GLOBALIZATION FINAL REPORT Why is Argentina an example of globalization failure? Raleigh Campus Globalization Seminar Group 12 Benoît PETIT - Clément PETIT - Rémi PETRELLA Pauline POIRIER - Vincent RACE 1
Introduction Argentina is one of the major countries in South America, along with Brazil, economically speaking. But even if today, the situation and the perspectives of Argentina are improving, they did not take a straight-ahead path. At the beginning of the 1990s, the government wanted to open up its borders in order to enjoy the globalization and be a wealthier country. Of course, before this date, Argentina was already part of a global world by exporting agricultural goods. It has taken some measures with side effects. Measures were not sustainable on the very long-term. The country had to undergo severe side effects and entered an economic recession between 2001 and 2004. Why is Argentina an example of globalization failure? We will begin by seeing further the characteristics of the Argentinian economy and know in depth the country. Then, we will pay attention to the policy that was implemented in the 1990s, and its side effects on the country s economy. We will finish by looking at what has been done within the last 10 years by the country s officials to recover a healthy situation. I) Why Argentina needed to enter a global market in the early 1990s a) Argentina before 1990 Argentina is very rich in natural resources and has a well-developed agricultural sector, it also seems that this country has the means to play a major role in economy and even become a leader, especially as an exporter of agricultural products. Sadly, the history of Argentina s economy is a tumultuous one: very high instability both economical and institutional. The origins of Argentina s economic crisis go back to the mid 1970s, when Argentina s military dictatorship acquired a huge debt in order to finance crazy projects. The 1980s were a period of economic turmoil and social problems. In 1981 and Argentina s GDP knew a negative growth of 12%, its worst decline since the great depression. Meanwhile, the median salary had fallen of 50% from its most recent high in 1974. The crisis turmoil was combined with a political instability, in 1982, Argentina tried in vain to invade the Falkland Islands, but eventually failed. This led to a shift from a military dictatorship to a democratic regime. When democracy was restored in 1983, unemployment was booming, wages were falling, and inflation was rising. Argentina simply didn t have the means or the power to recover, and in 1989, with a declining GDP, a big amount of debt and an inflation of 5,000%, the economy simply collapsed. By May 1989, conditions, both social and economic, had worsened to such a dramatic point that Argentinians took to the streets and rioted. At those days, foreign investors had long since fled, and it seemed the economic climate was far too risky for Argentina to achieve any kind of integration into the global economy. 2
b) Argentina s need for going global During the 1980s, the IMF pushed hard governments of poor countries to liberalize their capital markets. They were firmly thinking that capital controls were barriers to development. Irony of history, back in late 1980s, Argentina was well considered by the IMF. The IMF gave loans to Argentina in order to guide its policymakers in privatizing state enterprises, liberalizing foreign trade and investment, and improving government fiscal and monetary policy. During the 1990s, the country's economy improved a lot: the real income per capita was growing at a very fast pace of 4.5% per year. Argentina was part of a vast program of transformation that had been taking place in Latin America in the 1990s. Those countries abandoned economic strategies based on import and a very interventionist government. They adopted a more flexible model by doing reforms. This process brought opportunities based on natural resource and positive externalities of globalization. Controls on interest rates and prices were abolished. Major changes were introduced in tax policy and administration, the losses of central banks were reduced, public enterprises were restructured and privatized, public expenditures were cut and reoriented toward the development of human capital and infrastructure. II) What did Argentina s government in order to get globalized and what were the issues afterward? a) What has been made in Argentina to create a globalized economy? The power of trade unions had been very important in the election of Carlos Menem in 1989, who led the country for 10 years. Although, when he took power, he mostly implemented laws and reforms that went toward the financial sector way of thinking rather than labor. Menem made the labor laws more flexible in order to help the firms. Also, he chose to start privatizing companies and services providers held by government and depending on its funds. In 1991, He pegged the Argentinian Peso to the US Dollar: a Peso equals a US dollar. Any variation of the dollar would be reflected automatically on the Argentinian Peso. The government wanted to be perceived as a safe country by investors. So, if the currency was pegged to a strong worldwide currency, they thought the assets would be seen as worthy. It would also be easier to convert liquidities. The pegging of the peso would ease the privatization process, as investors would be much more likely to invest in national companies if they were sure that devaluation of the currency would not reduce their profits. Before the 1990s, most companies belonged to the country. From this date, the government engaged in a huge plan of privatizing most of its public services: airlines, electric power, post office, water utilities This was a way to attract new investors and bring new capital to push the growth up. Then, by selling companies to foreign investors, Foreign Direct Investments, the government got some cash back. This 3
cash was used to finance government investments that would be useful for Argentina s growth. The privatization gave Argentina s government cash. This was very helpful to lower the impact of the several economic issues that happened previously like the United States increasing interest rates and Mexican devaluation in 1994. But in reality, the sale of their businesses to private investors was just a way to fund the deficits caused by these economic shocks. However, in 1999 all the remaining companies that could be privatized in order to get fund have been privatized already. As a result, the state did not have any company left in case of a new crisis happening. b) What went wrong? Selling companies to private investors was a punctual entry of money, like exceptional revenue for a company. When all companies were sold, the country could not rely on this source of revenue any more to finance investments. Argentina had to find new means for raising cash. The privatization policies created an increasing disparity in incomes between the rich and the poor. Between 1991 and 1994, the pace of increase in income of the wealthiest 10% grew twice faster than the rate of the poorest 10% did. The incoming flows of money have benefited to a few part, which was already privileged rather than the entire country. Since the pegging of the Peso on the US Dollar in 1991, Argentina gave up the control of its money. Some country may act on their currency in order to tackle some issues, like inflation or disequilibrium of their BOP. But Argentina was not able to make any adjustments, because they didn t have the control on their money anymore. Argentina could no longer do that. This had been a problem, because Argentina and the USA have different characteristics. An action made by the USA for the American economy may not be a good thing for Argentina. Argentina also was weakened because its widely opened capital account: a large amount of debt in foreign currency made Argentina vulnerable to default not only if interest rates increased, but also if the currency depreciated dramatically, as it increases the repayment amount in domestic currency. Argentina's debt increased a lot in the 1990s. By 2000, the external debt/gdp ratio reached 51%, and the external debt/exports ratio was at 471%. Another drawback of the monetary policy led by Argentina was that Brazil was one of its privileged partners. Brazil was the first country in term of buying Argentinian goods. In the 1990s, Brazil knew several shocks and crisis, and the value of its currency, the Real, fell off a cliff. Thus, Argentina s products became very expansive for Brazil: as US Dollar remained strong, so did the Argentinian Peso. c) Aftermaths of the globalization policies In 1998, the collapse of the Brazilian currency led to important declines in export incomes. Economic growth was negative for three years in a row. In 2001, uncertainty about the growing public debt and the persistent economic downturn led 4
to very sharp increases in the yields of government bonds. Then the high amount of debt became unsustainable. Uncertainty extended to the viability of the currency peg, the investors and Argentinians didn t have faith in the ability of the financial system to repay dollar liabilities that were backed by peso assets, such as government debt. The result was a massive deposit withdrawal from the banking system. In December 2001, in order to stop it, Argentina suspended payments on its external debt and restricted deposit withdrawals. In January 2002, it abandoned its peg to the U.S. dollar. This resulted in a devaluation of around 40% of the Peso compared the US Dollar. Investments that had been made in peso did not worth something any more. Purchasing power of the population fell brutally. The impact of the Argentina crisis has been severe. In 2002, half of the population was living below the poverty line and the rate of inflation rose to 73%. III) The post globalization policy of Argentina a) A change in the economic policy As a result of the crisis, the economic policy that the government led since the starting of the globalization process changed drastically. The most urgent issue was the reduction of the debt, in order for the country to bounce positively. A number of measures have been taken in order to tackle that problem. One of the first decisions was to remove the currency board that was supposed to maintain a high value of the pesos. Other measures such as devaluation, government debt renegotiation have been implemented. Also the policy toward the rest of the world changed. The government decided for example to tax exports (that allows government to increase its revenue and it keeps domestic prices low) and to control capital inflows in order to avoid exchange rate appreciation. All of those measures had a real impact on the real economy. First, the debt increased to 125% of GDP in 2003, but then was reduced to 73% of GDP in 2004. Also, Unemployment rate fell from 23% in 2002, down to 10% in 2006. b) The positive effects and a quick recovery In 2002, Argentina has been obliged to stop devaluating, which could show positive aspects such as negotiating a debt reduction. Moreover, some concrete measures have been taken: freezing of price increases in public utilities, control on some financial capital inflows, freezing imposition on import taxes... With all these reforms, Argentina was at the beginning of a period of expansion: increase of GDP (as showed on the graph below) and low inflation rate. 5
This wonderful period has been painted in a black picture because of the behavior of the foreign sector and the government sector. The Argentine debt dynamics represents a dynamic growth and reaches a peak in 2004 until 125% of the GDP, reduced at 73% after the debt restructuring. When payments were delivered to organizations, Argentina showed a growing performance. By 2005, poverty has incredibly decreased from 55,7% to 33,8% in 2005. c) Is Argentina successful now? Today Argentina has recovered from the 2001 s crisis. The total GDP in 2010 was 756 billion dollar. Its growth was 9,2%, which is pretty good. Despite the nearly no growth in 2009 (due to the world crisis), the country seems to be fairly strong economically. The country is mainly exporting food as cereal and meat. Its primary economic partners are Brazil and the USA. From 2004 to 2011, the level of export compared to GDP stayed fairly steady at around 22%. This is still a low rate compared to other countries. In 2011, the unemployment rate is only 7%. It is a very good improvement compared to the 23% in 2002. Despite all those good economic good results, we have to take into consideration that Argentina is still suffering from two main issues. In one hand, the country is in very bad shape as far as corruption is concerned (ranked 100th out of 178th). In another hand, the inflation is still very high with nearly 25% every year. This rate is unsustainable and Argentina needs to address this issue as soon as possible. Also, the external debt is high and still growing. Those issues help to understand why Fitch, Moody s and S&P rate Argentina B. 6
Conclusion In the early 1990s, Argentina s government started new projects for the country in order to be fully open on the world, mainly to break with the previous dictatorship that was leading the country. Such a political regime had bad effects on many aspects within the country. To recover a good situation, the government decided to go global. In order to become attractive towards the world, the government privatized some companies and pegged the Peso to the US Dollar. But even if these measures had immediate positive consequences, they could not be used as a viable long-term solution. Actually, the government just gave up the control on the economy. So, 10 years later, in 1999, the country entered a recession for 3 years, with all other things that such a situation is leading to (social climate very low, default of payment from the country...). Then, to fix its problems, government had to walk back and implement new measures. First, they unpegged the peso from the US Dollar, implemented new taxes to get additional revenues, and renegotiated their debt... This bunch of measures made the situation easier to live in a few years time: less people are living under the poverty level, the debt has decreased to a more reasonable level regarding the GDP and so on. Today, even if the crisis froze the growth in 2009, the country is growing at the same pace as the emerging countries (BRICs) and presented a growth of 9,2% of its GDP in 2010. To reach such a figure, the Argentinian economy stressed on its historical strong point: agriculture and mostly cereals. If two decades ago, Liberalism was a goal, today, the government s policies are becoming more and more protectionist. 7
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