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Argentina: Stuck in a Time Warp

Argentina is stuck in a time warp. Political and economic reforms over the past decade were supposed to lead the country out of chronic economic crisis. In April 1991 Economy Minister Domingo Cavallo linked the Argentine Peso to America’s dollar at a rate of one to one, kicking off an era of radical reform. Yet ten years later, the same Signor Cavallo is trying to fend off recession and government default.

Argentina’s cycle of crisis is perplexing. The past ten years saw industries and social security privatized and international trade liberalized. A chronic budget deficit was brought under control, infrastructure upgraded, and the banking sector strengthened.

All this, and currency stabilization, made for an economic boom in Argentina that lasted until 1995, as foreign investors poured money in. In that year, the economy was set back by Mexico’s financial crisis. Growth rebounded strongly until 1998. Since then, the economy has confronted prolonged recession, and the government is having trouble refinancing the public debt. Fears of a default abound.

Starting with Cavallo, Argentina’s boosters argue that these problems are transitory, and blame the country’s difficulties on turmoil in world financial markets and the US dollar’s excessive strength in relation to the Euro, which reduces Argentina’s export competitiveness. Brazil’s devaluation in 1999 also undermined export competitiveness. Low world commodities prices and protectionism against Argentina’s agricultural exports are additional factors.