A Catastrophe Foretold: Economic Reform, Crisis, Recovery and Employment in Argentina
56 Pages Posted: 19 May 2006
Date Written: September 2007
The economic crisis of 2001-2002 in Argentina caused a large increase in unemployment. Policy responses have been imperfect. This paper discusses the roots and character of the crisis, the policies implemented to address the resulting social situation, and the quality of early warning indicators available at the time of the crisis. The main cause of the crisis was the rapid increase of public expenditure, public indebtedness and debt servicing in the late 1990s, and the failure to reverse it when a new administration took office in December 1999.
These fiscal developments prompted a large increase in the rate of interest the country had to pay in international markets, and eventually capital flight and a sudden stop of international financing both for the government and the private sector. The government announced it will stop servicing public debt, imposed capital controls and scrapped the currency system, causing a deep fall in economic activity, a sharp increase in inflation (40.9 in 2002, about 90% from 2002 to 2006) and a big increase in unemployment during 2002 and early 2003, until a recovery went underway.
Some interpretations of the crisis have linked it to the monetary system (of the currency board type) the country had adopted in 1991 after several bouts of hyperinflation also linked with excessive public indebtedness and fiscal deficit. An examination of the arguments for this interpretation shows them lacking as an explanation of why the crisis occurred, though in the event of a crisis already happening a more flexible monetary system would have been helpful.
The main responses to the social impact of the crisis have involved:
- A large workfare program, which at its peak covered about 14% of total labour force
- A freeze on utility charges (electricity, gas, fuel, telephones and others), further straining relations with the private firms running public services
- A stiff cut in public debt to bondholders (i.e. except debt to international organizations), accepted by ¾ of bondholders so far. This, and obtaining a primary budget surplus, enabled the government to engineer a recovery and accumulate foreign currency reserves while preserving its ability to pay for social programs.
Lack of early warning was not a factor in the crisis. Argentina has a good and well developed statistical system, and there was no dearth of indicators and early warning signals about this crisis. Even if improvements might be implemented in the main indicators available, they were enough to ascertain the probability of the crisis, and its impact. The main problems with forecasting and avoiding the crisis lay in poor governance, conflicting views about the country's position, different interpretations of the signals, and inability to respond through policy. Some of these problems are still present, and may have effects in the future.
Keywords: Argentina, employment, labor, workfare, economic reform, crisis
JEL Classification: E24, E3, E65, H6, I3, J6, N1, N3, O4, O5
Suggested Citation: Suggested Citation
Register to save articles to
By Nehal Bhuta
By Oren Gross
By Tom Ginsburg