How would you like to live in a country with annual inflation over 100% and interest rates near that number? In Argentina, that’s the daily reality as the country grapples with a spiraling economic crisis — inflation there is the third-highest in the world, behind only Venezuela and Lebanon.
The International Monetary Fund has been the country’s financial lifeline for decades now through periods of economic growth and turmoil, but the relationship is — to put it mildly — complicated. Despite doling out billions of dollars, the international financier has never quite succeeded in turning the ship around, largely due to political pushback in Argentina against reforms and other conditions imposed as part of lending agreements.
“In the last few times that the fund has been involved in Argentina, it has always tried to push some of the reform agenda Argentina needs, but that has always failed,” Monica de Bolle, a senior fellow at the Peterson Institute for International Economics, said during an interview with Marketplace’s Sabri Ben-Achour. “That story has just been repeating itself over and over and over again. It’s like a ‘Groundhog Day’ type of thing.
Argentina possesses definite comparative advantages in agriculture because the country is endowed with a vast amount of highly fertile land. Between 1860 and 1930, exploitation of the rich land of the pampas strongly pushed economic growth. During the first three decades of the 20th century, Argentina outgrew Canada and Australia in population, total income, and per capita income. By 1913, Argentina was among the world’s 10th wealthiest states per capita.
Beginning in the 1930s, the Argentine economy deteriorated notably. The single most important factor in this decline has been political instability since 1930 when a military junta took power, ending seven decades of civilian constitutional government. In macroeconomic terms, Argentina was one of the most stable and conservative countries until the Great Depression, after which it turned into one of the most unstable. Despite this, up until 1962 the Argentine per capita GDP was higher than that of Austria, Italy, Japan, and of its former colonial master, Spain. Successive governments from the 1930s to the 1970s pursued a strategy of import substitution to achieve industrial self-sufficiency, but the government’s encouragement of industrial growth diverted investment from agricultural production, which fell dramatically.
The era of import substitution ended in 1976, but at the same time growing government spending, large wage increases, and inefficient production created a chronic inflation that rose through the 1980s.The measures enacted during the last dictatorship also contributed to the huge foreign debt by the late 1980s which became equivalent to three-fourths of the GNP.
In August, the peso dropped more than 25 percent against the US dollar and has now lost more than half its value since the start of the year.
In response, Argentina’s central bank raised interest rates to a world record 60 percent, while President Mauricio Macri announced a series of “emergency” measures to eliminate the primary fiscal deficit, including cutting the number of government ministries and raising export taxes.
The belt-tightening measures have seen Argentinians, many of whom blame the IMF’s policies for a devastating economic collapse in the early 2000s, take to the streets in recent weeks amid growing anger over spending cuts and rising consumer prices.