafaelDiTela

andFernandaMiguel,2015).

16 A “haircut” is a total reduction in the net present value of a debt obligation due to: (1) a reduction in the principal of the obligation; (2) a reduction in the interest rates; (3) an extension of the obligation’s maturity. 17TheprimaryBudgetsurplusrepresentstheamountofmoneythatthegovernmenthasavailabletomakeinterestpaymentsorpaydownoutstandingdebt.

46

Asitwastobeexpected,creditorsdidnotacceptKirchner’soffer.Instead,they

demandeda“haircut”ofnomorethan40%andafullrecognitionofpast-dueinterests.

Argentinawasnotflexibleregardingthereductionofthe“haircut”butagreedtoshare

a10%ofthegrowthofGDPabove3%betweentheincreasedinterestpaymentsandthe

amortizationoftheoutstandingdebt.Noarrangementtookplace.(RafaelDiTelaand

IngridVogel,2004)

Afterthreeyearsofcontinuousdisputes, in2005,ArgentinaenactedtheLock

LawwhichprohibitedtheArgentinestatefrommakingarrangementstopaybondsthat

hadnotbeenexchanged.Thislawwasseenbythegovernmentasanincentiveforthe

bondholdertoaccepttheiroffers.

Inmid-January,2005,theArgentinegovernmentproposedtothecreditorsthe

possibilityofreceiving26%to30%ofthenetpresentvalueoftheoriginalfacevalueof

bondsobligations.Itwasa“takeitorleaveit”offer, inotherwords,aone-time-only

offer.Mostofthebondholders,a76.07%acceptedtheofferandtheoutstandingdebt

wasreducedfrom$81.8billionto$18.6billion.

Thefollowingyear,Argentinarepaidthe$9.5billiondebttotheIMF.Asforthe

debtowedtotheParisClub,in2008and2010,thegovernmentannouncedthatitwould

repaythem,butineachcasereneged.

In2010,anotherattempttoendwiththeremainingoutstandingdebtwasmade.

Todoso,theyhadtosuspendtheLockLaw.Argentina’screditorsagreedtonewdebt

swapdealwortharound$12billion.Now,theoutstandingdebthadbeenreducedto

$6.6billions.Withthisnewarrangement,92%ofalloriginaldebtorshadnowexchanged

theoriginaldebt,buttherewasstillaremaining8%ofholdouts.

This last group of holders, that was asking to receive a full payment, took

Argentina to theU.SDisctrictCourt,as thedebtwasgovernedunderNewYork law.

Argentina,evenhavinglostseveralseriesofruling,stillrefusedtopay.InFebruary2012,

47

New York District Court Judge ThomasGriesa upheld a lower-court ruling that

Argentinacouldnotmakepaymentsonitsrestructuredbondsunlessitalsopaidback

defaultedbondholders.TheArgentineauthoritiessaidthattheycouldnotsettlewith

the holdouts because if they did, the exchange bond holders with whom they had

agreedin2005,couldsueforequaltreatmentbyinvokingtheRightsUponFutureOffer

(RUFO)clause,whichhadbeenpartoftheagreementin2005.TheRUFOisaclauseused

incertaincontractsinwhichapartywhohasagreedtocontractualterms,gainscertain

rightsifotherpartiesinfutureobtainbetterordifferentterms.Therefore,theexchange

bondholderscouldalsoasktoreceivetheir fullpayment,whichArgentinacouldnot

affordtopayanddecidedtoappeal.

By October 2012, Argentina lost its appeal, the U.S. Second Circuit Court of

Appeals in New York confirmed the decision of Judge Griesa and by November, he

reissuedtheinjunctionforcingArgentinatocomplywithpayments.Thisannouncement

madeArgentinebonds fall sharplyasmarketperceivedtherisk thatArgentinacould

defaultonitspaymentsonemoretime.

ByMarch29,theArgentinegovernmentwasforcedtosubmitaproposalonhow

theyweregoingtopaytheholdouts.Argentinawasofferingtopayholdouts20cents

on every U.S. Dollar of the amount owed. As it was to be expected, in April 2013,

holdouts rejected the proposal, leaving a US appeals court to decide whether

Argentina’sproposalcompliedwiththerulingthatholdoutcreditorsmustbetreated

the same as investorswhoheld its restructuredbonds. In February 2014,Argentina

againappealedtotheUSSupremeCourt,askingittoreversethelower-courtrulings.

TheUSSupremeCourtrejectedArgentina’sappeal.

AlexKiciloff, theMinisterofeconomyofArgentina from2013 to2015,made

public his decisionnot tonegotiatewith theholdouts and simultaneouslydeposited

$832millioninaNewYorkbanktopayexchangedbonds.Thiswasmeanttoputthe

Americanbanksinaverytensesituationsincetodistributethemoneywentagainstthe

rulingofthecourts. Infact,theyweretoldbytheDistrictCourttonotdistributethe

paymentsunlesstheholdoutscreditorswerealsopaid.Argentinawashedtheirhands

48

andsaidthatbecausetheyhaddepositedthemoneyinthebanks,theircreditorshad

beenpaid,butthecourtdisagreed.TheU.S.SupremeCourtstillorderedthatArgentina

hadtopaytheholdouts,amountingtoapaymentof$1.5billiondollars(JohnHartley,

2014). Since theparties failed to reach an agreement, on June30, 2014,Argentina

entereda“technical”defaultonitsrestructureddebt.

4.6.2. Argentina’sreturntointernationaltrading

InDecember2015,MauricioMacriassumedthepresidencyandcarriedoutthe

resumption of negotiations with the holdouts with a view to Argentina’s return to

internationaltradingandfinancialrelations.Thistimenegotiationstookonadifferent

approachandwereinitiallymarkedbythewillingnessofthenewgovernmenttopay.

Withinamonthofassuming,theMacriGovernmentnegotiatingteammetfor

thefirsttimewithDanielPollack,thecourt-appointedmediator.Followingarelatively

shortperiodofnegotiationsintheNewYorkcourts,nearly90%oftheholdoutsaccepted

Argentina’sproposal,topaythedebtwitha25%reduction,andJudgeGriesaordered

hisinjunctionpreventingArgentinafrompayingothercreditorstobelifted.

Finally, on 19 April a successful bond issue of $16,500 millions enabled the

countrytocancelitsdebttotheholdoutsincash.OnApril22,$9,300millionswerepaid

toholdoutsandtheremaining$7,200weredepositedintheCentralBankinorderto

financethedeficitofthepublicaccounts.Followingtheliftingoftheinjunction,payment

wasmadetotheholdersofdebtfromtheswapswhohadnotreceivedpaymentssince

June2014,thusenablingArgentinatoputthedefaultbehindit,whichwasreflectedin

upgradestoitscreditratings.

49

5. DOINGBUSINESSIN2017 Theaimof thispartof theproject is to summarize thepositiveandnegative

pointsthatsomeonewhoisthinkingofstartingabusinessinArgentinashouldhavein

mind.Inordertodoso,IhavedecidedtouseaSWOTAnalysis(Strengths,Weaknesses,

OpportunitiesandThreats).

5.1. Strengths

- Argentinacontinuestobeaworldleaderinagriculturalexports.TheWorldTrade

Organization estimates that it is the 10th top exporter country in the world.

AccordingtotheWTO, in2015,totalexportsofagriculturalproductsequaled

$2.2billion.

- Ithasalotofimportantnaturalresources:fertileplainsofthepampas,lead,zinc,

tin,copper,ironore,manganese,petroleum,uraniumandarableland.

- BuenosAiresisoneofSouthAmerica’smaintradehubs.

- ArgentinahasthesecondhighestpercapitaincomelevelinLatinAmerica,after

Chile.Additionally,theIMFexpectspercapitaGDPtogrowuntil2022,whenitis

expected to be of $19,464 per capita. In 2016, Argentina’s GDP per capita

reached $10,051, in Chile of $12,938 and in Mexico and Brazil, $8,415 and

$7,447,respectively.(TheInternationalMonetaryFund)

- AmongtheLatinAmericancountries,Argentinastandsoutforhavingexpanded

the number of its trading partners. It plays a central role in theworld trade

networks.

- Recovered good standing with IMF after agreement with holdouts and

implementation of reform agenda by Macri, which has led to improved

internationalrelationships.

50

5.2. Weaknesses

- High inflation following thedevaluationof thecurrency remainsa substantial

dragonconsumerpurchasingpower.AfterMacri’selectionin2015,hepushed

thedevaluationofthepesoofasmuchasa30%relativetotheU.S.Dollarwhich

ledtoanincreaseininflation.

- Businessesfacehighlaborcostsaswagesarerisingfasttokeepupwithrampant

inflation.InMay2016,theminimumwageincreaseda33%,from6,060pesosto

8,060pesos($572.40)permonth.(AnthonyEsposito,2016)

- Two sovereign defaults since the turn of century have undermined investor

confidenceinArgentina’swillingnesstopayitsdebts,drivinginterestratesup.

- Unevenwealthdistribution.

- Highlevelsofperceivedcorruptionunderminepublictrustinthepoliceforce.

Accordingtotheglobalcoalitionagainstcorruption,TheCorruptionPerceptions

Index18, which scores countries on how corrupt their public sector is, has

increasedto36in2016,beingof32in2015.It isahighnumbercomparedto

Mexico,whoseindexisof30,butnotashighasBrazilorChile,whoseindexes

areof40and66, respectively.However, it isnota lownumbercompared to

othercountriesintheworld.

- Eventhoughsubsidiesforelectricityaregraduallybeingdecreased,businesses

enjoy low cost of electricity but this has led to a lack of investment in

infrastructure resulting in problems with generation and distribution. Power

shortages are frequent, particularly at peak times during summer months.

BlackoutsthereforeseriouslyaffectbusinessactivityinArgentina.Thepriceof

electricity is 8.819US cents per kWh, oneof the cheapest of the region. For

example,inRiodeJaneiro,Brazil,thepriceisof20.4UScentsperkWhandin

Chileitisof10.5UScentsperkWh.(TheWorldBankGroup)

18 The Index is prepared by representatives of more tan 100 countries. It is a politically non-partisan group.

51

5.3. Opportunities

- TheArgentine economyhas significant long-term growth potential due to its

naturalresourcewealthandhighlyeducatedlaborforce.

- Advancementsinnaturalgasextractiontechnologyholdthepotentialtomake

Argentina’svastshalegasreserveaccessible.

- Renewedopenness to foreign investmentwill allow firms to reverse yearsof

underinvestmentinkeysectors,includingagriculture,powerandenergy.

- President Mauricio Macri will continue to improve the country’s business

environmentthroughaseriesofregulatoryandfiscalreforms.

- Highpotentialofrenewableenergies.

- Cooperativedevelopmentonresearchandtechnology.

- Asurgeinavailablecapitalwillallowfirmstoexpandinareasthathadlongbeen

restricted by capital and price controls under the previous administration,

includingenergy,manufacturingandrealestate.

- Experts from the IMFpredict thatunemployment is going todecrease in the

future. The unemployment rate for 2016 was estimated of 8.47% and it is

expectedtodecreaseuntil2022,whereitwillreachthevalueof6.1%.

- The manufacturing sector exports are likely to improve as firms leverage

renewedaccesstoforeigncapitalmarketstoinvestinupgradingandexpanding

productive capacity, benefitting from a weaker currency that has bolstered

exportcompetitiveness.Additionally,amodestreboundinBrazilianeconomic

activity will provide tailwinds to Argentine exporters, given that Brazil is

Argentina’slargestexportmarket.

- Government revenues are expected to grow. Argentina’s fiscal position is

expected to improve through 2017, driven primarily by a strong rebound in

economicactivity.Itisexpectedthatrisinginvestmentandexportdemandwill

drivearecoverythatwillunderpinrobustgovernmentrevenuegrowth inthe

coming years. Over the year, additional revenue will come from the

implementationonAugust1ofataxprogrammeanttoencouragerepatriation

ofundeclaredassetsheld abroad. Individualswill be able to choose topaya

relativelysmallfinetoinvestonlow-coupongovernmentbonds.

52

- Debt Costs are expected to fall. Expenditure growth will be constrained as

subsidiesaregraduallyremoved,forexamplesubsidiesonthepriceofelectricity,

gasandtransport,aswellasthereductionoftotalpayrollsinthepublicsector.

ItispredictedbytheIMFthatthegeneralgovernmenttotalexpenditurein2021

willhavedecreasedtoapercentageofGDPof38.8%,while in2016 itwasof

42.23%.Argentinahasbeenmetwithextremelypositiveinvestorinterest,which

willallowittograduallyrefinanceitsdebtobligationsatmorefavorableinterest

rates.

- Argentina’ssovereigncredentialswillstrengthenoverthecomingyearsdespite

itsfiscalshortfallsandrisingdebtload.Thegradualnarrowingofitsfiscaldeficit,

coupled with its pro-investment policy orientation, will allow it to maintain

investor interest over the coming years and likely benefit from credit rating

upgrades20.

5.4. Threats

- Inflation has increased in the last year from 28.4% in 2015 to 41% in 2016.

(Coface,2017)

- Currencyweakness and slowprogresson fiscal consolidationwill continue to

drivehighinflationinthecomingquarters.

- Governmentinterferenceinmarketsishardtopredict.

- Strongconcentrationofexportsonjustafewagriculturalproducts.

- Potential electrical energy crisis. Argentina presents a demand/supply

imbalance.Ontheonehand,demandisnothighenoughbecausethepopulation

cannotpaythefullpriceoftheenergy.Ontheotherhand,theproblemofsupply

is caused because there has not been enough investment to have a good

structureofgenerationanddistribution,whichmakespricesmoreexpensive.

- According to the IMF,Argentina’scurrentbalanceaccount isgoing todecline

from-$7.253billionsin2016to-$16.599billionin2021.

20 The system of rating securities was originated by John Moody in 1909. The purpose of Moody’s ratings is to provide investors with a simple system of gradation by which future relative creditworthiness of securities may be gauged.

53

- WeakerexternaldemandfromkeytradingpartnerssuchasChina,Brazil,and

Venezuelawillcapgrowthinthecomingfiveyears.

54

6. Conclusion Thefirstconclusionthatcanbedrawnfromtheextensivestudyisthatitisnot

possibletoblameasinglephenomenon,politicalleader,socialclassoraneconomicplan

forthepoorresultsandcrisisoverthecourseofArgentina.TheArgentinedecaywasa

slow process in which several negative economic and political elements created

resistancetodevelopmentandcontributedtoacceleratingthecountry’smisfortune.

Additionally, external phenomena such as globalization, the world wars, the

globaleconomiccrises,amongothers,coupledwithArgentina’sstrongdependenceon

other economies, have undoubtedly contributed to the decline of Argentina. For

instance, in the agriculture sector,with the “Agro-export”model,Argentinabecame

heavilydependentontheEuropeanContinent,especiallyonGreatBritain.Thisexposed

Argentina to the economic cycles of Europe, which entered in recession with the

beginning of theWorldWar I, affectingArgentina althoughnot being involved in it.

AnotherexampleofdependencewastheConvertibilityPlan.Fixinganexchangerateto

anothercurrency,likeinthecaseofArgentinawholinkedpesototheUSDollar,provides

stabilityandreducesinflationintheshorttermbut,inthelongterm,cancreateworse

imbalances. With this measure, the monetary policy of Argentina was directly

dependentonthemonetarypolicyoftheUnitedStatesand,ofcourse,thedynamicsof

theUSeconomywerenotthesameastheonesthatArgentinaneededatthetime,so

thesystemendedinfailure.

However,allcountrieshaveresentedinternationalphenomenainacertainway

and most of them have been able to overcome their effects. For this reason, it is

opportunetothinkthat,inthecaseofArgentina,internalphenomenaweretheones

thatreallyheldthecountryback.Therefore,itcanbesaidthatArgentina’sfailurewasa

productofbothbadsocio-economicgovernmentpoliciesandthelackofinstitutionsto

createsuccessfulpolicieswhenArgentinaneeditachange,andpossiblyanelectorate

thatcouldnotdistinguishbetweenrealityandgoldenpromises.

55

Anotherconclusionistheimportanceof investinginproductivesectorsofthe

economy,sectorsthatcanbenefitthecountryinthelongterm.Argentinahasreceived

alotofexternalcapitalthroughoutitshistory,buthasnotbeenabletoguidetheflow

thatenterstosectorsthatreactivatetheeconomy.Ithasallocatedalotofcapitalto

subsidies instead of creating a good infrastructure for roads, an energy distribution

system.

As for the future of Argentina, I believe it has a lot of potential. TheMacri

government has taken the necessary or more obvious steps to make Argentina's

economycompetitive.Forexample,freeingtheexchangerateornegotiatingdebtwith

holdouts.Itisaverydynamiceconomythat,althoughitdependstoalargeextenton

Brazil,hasanagriculturalandanenergysector thatwith thecorrect investmentcan

becomevery important.Thanksto its recentopeningtotheworld,a lotofcapital is

entering the country, so if Argentinahas learned from its past experience, it should

investitproductivesectorslikethepreviouslymentioned.

56

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• KlausF.Veigel(2009).Dictatorship,Democracy,andGlobalization.Argentinaand

thecostofParalysis,1973-2001.ThePennsylvaniaStateUniversity.

61

• Bernhard Fischer and Peter Trapp (1985). Financial Markets and Monetary

ControlUnderHigh Inflation – TheCaseofArgentina (PFD file). Retrieved from

https://www.econstor.eu/bitstream/10419/47154/1/158838866.pdf

• RafaelDiTela,TarunKhanaandHuwPill(2003).Argentina’sFinancialSystem:The

CaseofBancodeGalicia(PDFfile).HarvadBusinessSchoolCases.

• CarlosRodríguez(1989).ManagingArgentina’sExternalDebt:TheContributionof

Debt Swaps (PDF file). Retrieved from

http://documents.worldbank.org/curated/en/759631468913790645/pdf/multi0p

age.pdf

• IndexMundi.Argentina–Foreigndirectinvestment(Datafile).Datatakenforthe

years 1990 and 1994. Retrieved from

https://www.indexmundi.com/facts/argentina/foreign-direct-investment

• AldoMusacchio(2012).Mexico’sFinancialCrisisof1994-1995(PDFfile).Harvard

Business School Working Paper. Retrieved from

https://dash.harvard.edu/bitstream/handle/1/9056792/12-101.pdf?sequence=1

• JavierArnaudo,LuisQuerolandGustavoPérez(2003).CrisisdelTequila.Susefectos

sobre el sistema financiero argentino y sus normas prudenciales (PDF file).

UniversidaddelCema.Retrievedfrom

https://www.ucema.edu.ar/posgrado-download/tesinas2003/MDB_Arnaudo.pdf

• LeonardoLanotti (2010).LaCrisisBrasilera–EfectoSamba (PDF file).Retrieved

from

http://www.monografias.com/trabajos910/crisis-brasilera-samba/crisis-brasilera-

samba.shtml

• LaNación(2000).LadeudaexternayasuperalamitaddelPBI(PDFfile).Retrieved

from http://www.lanacion.com.ar/15368-la-deuda-externa-ya-supera-la-mitad-

del-pbi

• La Nación (2006). El "impuestazo" de Machinea (PDF file). Retrieved from

http://www.lanacion.com.ar/789249-el-impuestazo-de-machinea

• Enrique Szewach (2001). Global Analysis. Report of the Economic Situation.

ConsejoProfesionaldeCiencias Económicasde laCiudadAutónomadeBuenos

62

Aires. Retrieved from

http://www.consejo.org.ar/publicaciones/iec/iec208/default.html

• Rafael Di Tela and Ingrid Vogel (2004). The 2001 Crisis in Argentina: An IMF-

SponsoredDefault?(A)(PDFfile).HarvardBusinessSchoolCases.

• Huw Pill (2002). Argentina: Data Supplement, 1990-2002 (PDF file). Harvard

BusinessSchoolCases.

• Michael H.Moffet (2016).Argentina and the Vulture Funds (PDF file). Harvard

BusinessSchoolCases.

• Rafael Di Tela and Ingrid Vogel (2004). The 2001 Crisis in Argentina: An IMF-

SponsoredDefault?(B).HarvardBusinessSchoolCases.

• JohnHartley (2014).Argentina'sDefault: Lessons Learned,WhatHappensNext.

Forbes. Retrieved from

https://www.forbes.com/sites/jonhartley/2014/08/04/argentinas-default-

lessons-learned-and-what-happens-next/#27b8cbc62384

• WorldTradeOrganization.TableA14.Top10exportesandimportersofagricultural

products. 2015 (Data file). Retrieved from

https://www.wto.org/english/res_e/statis_e/wts2016_e/wts16_chap9_e.htm

• IMF.GDPpercapita (currentUS$) (Data file).DatatakenforArgentina,Mexico,

Brazil and Chile for the year 2016. Retrieved from

https://www.imf.org/external/pubs/ft/weo/2016/01/weodata/weorept.aspx?pr.

x=62&pr.y=10&sy=2014&ey=2021&scsm=1&ssd=1&sort=country&ds=.&br=1&c=

213%2C273%2C223%2C228%2C233%2C248&s=NGDPDPC&grp=0&a=

• Anthony Esposito (2016). Argentina sets minimum wage of $572 per month.

Retrieved from http://www.reuters.com/article/us-argentina-wages-

idUSKCN0YA31A

• TheGlobal Coalition against corruption. Data taken for Argentina for the years

2015 and 2016, and forMexico, Brazil and Chile for the year 2016 (Data file).

Retrieved from

http://www.transparency.org/news/feature/corruption_perceptions_index_2016

63

• TheWorldBankGroup.DoingBusinessproject,Priceofelectricity(UScentsper

kWh) (Data file). Data taken for Argentina, Brazil and Chile. Retrieved from

http://www.doingbusiness.org/data/exploreeconomies/chile/getting-electricity

• IMF.Unemployment (Datafile).DatatakenforArgentina,fortheyear2016and

2022. Retrieved from

https://www.imf.org/external/pubs/ft/weo/2016/01/weodata/weorept.aspx?pr.

x=68&pr.y=17&sy=2014&ey=2021&scsm=1&ssd=1&sort=country&ds=.&br=1&c=

213&s=LUR&grp=0&a=

• IMF.Generalgovernmenttotalexpenditure,percentofGDP(Datafile).Datataken

for Argentina for the years 2016 and 2021. Retrieved from

https://www.imf.org/external/pubs/ft/weo/2016/01/weodata/weorept.aspx?pr.

x=38&pr.y=13&sy=2014&ey=2021&scsm=1&ssd=1&sort=country&ds=.&br=1&c=

213&s=GGX_NGDP&grp=0&a=

• Coface (2017). Argentina Major Macroeconomic Indicators. Retrieved from

http://www.coface.com/Economic-Studies-and-Country-Risks/Argentina

• IMF.Argentina’scurrentaccountbalance(Datafile).Datatakenfortheyears2016

and 2021. Retrieved from

https://www.imf.org/external/pubs/ft/weo/2016/01/weodata/weorept.aspx?pr.

x=63&pr.y=10&sy=2014&ey=2021&scsm=1&ssd=1&sort=country&ds=.&br=1&c=

213&s=BCA&grp=0&a=

64

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