14-4311_argentina_crisis_05_part2_29

14-4311_argentina_cr - ECON 4311 The Economy of Latin America The Crisis in Argentina Part 2 The Crisis(1999-2002 square Argentina suffered a lot

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Unformatted text preview: ECON 4311: The Economy of Latin America The Crisis in Argentina Part 2 The Crisis (1999-2002) square Argentina suffered a lot from the Russian and Brazilian crises of 1998-1999. square In 1999 Argentina entered a recessionary period that ended up lasting 4 years: Argentina – Economic Indicators 1999 2000 2001 2002 Real GDP per capita growth %-4.6-1.7-7.0-10.8 Unemployment rate 13.8 14.7 18.3 23.6 Poverty rate 26.7 28.9 38.3 57.5 Argentina -- Real GDP (billions 1995 US dollars) 220 240 260 280 300 320 1997 1998 1999 2000 2001 2002 2003 square During 1999, Menem tried to reform the constitution to allow him to run for a third consecutive term, but at the end he could not succeed. square In December 1999, Fernando de la R´ ua became Presi- dent of Argentina, as the head of the center-left Alliance coalition. He promised to end the recession and fight corruption. square De la R´ ua’s initial concern was to reduce the federal bud- get deficit, which was 2.5% of GDP. He thought this would instill confidence in government finances, reducing the interest rates and reigniting the economy. square There were several options to reduce the deficit, but none seemed politically viable:- Cut spending (politically difficult).- Cut tax rates (not clear that the short term gains in economic reactivation would offset lost revenues)/- Print money (but de la R´ ua did not want to abandon the currency board).- Get more foreign debt (but foreign markets were not going to lend any more money – only the IMF gave a $7.2 bn stand-by loan in March 2000). square The only option left was to raise tax rates: de la R´ ua secured approval for 3 big tax increases, effective Jan 2000, Apr 2001, and Aug 2001 (the impuestazo ). square But taxes were already high in Argentina! (max personal income tax rate in Arg was 35%, close to the one in US; VAT in Arg was 21%; in Arg there are taxes on exports and financial transactions, taxes that do not exist in the US). square High tax rates encourage tax evasion and corruption. square Recovery did not take place. The Minister of Economy, Ricardo L´ opez Murphy proposed a spending cut of $4.5 bn but they caused public protest by interest groups that would be affected. L´ opez Murphy had to quit. square Cavallo returned as Minister of Economy in March 2001 (that month saw three different Ministers of Economy). square On April 2001, Cavallo introduced a bill to switch the peg of the peso to the dollar alone to a 50-50 combo of the dollar and euro (at that time the US dollar was at its strongest level and made Arg exports not competitive). square Investors interpreted this proposal as a step towards de- valuation. Interest rates shot up and a “silent run” on banks started....
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This note was uploaded on 01/18/2012 for the course ECON 4311 taught by Professor Staff during the Spring '08 term at Minnesota.

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14-4311_argentina_cr - ECON 4311 The Economy of Latin America The Crisis in Argentina Part 2 The Crisis(1999-2002 square Argentina suffered a lot

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