Carlos Menem

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: 1 airlines 2 gas transportation and distribution 3 passenger and cargo railways 4 power generation and distribution 5 telecommunications & the postal service 6 water and sewage systems 7 oil and gas extraction facilities, coal mines, petrochemical plants, steel mills 8 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 as a percentage of GDP grew from 9.4 percent in 1989 to 21 percent in 2000. 16 At the same time, GDP growth slowed from 7.9 percent between 1991 and 1994 to negative or negligible growth since mid-1998. 17 Lack of economic growth, combined with an expansion in government expenditures, generated a fiscal deficit that grew from 0.15 percent of GDP in 1994 to 2.4 percent in 2000. (See Chart 1.) To achieve fiscal balance without distorting the economy, the government could have lowered its expenditures. Instead, it chose to finance the fiscal deficit by raising taxes and incurring additional debt in financial markets and with the IMF. Raising taxes proved to be a bad tactic; it generated more tax evasion and suffocated an already hobbled private sector. For the past seven years, the Argentine government has imposed an increasingly heavy debt burden on the people. (See Chart 2.) In 1998, Argentina's per capita debt surpassed that of Korea during the Asian financial crisis. Total Argentine public debt increased from 34 percent of GDP in 1991 to about 52 percent in 1999 (see Chart 3) and currently accounts for 23 percent of all emerging market debt. 18 High debt increases the cost of borrowing from capital markets because it increases the perception of investment risk.

Sustaining this level of debt will soon be impossible. Unless Argentina generates strong economic growth soon, it will not be able to service its debt without additional external bilateral or multilateral support, debt forgiveness or debt restructuring by creditors, or some combination of the two.

Sources

Australian Goverment Department of Foreign Affairs and Trade

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Introduction | Dictatorship | Raúl Alfonsín | Fernando de la Rúa

Interim Presidents | Néstor Kirchner | Graphs | Final Analysis