Argentina's Exchange Rate Regime example essay topic

Argentina is an economic, financial, political and social tragedy. The country declined from being the 10th wealthiest nation to the 36th wealthiest in 1998. Argentina is the only wealthy country to experience so great a reversal in recent history. Currently in a financial crisis, Argentina faces fewer prospects for positive economic growth in the future.

Poor economic policies and political instability contributed to Argentina's current state. The International monetary fund's loans and guidance have aggravated Argentina's problems as well as self inflicted problems through profligate and corrupt spending by argentina. Problems began with the hyper inflation of the 1980's. to slash this, anchoring the currency to the dollar was to be done, otherwise the country's real exchange rate would appreciate, demand for its exports fall and unemployment increase, dampening wage and price pressures. According to Edwin Truman, from the Institute for International Economic, the argentine authorities opted for a particular rigid type of exchange rate based stabilization regime, one that guaranteed the convertibility of one peso into one dollar. The IMF encouraged this exchange rate system, but did not promote sustained growth. Argentina should have encouraged a more flexible exchange rate.

There were other mistakes in Argentina's reform program. It was praised for allowing large foreign ownership of banks. This led to a seemingly more stable banking system, but one which failed to lend to small sized firms and growth slowed due to firms not getting enough finance. Soon there were higher interest rates and double digit unemployment. The global financial crisis that followed East Asia's crisis set off a series of big exchange rate adjustments. (the US dollar, to which Argentina's peso was tied, increased sharply in value). According to the Strait Times, there are lessons to be drawn from argentina's situation: .

In a world of volatile exchange rates, pegging a currency to one like the US dollar is highly risky... Globalization exposes a country to enormous shocks. Adjustments in exchange rates are part of the coping mechanism... Any government following policies which leave parts of the population unemployed or underemployed is failing in its primary mission... Growth requires financial institutions that lend to domestic firms. Selling banks to foreign owners, without appropriate safeguards, may impede growth and stability.

In the end, the failure of the argentine economy to grow undermined political support for the policies necessary to sustain argentina's exchange rate regime and led to devaluation and default. Fixed exchange rate regimes are brittle and they can break if the external and internal economic and financial forces arrayed against them are strong. Argentina's exchange rate was not only fixed, it was hardened by its convertibility law, currency board type of monetary arrangement, and no exit strategy. The strength of the dollar sustained, to which the peso was pegged after 1995. Argentina devalued its currency 29 percent and adopted a dual exchange rate after congress granted president Eduardo duh alde emergency powers to revive the economy.

The government announced the argentine currency would be floated but that a rate of 1.40 pesos to the dollar would be set for international transactions. According to capitalist magazine, the bush administration should encourage argentina to adopt policies that will increase economic freedom and lead to long term growth and stability: . Adopting the US dollar as the official currency. The best way for argentina to address the interest rate premium resulting from currency risk would be to adopt the US dollar as its own currency. This would eliminate the risk stemming from peso-dollar exchange rate and lead to lower interest rates...

Reduce spending and taxes. To spur economic growth, argentina needs to lower taxes without aggravating the fiscal deficit and slash govt expenditures... Foster further deregulation. Argentina should build on this progress by scaling back regulations governing... Encourage free trade. Argentina should expand its export markets and diversify its export base by signing agreements with other nations that are receptive to unrestricted trade...

Strengthen the rule of law.