1. Don’t Cry for Me, Argentina March 18 th, 2005 Presented by, Four People Who Are Not John Stiver

2. Background Argentina has a history of chronic monetary, economic, and political problems. Argentina has a history of chronic monetary, economic, and political problems. In 1810, it declared independence from the Spanish Government. In 1810, it declared independence from the Spanish Government. No stable government ruled until 1862. No stable government ruled until 1862.

3. Background Late 1800s: Steady growth and a booming economy due to beef exports to Europe. Late 1800s: Steady growth and a booming economy due to beef exports to Europe. 1890: First large economic downturn as a nation due to budgetary problems by an incompetent government. 1890: First large economic downturn as a nation due to budgetary problems by an incompetent government. Power traded between Presidents and military dictators. Power traded between Presidents and military dictators.

4. Background In 1902, Argentina followed a Gold Standard that had a 100% reserve ratio. In 1902, Argentina followed a Gold Standard that had a 100% reserve ratio. In 1914, this was abandoned. In 1914, this was abandoned. Brought back in 1927. Brought back in 1927. Abandoned in 1929. Abandoned in 1929. In 1945, inflation became a big problem. In 1945, inflation became a big problem. Unresolved political pressures resulted in the government spending more than it had taken in in taxes, causing inflation. Unresolved political pressures resulted in the government spending more than it had taken in in taxes, causing inflation.

5. Background In the 70’s there was triple digit inflation In the 70’s there was triple digit inflation Early 90s: President Menem stepped in with a reform Early 90s: President Menem stepped in with a reform He pegged the peso to the dollar He pegged the peso to the dollar Inflation quickly fell to below 4% Inflation quickly fell to below 4%

6. The Crisis (1999-2002) 1999: President De la Rúa elected 1999: President De la Rúa elected Federal budget deficit high Federal budget deficit high Tax increases attempt to control it Tax increases attempt to control it Tax rates are already substantial Tax rates are already substantial Caused tax evasion-related corruption Caused tax evasion-related corruption 2000: Economy continues to shrink 2000: Economy continues to shrink Drastic decreases in government spending causes chaos Drastic decreases in government spending causes chaos

7. The Crisis (1999-2002) Political deadlock between president and senate Political deadlock between president and senate December 2001: freeze on bank deposits December 2001: freeze on bank deposits Recession turns into depression Recession turns into depression People and businesses cannot make payments People and businesses cannot make payments IMF cuts off loans to Argentina: no outside funds IMF cuts off loans to Argentina: no outside funds Five presidents in two weeks Five presidents in two weeks

8. The Crisis- Statistical Data Bankruptcies reached record levels Bankruptcies reached record levels From 1998-2002: From 1998-2002: Real GDP fell 28% Real GDP fell 28% Inflation went from negative levels to 41% Inflation went from negative levels to 41% Exchange rate fell from 1 Peso/$ to 4 Pesos/$ Exchange rate fell from 1 Peso/$ to 4 Pesos/$ Unemployment increased from 12.4% to 23.6% Unemployment increased from 12.4% to 23.6% Poverty rate rose from 25.9% to 57.5% Poverty rate rose from 25.9% to 57.5% Real wages fell 23.7% in 2002 Real wages fell 23.7% in 2002 Real supermarket sales fell 26% in 2002 Real supermarket sales fell 26% in 2002

9. Why the Recession Did Not Happen Corruption Corruption Failure of Free Markets Failure of Free Markets The Currency Board The Currency Board Overvalued Peso Overvalued Peso Provincial Government Finances Provincial Government Finances

10. Why the Recession Happened Currency crisis in Russia and Brazil Currency crisis in Russia and Brazil Tax Increases Tax Increases Lowered Confidence in the Peso Lowered Confidence in the Peso Contamination of the private sector Contamination of the private sector

11. What could Argentina have done differently? Fiscal: cut taxes early, accept more drastic budget cuts to avoid inflation Fiscal: cut taxes early, accept more drastic budget cuts to avoid inflation Monetary: dollarize, allow banks to issue own notes, default on public debt early Monetary: dollarize, allow banks to issue own notes, default on public debt early Systematic: could go strictly floating or gold standard, but disadvantages to both according to precedents Systematic: could go strictly floating or gold standard, but disadvantages to both according to precedents

12. What to do now? Short term Dollarize now Dollarize now Implement tax cuts Implement tax cuts Revamp banking system to promote confidence Revamp banking system to promote confidence Set floor price for default debt Set floor price for default debt

13. What to do now? Long term Examine structure of law Examine structure of law Simplify tax strategy Simplify tax strategy Improve Federal-Province relationships Improve Federal-Province relationships Reduce unnecessary government spending Reduce unnecessary government spending More flexible labor laws More flexible labor laws Improve health care Improve health care

14. International Policy Implications Determine comprehensive view on handling financial crises Determine comprehensive view on handling financial crises Examine US laws on foreign seizure Examine US laws on foreign seizure Improve IMF recommendations Improve IMF recommendations Borrow / Bailout / Depreciation / Default may not work as well Borrow / Bailout / Depreciation / Default may not work as well Property rights as related to prosperity Property rights as related to prosperity

15. Questions??