Carlos Menem: Difference between revisions
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*'''Convertibility Law''' | *'''Convertibility Law''' | ||
In 1991, he created a currency board that proposed the Convertibility Law, which was passed by the Congress. This law made the peso (Argentina currency) convertible with the dollar at a fixed nominal exchange rate, with the domestic monetary base fully backed by the foreign exchange reserves of the Central Bank. Because of this new currency board system, the government couldn't issue notes without the full support of foreign reserves. Under this law, the government's liabilities could not be payed by printing money. This helped to solve the hyperinflation problem immediately. | In 1991, he created a currency board that proposed the Convertibility Law, which was passed by the Congress. This law made the peso (Argentina currency) convertible with the dollar at a fixed nominal exchange rate, with the domestic monetary base fully backed by the foreign exchange reserves of the Central Bank. Because of this new currency board system, the government couldn't issue notes without the full support of foreign reserves. Under this law, the government's liabilities could not be payed by printing money. This helped to solve the hyperinflation problem immediately. | ||
<p align="center">[[Image:Argentina_country_brief2_clip_image001.jpg]]</p> | |||
*'''Privatization of national companies''' | *'''Privatization of national companies''' | ||
Between 1990 and 1994, Menem privatized: | Between 1990 and 1994, Menem privatized: | ||
# airlines | |||
# gas transportation and distribution | |||
# passenger and cargo railways | |||
# power generation and distribution | |||
# telecommunications & the postal service | |||
# water and sewage systems | |||
# oil and gas extraction facilities, coal mines, petrochemical plants, steel mills | |||
# most public banks. | |||
This reduced government consumption since all the state companies left were unproductive and inefficient, and were operating at a loss. | This reduced government consumption since all the state companies left were unproductive and inefficient, and were operating at a loss. | ||
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==='''Increasing Debt'''=== | ==='''Increasing Debt'''=== | ||
Government expenditures grew from 9.4% in 1989 to 21% in 2000. At the same time, GDP growth slowed from 7.9% between 1991 and 1994 to negative growth since mid-1998. Lack of economic growth, combined with increasing government expenditures, generated a fiscal deficit that grew from 0.15% of GDP in 1994 to 2.4% in 2000. To achieve fiscal balance, instead of decreasing its expenditures, it | Government expenditures grew from 9.4% in 1989 to 21% in 2000. At the same time, GDP growth slowed from 7.9% between 1991 and 1994 to negative growth since mid-1998. Lack of economic growth, combined with increasing government expenditures, generated a fiscal deficit that grew from 0.15% of GDP in 1994 to 2.4% in 2000. To achieve fiscal balance, instead of decreasing its expenditures, it chose to raise taxes and incurred more debt in financial markets and with the IMF. Raising taxes proved to be a bad tactic; it caused more tax evasion and suffocated the private sector even more. | ||
In 1998, Argentina's per capita debt surpassed that of Korea during the Asian financial crisis. Total Argentine public debt increased from 34% of GDP in 1991 to about 52% in 1999. High debt increases the cost of borrowing money because it increases the perception of investment risk. | In 1998, Argentina's per capita debt surpassed that of Korea during the Asian financial crisis. Total Argentine public debt increased from 34% of GDP in 1991 to about 52% in 1999. High debt increases the cost of borrowing money because it increases the perception of investment risk. | ||
<p align="center"><ins>'''External Debt in billion U$S'''</ins></p> | |||
<p align="center">[[Image:Extdebt50.JPG]]</p> | <p align="center">[[Image:Extdebt50.JPG]]</p> | ||
</br> | </br> | ||
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==='''Corruption'''=== | ==='''Corruption'''=== | ||
Weakness in the rule of law, coupled with a large bureaucracy, has implemented a culture of corruption. Corruption affects the entire government. 82% percent of people living in Argentina do not trust the effectiveness of the judicial system and therefore do not use it. This distrust doesn't help to sustain economic growth. A weak, non-transparent judicial system raises the cost of doing business and undermines local and foreign investment. By increasing risk, corruption undermines the confidence of citizens and foreign investors alike in undertaking commercial activities, saving, and making long-term investments. | Weakness in the rule of law, coupled with a large bureaucracy, has implemented a culture of corruption. Corruption affects the entire government. 82% percent of people living in Argentina do not trust the effectiveness of the judicial system and therefore do not use it. This distrust doesn't help to sustain economic growth. A weak, non-transparent judicial system raises the cost of doing business and undermines local and foreign investment. By increasing risk, corruption undermines the confidence of citizens and foreign investors alike in undertaking commercial activities, saving, and making long-term investments. | ||
Menem also encouraged illegal activity through excessive taxation. According to the Latin American Foundation for Economic Research (FIEL), Argentina's illegal economy totals an estimated $64 billion per year. An estimated $15 billion of this is due to tax evasion. Tax evasion is a reaction to extreme levels of taxation imposed by the government to finance the increasingly government expenditures. | Menem also encouraged illegal activity through excessive taxation. According to the Latin American Foundation for Economic Research (FIEL), Argentina's illegal economy totals an estimated $64 billion per year. An estimated $15 billion of this is due to tax evasion. Tax evasion is a reaction to extreme levels of taxation imposed by the government to finance the increasingly government expenditures. | ||
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==IMF's "help" not really useful== | ==IMF's "help" not really useful== | ||
IMF has been lending money to Argentina since 1983 accompanied by policy adjustment directions. Most of them hindered economic growth, and the reliability of IMF loans | IMF has been lending money to Argentina since 1983 accompanied by misguided policy adjustment directions. Most of them hindered economic growth, and the reliability of IMF loans decreased. | ||
*Since 1983, the IMF has lent to Argentina nearly U$S 30.6 billion. | |||
*These loans were available without interruption, whether the country was facing a crisis or not. | |||
*The IMF prescribed policies that retarded economic stability and long-term growth. Each IMF arrangement required Argentina to balance its fiscal budget by raising taxes, deterring economic activity and encouraging tax evasion. | |||
*Argentina couldn't implement the reforms demanded by the IMF. Argentina was required to cut government expenditures to help balance the budget. However, since 1989, expenditures had grown from 9.5% to 22.3% of GDP. Because of the huge inflows from privatization, the government was able to run a fiscal surplus. After most state industries had been privatized, the fiscal deficit returned. Even though Argentina showed failure to meet IMF adjust demands, they kept lending them increasing amounts of money. | |||
==Sources== | ==Sources== | ||
Latest revision as of 02:30, 7 December 2006
Major Changes
Immediately after being elected, Menem announced major plans to open the economy. During his first presidency, his policies were thought to help the economy to grow and promised a period of prosperity. However, his second presidency showed how unsuccessful these policies were. Argentina entered a deep recession with no hopes.
First Presidency
- Convertibility Law
In 1991, he created a currency board that proposed the Convertibility Law, which was passed by the Congress. This law made the peso (Argentina currency) convertible with the dollar at a fixed nominal exchange rate, with the domestic monetary base fully backed by the foreign exchange reserves of the Central Bank. Because of this new currency board system, the government couldn't issue notes without the full support of foreign reserves. Under this law, the government's liabilities could not be payed by printing money. This helped to solve the hyperinflation problem immediately.
- Privatization of national companies
Between 1990 and 1994, Menem privatized:
- airlines
- gas transportation and distribution
- passenger and cargo railways
- power generation and distribution
- telecommunications & the postal service
- water and sewage systems
- oil and gas extraction facilities, coal mines, petrochemical plants, steel mills
- most public banks.
This reduced government consumption since all the state companies left were unproductive and inefficient, and were operating at a loss. By selling all this national patrimony U$S 60,000 million were lost. Two example was YPF (national oil company), Aerolineas Argentinas (national airlines). All the Boeing 707 were sold by only 1 dollar each. Although the companies were released of their debt when sold to foreign companies, the total debt they owed was taken by the government.
- Deregulation
Menem eliminated price and exchange rate controls, and removed export taxes and import quotas. By deregulating the economy, the cost of doing business drastically decreased and stimulated, so the output increased too.
These policies caused inflation to go down, investment went up too, Argentinians were satisfied. Argentina's annual GDP grew 7.9 % from 1991 to 1994. Gross Investment rose by more than 120%. Poverty fell from 38% in 1989 to 13% in 1994. Unfortunately, this growth was not sustainable.
Just a Promise
Even though there was a huge economic growth in the beginning, this plan of economic liberatization failed and caused a recession that lasted 5 more years. This full economic dependence caused the following problems:
Increasing Debt
Government expenditures grew from 9.4% in 1989 to 21% in 2000. At the same time, GDP growth slowed from 7.9% between 1991 and 1994 to negative growth since mid-1998. Lack of economic growth, combined with increasing government expenditures, generated a fiscal deficit that grew from 0.15% of GDP in 1994 to 2.4% in 2000. To achieve fiscal balance, instead of decreasing its expenditures, it chose to raise taxes and incurred more debt in financial markets and with the IMF. Raising taxes proved to be a bad tactic; it caused more tax evasion and suffocated the private sector even more.
In 1998, Argentina's per capita debt surpassed that of Korea during the Asian financial crisis. Total Argentine public debt increased from 34% of GDP in 1991 to about 52% in 1999. High debt increases the cost of borrowing money because it increases the perception of investment risk.
External Debt in billion U$S
Uncertainty over the monetary system
The Convertibility Law dealth with the problem of high inflation. The high value of the peso tied to a strong U.S. dollar cause a lot of problems. The absence of stable reforms generated speculation on the sustainability of the currency board.
Excessive regulation
Most privatization didn't encourage competition, it simply transferred monopolies from the public to the private sector. Argentina's labor system was heavily burdened by excessive regulations that constrain the ability of businesses to adjust to fit market changes, forcing many businesses to ignore labor laws by employing workers outside of the legal system.
Barriers to free trade
Argentina began reducing its tariffs in the 1980s. The major trade policy of the 1990s was to set up a common market with Argentina, Brazil, Uruguay, and Paraguay (known as Mercosur) in 1991. Mercosur prohibits trade barriers between member nations on approximately 85 percent of tariff lines and maintains common tariffs and trade barriers against non-members. Trying to open the market does not go with this trade-bloc strategy. Additionally, the interdependence on trade among members made each country in the bloc highly vulnerable to other countries' economic woes. For example, in 1999 Argentina suffered a 24% decline in exports to Mercosur countries because of Brazil's devaluation against the dollar. For Argentina, Mercosur has functioned as a prison, limiting the country's potential.
Corruption
Weakness in the rule of law, coupled with a large bureaucracy, has implemented a culture of corruption. Corruption affects the entire government. 82% percent of people living in Argentina do not trust the effectiveness of the judicial system and therefore do not use it. This distrust doesn't help to sustain economic growth. A weak, non-transparent judicial system raises the cost of doing business and undermines local and foreign investment. By increasing risk, corruption undermines the confidence of citizens and foreign investors alike in undertaking commercial activities, saving, and making long-term investments.
Menem also encouraged illegal activity through excessive taxation. According to the Latin American Foundation for Economic Research (FIEL), Argentina's illegal economy totals an estimated $64 billion per year. An estimated $15 billion of this is due to tax evasion. Tax evasion is a reaction to extreme levels of taxation imposed by the government to finance the increasingly government expenditures.
IMF's "help" not really useful
IMF has been lending money to Argentina since 1983 accompanied by misguided policy adjustment directions. Most of them hindered economic growth, and the reliability of IMF loans decreased.
- Since 1983, the IMF has lent to Argentina nearly U$S 30.6 billion.
- These loans were available without interruption, whether the country was facing a crisis or not.
- The IMF prescribed policies that retarded economic stability and long-term growth. Each IMF arrangement required Argentina to balance its fiscal budget by raising taxes, deterring economic activity and encouraging tax evasion.
- Argentina couldn't implement the reforms demanded by the IMF. Argentina was required to cut government expenditures to help balance the budget. However, since 1989, expenditures had grown from 9.5% to 22.3% of GDP. Because of the huge inflows from privatization, the government was able to run a fiscal surplus. After most state industries had been privatized, the fiscal deficit returned. Even though Argentina showed failure to meet IMF adjust demands, they kept lending them increasing amounts of money.
Sources
Australian Goverment Department of Foreign Affairs and Trade
Introduction | Dictatorship | Raúl Alfonsín | Fernando de la Rúa
Interim Presidents | Néstor Kirchner | Graphs | Final Analysis
