From the Lost Decade to Austerity: Navigating Through Argentina’s Economic Crisis

The economic landscape of Argentina is characterized by an ongoing battle against an amalgam of debt, poverty, and inflation accompanied by global economic shifts and domestic policy missteps. This article delves into the complexities and challenges of Argentina's navigating national crisis. Indeed, it will discuss the broad use of expansive monetary policies, decreasing faith in the Argentinian peso, and the stringent austerity measures implemented by President Javier Milei. The article also aims to shed light on the dynamics of Argentina's multifaceted efforts to foster recovery.

The ongoing economic crisis in Argentina is not new and dates to the 1970's. Indeed, the 1973 and 1979 oil crises have had devastating and still unresolved consequences on Latin American countries, including Argentina. The recessions provoked in Europe, Japan, and North America caused a significant decrease in demand for Latin American exports, generating price falls on Argentinian products. As a result, the country’s debt and interest rates on debt repayment loans increased, further disincentivizing foreign investments. Domestic economic mismanagement, driven by the government funding expensive ISI policies, increased the debt up until the 1980’s. These international and domestic economic causes drove Argentina into the “Lost Decade”.

This decade lasted from the 1980s until the end of the 1990s and was characterized by negative growth rates, hyperinflation, as well as close to 40% of Latin American households being poverty-stricken by the mid-1990s. These deep-rooted and complex factors plunged Argentina’s economy into a precarious situation from which it was never able to fully recover from. In the 2000s, the efforts by the Argentinian government to repay the debt and close the fiscal gap kept inflation rates high. More recently, the COVID-19 pandemic and the global economic slowdown have worsened matters by disrupting trade and investment flow, vital to Argentina's economy.

In 2024, Argentina is suffering from a severe inflation crisis. As a matter of fact, the inflation rate, the rate at which the value of a currency is falling and, consequently, the general level of prices for goods and services is rising in an economy over some period of time, was 211% in December 2023 (The Economist, 2024). Argentina's inflation rates overtook Venezuela's, placing it as the country in Latin America with the highest price rises. In January 2024, the inflation rate surged to 254% (The Economist, 2024), demonstrating that the Argentine economic situation is further worsening and far from being resolved. Besides inflation, Argentina's public debt represents 90% of the country’s GDP (The Economist, 2023), the total market value of all finished goods and services produced within a country in a given period of time.

Several factors can be attributed to Argentina’s very high inflation and, more generally, its difficult economic situation. First, the Argentine government has significantly expanded the amount of money in circulation in recent decades, almost tripling it in the thirty years leading up to 2020. Indeed, in 1990, Argentina had 711 billion pesos in circulation, and by 2020, it had roughly 2.5 trillion pesos in circulation (AIER, 2023). Recent years have seen a sharp increase in this trend, with the money supply growing by nearly ten times in less than four years, as by September 2023, Argentina had 22 trillion pesos in circulation (AIER, 2023). The government's need to finance significant deficits and overspending in the absence of adequate revenue from other sources has contributed to this practice. To quickly pay for its expenses, the Argentine government has therefore frequently resorted to printing more money, which has devalued the peso and raised prices.

Moreover, Argentina's lack of confidence in the country’s peso has further exacerbated the inflation, as a significant part of the population now prefers to hold US dollars as a more reliable store of value. According to The New York Times, an estimated $200 billion in US currency has gravitated toward Argentina’s $487 billion economy. Thus, this fuels a vicious cycle whereby the peso depreciates more quickly, forcing the central bank to print more money, which then fuels inflation. To give an idea of how hard Argentina’s peso has fallen, today, a single US dollar purchases 1,000 pesos (AIER, 2023).

Austerity measures, led by recently elected President Javier Milei, are at the core of the Argentine government’s response to the ongoing crisis. Indeed, Argentina’s newly elected president, Javier Milei, declared to the crowd on December 10th, the day of his election, that “there is no alternative to austerity”, warning the population of the tough times it would endure ahead (The Economist, 2023).  d on an ambitious stabilization plan to restore economic stability.

To do so, drastically cutting public expenditures is part of the government’s solution. Indeed, Luis Caputo, the new economy minister, promised to slash electricity and transport subsidies and reduce federal transfers to Argentina’s 23 provinces. Furthermore, the government will increase taxes on imported goods from 7.5% to 17.5% and extend a tax of 15% on all exports (The Economist, 2023). The idea is to cut spending while temporarily increasing taxes to raise revenue to lower the annual deficit from over 5% of GDP to zero by the end of 2024 (The Economist, 2024).

However, these austerity measures are not without consequences. In fact, such economic policies as the cut of public expenditures present many social implications, as they will affect the poorest and most vulnerable people. This will further exacerbate already very high Argentine poverty, namely a state in which a person or community lacks the financial resources and essentials for a minimum standard of living. Indeed, the Argentinian government statistics revealed that by mid-2023, Argentina’s poverty headcount ratio was around 40 percent, meaning that 4 Argentinians out of 10 lived on less than $2.15 a day at 2011 international prices (AIER, 2023).

In conclusion, Argentina's economic crisis, marked by persistent inflation, debt, and poverty, is the result of decades-long challenges compounded by global economic shifts and domestic policy errors. From the 1970s oil crises to today's inflationary heights, the nation has faced a turbulent financial journey. The recent austerity measures introduced by President Javier Milei highlight the difficult choices facing the country as it seeks to stabilize its economy while having negative social impacts. Argentina's path forward remains fraught with uncertainty, demanding a delicate balance between fiscal discipline, economic growth, and social policies.

References

Miltimore, Jon, Argentina’s Rampant Inflation Explained, American Institute for Economic Research, December 5th 2023, https://www.aier.org/article/argentinas-rampant-inflation-explained-in-one-chart/.

In Argentina Javier Milei faces an economic crisis, The Economist, November 20th 2023, https://www.economist.com/leaders/2023/11/20/in-argentina-javier-milei-faces-an-economic-crisis.

Javier Milei implements shock therapy in Argentina, The Economist, December 13th 2023, https://www.economist.com/the-americas/2023/12/13/javier-milei-implements-shock-therapy-in-argentina

In Country Where Houses Are Bought in $100 Bills, Plan for Sweeping Change, The New York Times, November 24th 2023, https://www.nytimes.com/2023/11/24/world/americas/argentina-economy-peso-dollar-javier-milei.html.