Exchange rates and currency crises
Argentina’s economic recovery policy choices and implications
Successful policies bringing economic growth and poverty reduction in Argentina
Authors:
L. Sandoval; M. Weisbrot
Publisher:
Center for Economic and Policy Research, Washington, 2007
Argentina has recovered quickly from a record sovereign debt default and financial collapse in December 2001. The authors argue that this was due to a shift in government policy after IMF promoted austerity had led to large scale protests driving the previous government from office.
The government strengthened foreign exchange controls and intervened in the foreign exchange market to maintain a stable and competitive real exchange rate. According to the authors, this proves that targeting the exchange rate does not necessarily foster inflation if there is an excess supply of foreign exchange at the target rate. Also, sterilising interventions in the foreign exchange market by issuing bonds in the domestic market is seen to be viable.
The authors then argue that the default enabled the government to pursue new macroeconomic policies. By remaining firm towards creditors, particularly the IMF, the government avoided an unsustainable debt burden which could have hampered economic recovery. This was possible because of Argentina's high trade surplus and taxes, notably on export, which provided the government with funds to finance social stipend programmes. Those programmes reduced poverty and consumption volatility so that Argentina's growth did not result from high exports due to devaluation, but was driven by private consumption and investment. The authors conclude that certain heterodox policies can create sustainable growth.
