International Business: Should We Cry for Argentina?

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Summary

Argentina has been a fine example of a successful economy for several decades in Latin America. However, the country defaulted on its $ 155 billion of public debts. This is the largest ever for any country. In 2002, when President Dhualde tried to implement some economic reforms, the country further plunged into an economic crisis. One of these reforms led the peso to lose two-thirds of its value against the dollar. This led the government to seize the savings accounts of its citizens and restricted them on how much they could withdraw. Both local and international companies suffered the due loss of value of the peso.

The government raised taxes for rich companies and local companies. Companies struggled to pay their suppliers abroad. Other defaulted. The government also introduced restrictions on foreign exchanges. In addition, foreign investors lost confidence in Argentina. International companies had difficulties repaying their dollar-denominated debts as the value of the peso declined. Argentina’s government amassed debts in terms of dollars, which proved to pay through a weak peso.

Between 2001 and 2002, the country suffered a 15 percent economic decline, unemployment rose to 21 percent, and poverty increased to 51 percent among the citizens. By 2010, the inflation was 10 percent high as the government tried to stimulate the economy through rising wages, imposing price controls, keeping the peso low, and spending public funds. This reduced consumers’ purchasing power and increased poverty.

Update the economic situation in Argentina to reflect recent events. How is the value of the peso faring? Do you think it was wise to cut the ties between the peso and the dollar? Why did Argentina peg its currency to the dollar in the first place? Do you think that the link between the peso and dollar contributed to Argentina’s problems?

The president’s idea to cut ties with the dollar led to devastating effects as the peso lost three times its value to the dollar. This was an unwise move to restore the economy. The country pegged its peso against the dollar as an attempt to enhance economic growth and slow down hyperinflation. Initially, the idea was a success but later proved futile.

The link between the dollar and peso contributed to Argentina’s problem. Since the dollar made the peso so weak, Argentina had the option of adopting the dollar as its official currency but if failed to do so. This could have slowed down the rising interest rate associated with currency risks, risks from exchange rates, and result in low-interest rates of its domestic debts (Katel, 2001).

How did local and international companies adapt to the business environment at the height of Argentina’s crisis? Did they pursue similar courses of action or design dis-tinct strategies to deal with its effects?

Local and international companies in Argentina pursued different avenues in order to adapt to the crisis. There were massive privatization and encouragement of exports for stimulating the economy among local companies. This led to the process of devaluation affecting both financial and commercial industries. Conversely, few international corporations turned to international markets to find ways of refinancing their restructured debts. These companies also closed down due to massive taxation systems imposed by the government.

Be specific in your answer, and give examples. 3. What was the impact on ordinary citizens immediately after the default and later as the economy recovered? What do the aftereffects of the crisis mean long term for ordinary citizens’ spending power? What has it done to the value of their savings? In your opinion, has international aid helped or hurt the ordinary people of Argentina?

Ordinary citizens were the biggest losers during the crisis. Majorities lost their jobs. Most of the privatized companies were mainly utility companies. Consequently, prices of basic commodities rose steadily, demands declined, and companies retrenched many workers.

Consumers also lost their spending power on a long-term basis due to unemployment and frozen or restricted drawing of savings. Savings also lost their values as the value of the peso became weak. However, people tried to convert their savings into dollars, but the government restricted such attempts.

International aids have had negative effects on the lives of ordinary Argentinian citizens. The government of Argentina has been borrowing from international donors but at high rates. This eventually passes to the citizens. Argentina ought to have ended its continuous dependence on the IMF every cycle. The growing debts forced the government to tax companies heavily leading to closure and eventual job losses.

Reference

Katel, P. (2001). Argentina’s Crisis Explained. The Times, 20(1), 1-4.

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International Business: Should We Cry for Argentina?

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