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 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 chosed to raise taxes and incurre 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.

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 policy adjustment directions. Most of them hindered economic growth, and the reliability of IMF loans encouraged moral hazard. After almost two decades of misguided recommendations and nearly continuous funding, the IMF's involvement in Argentina actually strengthened the power of political vested interests at the expense of economic growth.

Consider the following facts:

Since 1983, the IMF has extended to Argentina seven Stand-By Arrangements, two Extended Fund Facility agreements, and two renegotiations of its loans. The total amount lent to Argentina through these arrangements was SDR 24,117 million, or nearly $30.6 billion in U.S. dollars. 45

IMF loan agreements with Argentina have been in place during all of the 18 years since 1983, except 1986-1987 and 1988-1989. The loans were available without interruption, whether the country was facing a crisis or not.

In each program, the IMF prescribed policies that retarded economic stability and long-term growth. Each IMF arrangement, for example, required Argentina to balance its fiscal budget by raising taxes, which in turn deterred economic activity and encouraged tax evasion, thereby aggravating the fiscal imbalance that the recommendation was intended to address.

Argentina regularly failed to implement the reforms demanded by the IMF in return for credit arrangements. In each IMF arrangement, for instance, Argentina was required to cut government expenditures to help balance the budget. Since 1989, however, expenditures have grown from 9.5 percent to 22.3 percent of GDP. (See Chart 4.) Only with massive inflows from privatization was the government able to run a fiscal surplus. (See Chart 1.) After most state industries had been privatized, the fiscal deficit returned. Despite ample evidence of such failure to meet IMF reform demands, the IMF continued to lend Argentina funds--and in increasing amounts. (See Chart 4.)

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