Argentina's Currency Crisis: Solutions

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How they fixed it

• There existed governmental encouragement of import substitutions and accessible credit for businesses to restart and regrow.
• The government developed an agressive plan to improve tax collection - imports taxes and royalties
• They also set aside money for social welfare
• The government also took measures to strengthen the currency
  • They sold reserve dollars in the public market to help the peso regain its value
  • After this measure had sufficiently stimulated the economy, the Central Bank bought dollars in the local market and stocked them as reserves, building their foreign currency reserves back up.

Possible Solution

• One possible solution to Argentina's Currency Crisis would have been "dollarizing" their economy. In this instance, a country replaces their current currency with the US dollar. This soltuion was one of the most promising alternatives to Argentina during this time, and many other countries in Latin America believed that this exact system could help their own economies. In addition to Argentina, El Salvaor and and Mexico considered dollarization, eventhough no country to date has officially taken part in converting their currency to the dollar. Many economists, including Alan Greenspan, believe that this would be a good idea, because the US dollar is the currently considered the most stable world currency. For Argentina, the attributes to using the dollar are numerous. In addition to reaping economic stability in the country, this action would also increase stability in the western region of the world, further strengthening the hemisphere and trade relations between the United States and Argentina. Alan Greenspan assures the United States that only positive attributes can flourish from a decision like this, because even if other countries choose to "dollarize," domestic interest rates in the United States would not change.

Other Recommendations

Many authors and economists continue to study the implications of the 1998 Argentine Currency Crisis today. In addition to the potencial solution of dollarizing the economy, many of these scholars believe other different reforms and corrections could ensure a more stable economy and country in the future.

• Reform of law and judicial systems
  • This presents a problem because the Argentine judicial system has a long history of crime and "turning-their-head" during times of crisis. Protests and riots broke out in numerous streets during the 1998 Currency Crisis, which sparked violence and even deaths. Not only was the government able to control the economy during this time, but they also lacked the ability to cocontrol and calm the Argentine people. It is a popular belief that greater adherence to the judicial system could have brought a greater sense of peace to Argentina, granting the government more time to make more constructive and thorough decisions.

• Tax Strategy
  • Another possible solution could be to eliminate and reduce certain or nuisance taxes in the Argentine economy. Economists believe that reductions in the the value-added tax, payroll tax, and top rate tax would all have positive effects on the future growth of the Argentine economy.

• Social Reform
  • Currently in Argentina, constrictive labor laws add to high unemployment while Government-run medical care is considered poor and ineffective. Reforms in these two areas, would also help strengthen the Argentine economy, while improving the Argentine way of life at the same time.

The comeback

• In 2003, the Argentinian government launched a three year economic plan with the IMF basically aimed at stimulating their recovery and planting the roots for long term economic growth.
• GNP increased 8.8% in 2003 in respect to the previous year
• 9.0% in 2004 in respect to 2003
• 9.1% in 2005 in respect to 2004
• Dec 2005 - foreign currency reserves were at $28,000 million. They also began to make debt payments back to the IMF.
• Exchange was stablilized at 3 pesos to the dollar or 33 cents per peso.
• Inflation decreased.
• The unemployment rate also decreased, in 2000 the rate was 15.4, in 2001 it was 18.3 and by the end of 2005 it was approximately 10.2%.
• The Argentinian government also reached a settlement with its creditors which granted them a considerable reduction in their debt.

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