Why Is Argentina’s Economy In Constant Cliffhanger Mode? part-2

As per the World Bank, Argentina has enormous natural resources in the fields of oil and agriculture. Within its 2,8 million square kilometres of territory, Argentina is enriched with remarkable fertile land, gas and lithium reserves and has huge potential for renewable energy. Argentina has huge potential in some of its manufacturing sub-sectors and innovative services in high-tech industries. In Spite of significant resources,  why is Argentina’s economy in a constant crisis? In this part we look into macro level issues.

Are the most profound changes in Argentina political or economic?

It is difficult for political actors to take responsibility for their decisions, but it is prevalent for them to turn the excuse into a justification. When it comes to an economic situation, they prefer to distract with a populist speech, which eliminates suspicion of responsibility, usually blaming others. Commonly, these discourses only serve to communicate to citizens the tip of the iceberg of what the financial disaster that they entail means. It is also frequently the case that, in the struggle for power, opposition political forces are oriented towards demonstrating the failure of the government and very seldom do they present any propositions, generating an atmosphere of mistrust and resentment on the part of all political sides. Argentina is a clear example of a political process undergoing alterations that have led the country to turn political uncertainty into economic uncertainty. Nor is it a question of seeking to make political power totalitarian. Instead, the horizons of politics in Argentina become the common objective, as true democratic integration with the support of all political factions intends, without having to abandon its ideologies.

Every free and sovereign country has its mechanisms and means to exercise political power as it sees fit; however, the history of Argentina and its economy would be incomplete if the legislative bills that have occurred in the country are not studied and understood.

Not necessarily the political scene dictates the failure of the economy; on some occasions, the economy has dictated the political collapse of those who tried to take political power. The economy has become the central discussion of the power struggle today, but the emergence of military dictatorships and reformist periods were the breeding ground to see the consequences of ruptures in politics and economy flourish. From these processes, it is possible to understand the reason behind such a fractured vision of economic and political reforms, and perhaps they will continue to occur in subsequent years, so the main question will remain unanswered, until some of the changes, both political and economic, aim to guarantee social welfare.

The approval of a government initiative requires an endorsement in Congress and prevents various interest groups from blocking the process itself, especially when it comes to reforms that alter the status quo. (Castañeda, 2016).

The dollar as a refuge to the constant crisis

Argentina has gone through a series of exchange rate interventions throughout almost a century; the first intervention was in 1931 when it was decorated that the currency exchange operations could only take place at the authorized banks, dividing the currency market into two segments, an “official” one for the country’s priority needs; and a “free” for the currency exchange done by private parties. This first exchange rate intervention did not produce many differences in Argentina’s economy since most of the capital and the exchange transactions were handled by the elite, while the rest of the population did not have an interest in these types of transactions.

We start to see the scarcity of foreign currency during the end of the ’40s until the end of the Perón period in 1955, letting the gap between the two exchange rates grow. According to Cortés (2005), the official exchange rate was that of 9,25 pesos per dollar, while the parallel exchange rate was 29,72 pesos per dollar. The gap between the official and the identical exchange rates has been a constant and cyclical issue. In 1970 an exchange rate intervention was taken where the operations done with the official rate were only reserved for the authorized commercial transactions; opening like this, again, the parallel markets for dollars and widening the gap between the two exchange rates. This widening gap is driven by the demand for foreign currency by the argentine people when they seek refuge by having their savings in dollars to protect themselves from the possibility of the devaluation of the Peso.

In the late ’80s, Argentina suffered hyperinflation, which devalued its currency’s value. To solve this, “coin convertibility” was installed, setting equality between the dollar and the Peso. The “convertibility” policy was sustained for ten years until 2002, when the exchange rate intervened once more, taking it to 1,40 pesos per dollar. (Hidalgo, 2013).

Almost a decade after, in 2011, the government of Cristina Fernandez introduced a new exchange rate control, similar to the one in the ’70s where the access to dollars was limited for treasury purposes, again, widening the gap between the official and the parallel rates (Lafuente, 2019). This gap added to the high inflation in Argentina (of around 100% last year according to an article published by Forbes), has permitted speculators to play with the currencies inside the country and make a decent amount of money with the informal foreign currency trade.

Source: Forbes

More recently, after dropping the fixed-rate and promising a free flow of dollars in Argentina, Mauricio Macri introduced a new, more flexible, exchange rate control policy; in which private citizens were able to buy 200$ a month at a fixed rate of 30% on top of the official rate called “Solidary rate”. Companies could get access to dollars for specific priority transactions at the official rate, to preserve international reserves. The demand for dollars increased the gap between the two exchange rates to almost 80 percent, with the official rate at 74,85 pesos per dollar against 127 pesos per dollar in the parallel market (infobae, 2020).

In conclusion more and more analysts are debating the manner in which Argentina’s government and financial institutions handle these crises. Any decision about leading towards economic stability have to be taken on the basis of economic rather than political requirements.

 

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Sources

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Castañeda, V. M. (2016). LAS CRISIS ECONÓMICAS Y EL ESCENARIO POLÍTICO EN LA INTRODUCCIÓN DE REFORMAS TRIBUTARIAS. LA EXPERIENCIA ARGENTINA (1980- 2010) Y UNA CONSTATACIÓN PARA LATINOAMÉRICA. Bogotá, Colombia: Universidad Nacional de Colombia. URL: https://revistas.unal.edu.co/index.php/ceconomia/article/view/52466

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Forbes (2019), Argentinas peso, nothing but trouble. Forbes: https://www.forbes.com/sites/stevehanke/2019/03/16/argentinas-peso-nothing-but-trouble/#6b35fa902a9a

France24 (2019) Fernandez deja en suspenso futuro control cambiario en Argentina. France 24: https://www.france24.com/es/20191105-fernández-deja-en-suspenso-futuro-de-control-cambiario-en-argentina

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Infobae (2020) Dólar hoy: El blue se mantuvo en 127 en otra rueda de calma cambiaria. (infobae): https://www.infobae.com/economia/2020/07/08/dolar-hoy-el-blue-cae-a-126-en-otra-rueda-de-calma-cambiaria/

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The World Bank: https://data.worldbank.org/country/AR