The devaluation of the peso and the end of the peg to the dollar along with fiscal consolidation will bring economic recovery to Argentina.
After the economic reform in the 1990s and under the Convertibility Plan, Argentina’s economy was doing well. This reform brought to the Argentineans both economic stability and growth. In 1998, Argentina began showing some signs of economic slowdown. Then, in December of 1999, the new president, Fernando De La Rua, confirmed the serious economic problems of the country. At the end of 2001 and after several attempts at trying to solve the situation through various measures, such as the Impuestazo, the blindaje, the megacanje and ...view middle of the document...
* An overvalued peso reduces the competitiveness of Argentina. The production of national goods experienced a decrease [Exhibit 1c] as a consequence of the lower prices of the imports. Devaluating the peso decreases the prices of Argentinean goods in the rest of the world and increases the prices of foreign goods in Argentina; therefore, the devaluation of the peso will decrease imports and increase exports, restoring Argentina’s competitiveness.
* The reduction of the levels of production because of the overvalued peso along with the economic crisis caused an increase of the unemployment rate [Exhibit 1a and Exhibit 1b]. The devaluation and the consequent increment in the consumption of Argentinean goods will reduce unemployment.
* The devaluation will lower Argentineans’ wages in terms of other currencies increasing Argentina’s competitiveness. Low salaries will attract investors from outside the country.
* The devaluation will also eliminate deflation by stopping the effect of the appreciation on the prices.
* Argentina is suffering a loss of international reserves [Exhibit 3] as a result of trying to maintain a fixed exchange rate. The country is suffering a capital flight [Exhibit 5 and 6] and Argentineans are purchasing equity abroad. Devaluation in the short run increases interest rates, which must be offset by the central bank through an increase in the money supply and an increase in foreign reserves.
* On the other hand, the devaluation of the peso will increase Argentina’s debt. Argentina’s debt is denominated in foreign currency, the devaluation will make it grow more and more and consequently Argentina’s government expenditures on debt service will increase.
Benefits for Argentina from the fiscal consolidation
End of the structural deficit
Argentina has a tendency to suffer fiscal deficits. Argentina’s overall fiscal balance has been negative since 1994 [Exhibit 4]. The total external debt has dramatically increased since 1993, reaching 58.3% of the GDP in 2001, while...