Argentina Financial Crisis An Assessment Assessment

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ARGENTINA FINANCIAL CRISISArgentina Financial CrisisIn the year 2001, Argentina had a financial crisis that sent the South American nation into what could only be described as a political and economic tailspin. This text seeks to present some factual information as to what really happened and how this could be tied to events in the 17th century England.DiscussionFrom the onset, it would be prudent to note that according to Rodrik (2003), the move by Argentina to fix its currency to the US dollar was born out of the country’s belief that it could swiftly attain rich country income levels by reducing sovereign risk. Thus, in the words of the author, there was hope that it “would be rewarded with a sharp reduction in ‘Argentina risk’, leading to large amounts of capital inflows and rapid economic growth” (p. 17). In Argentina, new sources of revenue were highly desired. This had been the very same scenario that was experienced under the Stuarts (North and Weingast, 1989).According to Rodrik (2003), it would be difficult for a country to access foreign capital without the removal of sovereign risk. The only way to remove this particular risk, as the author further points out, is to undertake a commitment that other people’s funds will not be played around with. To a large extent, Argentina was determined to convince all those who mattered that its commitment was not only binding, but also real. It is important to note that as North and Weingast (1989) point out, “reputation has long been noted as an important factor in limiting a sovereign’s incentive to renegade, and this approach has recently been formalized in the elegant models of modern game theory” (p. 807). Otherwise, there is nothing that would prevent the sovereign from acquiring a loan and renegading on an agreement to repay. In the very same way, Argentina was keen on building its reputation. In honoring its commitments, the country would be able to have access to additional funds in the future. This is what North and Weingast (1989) refer to as the ‘long arm of the future.’As Rodrik (2003) further points out, the linchpin of the plan of action in the case of Argentina was the currency board regime’s straitjacket. More specifically, in the words of the author, “by linking the value of the peso one-for-one to the US dollar in 1991, and putting monetary policy on automatic pilot, the regime sought to counteract the effects of more than a century of financial mismanagement” (Rodrik, 2013, p. 17). This was, as it would turn out, the wrong course of action.

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Indeed, as Gartner (2004) observes, currency board arrangements are often associated with a wide range of risks. According to Gartner (2004), at the time, the overvalued peso severely constrained the growth of the Argentinean economy. Further, it is important to note that as the author points out, the fixed-exchange rate’s credibility was effectively undermined by several other factors including, but not limited to, high borrowing costs in the context of increased borrowing appetite on the part of the government. The country had limited options. It is because of the situation recounted herein that “Argentina had arguably little choice…

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…the long-term. As has been highlighted in this text, the move to promote the exchange rate’s peg was rather effective in the short-run, and indeed appeared practical and viable. However, in the long term, this resulted in excessive borrowing on the part of the country’s public sector – effectively increasing the final collapse’s cost. Countries ought to have in place fiscal policies that are consistent. Debt should also be kept at manageable levels. Failures on these two fronts is what, arguably, resulted in the demise of this once-prosperous nation. North and Weingast (1989) assess and highlight various institutional reforms that made it possible for early modern England to achieve economic growth. It would, however, be prudent to note that the said reforms were largely forced. Their occurrence was not natural. There are various parallels that could be drawn between the Crown (prior to the Glorious Revolution) and Argentina’s situation. In both scenarios, the financial system was largely a source of expediency. In both instances, there were fiscal needs that, in retrospect, appear to have advanced an agenda of government arbitrariness.Like was the case in the Crown, Argentina had very little in the form of institutional checks and balances. North and Weingast (1989) point out that external institutional checks were severely limited in the Crown executive. Thus, the king was not constrained (with the power that traditional institutions had being even further curtailed over time.) This effectively meant that political as well as economic rights could be altered by the Crown without any significant opposition. In the case of Argentina, the currency board regime could be deemed….....

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