Argentina: Determinants of a Crisis

After eight years of strong growth of output with stable prices, in 1999 Argentina entered a recession which culminated at the end of 2001 in a deep economic and social crisis. At first sight the crisis was brought about by the fixed exchange rate peso-dollar which had previously stopped inflation and spurred growth. This because the increase in the international value of the dollar between 1995 and 2001, and the depreciation of the Brazilian real in 1999, had a strong negative impact on the competitiveness of Argentine products. A deeper analysis shows that the lack of competitiveness of Argentina goes back to the early nineties, and that the negative effects of the dollar’s appreciation were to some extent compensated by a substantial reduction in the average prices of Argentina’s products with respect to American ones. One major determinant of the crisis seems to have been the structural excess of public expenditures over revenues, aggravated by very low private savings. Particularly negative were the effects of substantial increases in public sector wages.