Whyis the inflation rate so high in Argentina?

Answer 1

-Poor monetary value of the money
-Many foreign unpaid loans (bad debt)
-Not enough exports
-bad social systems
-bad government

Answer 2

Corrupt government.

Answer 3

Look at this:

As part of the ongoing Bank series, Practitioners in Development, Mario Blejer, Director of the Centre for Central Banking Studies and Advisor to the Governor, Bank of England came to the Bank on October 22nd to discuss his experiences managing the financial crisis in Argentina in 2002. John Page, a sector director in the Bank’s Poverty Reduction and Economic Management unit, made opening remarks. Page noted the importance of the series was to help the Bank understand how its policies actually impact events on the ground. He provided some background information on Blejer, and the chairman of day’s lecture, Murilo Portugal, Executive Director of the IMF, and two discussants, Dr. Vijay Kelkar, Minister of State in India’s Ministry of Finance, and Agustin Carstens, Deputy Managing Director of the IMF and former Undersecretary of Finance and Public Credit for Mexico.

Blejer noted his public service only lasted one year, but at a serious time in both Argentina’s history. He said the biggest lesson for him was the clear difference between how one thinks during normal times from what is necessary during a crisis. During a crisis, a different policy making structure is necessary, one which requires imagination and boldness. He said the lessons one may draw from the Argentina experience may not be applicable to normal circumstances. Crisis management has distinct phases. First, one must understand the nature and causes. Then one must define the trade offs one will be facing since any policy decision made will have some down side. An operational strategy must be defined, followed by issues of implementation. Blejer emphasized the importance of being persistent in following a chosen strategy. Changing strategies in the middle of implementation is dangerous, he said. The final step is to draw lessons from the experience.

The crisis was an attack on the currency as well as a bank run. Blejer suggested one might not have been able to happen without the other. He also noted additionally there was a debt crisis. The currency crisis centered on the convertibility regime, which was introduced in 1991 after a period of rapid inflation. The goal was to fix the currency rate and limit the central bank from changing monetary policy. It positively affected the rapid inflation rate, and the economy began growing again. But there were weaknesses in the regime as well. The fixed currency rate made the economy uncompetitive with other countries. There were also inconsistencies in the country’s macroeconomic policies which increased debt. Finally, during the late 1990’s, capital flows reversed, which Blejer suggested was in part caused by serious economic crises from other parts of the world. Of the three reasons, Blejer believes the faulty macroeconomic policies were the most damaging. The rigidity of the system did not allow it to recover from shocks. Public debt began to balloon by the end of the decade. This was exacerbate by significant public expenditures and the start of a recession in 1998.

The banking crisis occurred after more than a year of declining deposits, something Blejer called unprecedented. So it was not a traditional bank run. He said the reason was government abuse of the banking sector. People took their money out of the banks, he said, because they feared government policies would make the banks insolvent and the government would confiscate the money. The fear developed because he believes the public was observing the government undermining the private sector in the bank portfolios. This was occurring during 2001. The government began forcing the sector to take on more and more government bonds. The interests rates were high, so the initial reaction from the banks was positive, but eventually they realized the government might default on the bonds, so they began to refuse the deposits, which the government continued to force upon the banks. Interest rates began to rise and the price of the bonds fell. By the end of 2001, the banks implemented withdrawal restrictions as investors began to panic. The panic resulted in public riots and the fall of the government by start of 2002. Currency was converted to pesos, which created more debt for the banks. To avoid a total collapse of the sector, the government sought to stabilize the banks by providing further issuances of bonds. At that point, Blejer was appointed Director of the Central Bank. The run was continuing despite restrictions the bank’s were placing on withdrawals. A run began on the peso as well, as the exchange rate began to climb. The Central Bank sought to maintain liquidity in the banking system in order to defuse a bank run. Such an effort would create hyperinflation, one of the trade offs he and colleagues had to consider: either have hyperinflation or allow the banking sector to collapse. To avoid either scenario meant slowing the bank run and provide some liquidity. Importantly, was to get investors to buy Central Bank assets rather than government bonds. Also critical was to slow the devaluation and chaos of the currency market. The strategy was strongly opposed by the IMF which advised no intervention from the Central Bank. The Central Bank settled on a dual strategy of intervention which included higher interest rates and have a falling exchange market intervention. Some banks had to be closed: about 3%. Short term bills were created by the Central Bank. Devaluation was not prevented, but chaos was averted.

Deposits continued to fall, but finally the rate slowed and began to grow after six months. Interest rates fell by the fall. Once the exchange rate was stabilized, inflation was halted. Blejer was careful to note the problems are still not fully resolved and only reflect the current situation. The bond situation still needs restructuring, but slowly. He characterized the worst of the crisis as over. The strategy worked, he said, because fiscal accounts can turn around to allow absorption of liquidity. They were adjusted through distorted means, but that they could be adjusted was paramount. Fiscal accounts improved because the debt is not being serviced, he said. Additionally, there were some who put political pressure on the Central Bank to have a more expansive policy to create hyperinflation. But Blejer said the Central Bank and many in government realized this could lead to civil strife and resisted. Importantly for the future was to secure in the public’s mind that property rights are sacred.

Kelkar compared Argentina’s and India’s fiscal problems. He said India suffered major internal and external economic shocks similar to Argentina, and bank runs also occurred. India overcame its crisis in the early 1990’s. The outcome was different because India did little off shore borrowing. Personal savings was also a determinant. Kelkar suggested flexibility in the labor market played a role. Also India’s democratic leanings and strong institutions allowed the country to absorb these shocks more easily. Kelkar said that earlier and stronger intervention by the IMF would have alleviated Argentina from much pain. A key problem for Argentina was lack of market access which the IMF could have helped with larger resources. The Fund program also needed to be longer because of the significant structural change that was necessary. The Fund does not give enough attention to the political economy of reforms, Kelkar said, and needs to reexamine these fundamental macroeconomic issues more closely in the future.

Carstens said he would discuss lessons learned from the crisis from his perspective within the IMF. He said, in addition, to the reasons Blejer cited as the core of Argentina’s problems, he had two more reasons. He said there was an involuntary cover up of the regime’s flaws. He also said active dollarization of declining currencies helped speed up the instability of the regime. He noted that the situation remains difficult and much of the future success relies on how well the current government can implement sound fiscal policies that Blejer help initiate. The Fund has drawn the following lessons from Argentina. First, the more needs to be done on crisis anticipation and prevention. Second, careful assessment of the links between structural reforms and growth is needed. Third, a new focus is needed for debt dynamics on crisis prevention and resolution. Fourth, crisis resolution in Argentina illustrates the importance of timely debt restructuring. Fifth, the crisis illustrates the pervasive effects of default on the financial system and macroeconomic policies. Sixth, an exchange rate regime needs to feed a country’s economic and political realities. Seventh, there are limits to the ability of an exchange rates to discipline other aspects of economic policy to insure stability. Among the lessons the Fund has learned included: that it has shortcomings in identifying vulnerability in countries in crisis; that it needed to reexamine its seal of approval; and that the Fund shouldn’t provide financing in situations where the debt dynamic is unsustainable.