These years are marked by continuity in fiscal policy despite political instability. The combination of industrial protectionism, redistribution of income from an agrarian to industrial production, and growing state intervention in the economy sparks an inflationary process. High trade protection shields domestic industry from external competition and enables a fixed exchange rate.
High inflation prompts a stabilization plan that includes tighter monetary policy, a cut in public expenditures, and increases in taxes and utility prices. Wage growth in the early 1960s pushes prices up. The inflation rate increases faster, and soon real wages fall.
The Ministry of Economy puts an end to the exchange rate policy of previous governments. The currency undergoes a 30 percent devaluation. The international financial community supports the government as it attempts to control inflation while encouraging competition. The economy enjoys brief stability in 1973.
The government fixes wages while letting the market determine prices. This policy proves unpopular as real wages fall. The Central Bank then increases the money supply, prompting massive capital flight. As thousands move their savings out of pesos and into dollars in fear of a devaluation, the government resorts to heavy foreign borrowing.
Mexico's suspension of debt payments stalls Argentina's borrowing spree as many developing countries are barred from international capital markets. By then, however, Argentina's international debt has reached unprecedented proportions, and inflation remains unchecked.
Alfonsín implements the Austral Plan, designed to cut inflation through a price and wage freeze and centered around monetary reform that includes a new currency. For six months inflation drops and prices stabilize. But by early 1986, under pressure from business interests, the government reverts to promoting economic growth at the expense of price stability. Inflation growth resumes.
Facing a financial crisis and no longer able to pay the interest on its debt, Argentina signs an austerity program with the IMF. The plan calls for drastic budget cuts, positive interest rates, a slowing down of salary increases, and devaluations. The plan proves unpopular in Argentina, and fails to redress the economy or reduce inflation.
In a drastic measure to reverse slow growth, weak investment, and chronic inflation, Menem introduces the Convertibility Law, which pegs the peso to the U.S. dollar, outlaws the printing of money to finance fiscal deficits, and requires the monetary base to be fully backed by foreign currency reserves. Sweeping reforms in all areas alter the monetary system and improve fiscal and tax policies.
The successful monetary reform program leads to one of the world's lowest inflation rates in the late 1990s. Economic stability attracts local and foreign capital to the local banking system and opens the way for foreign direct investment. Although it is popular, the Convertibility Law reduces Argentina's flexibility to deal with external shocks.
The 1999 recession reverses some of the past decade's progress. Domestic banks take a very cautious stance and cut off credit to local firms. Government and major industries rely on international financial markets. The lack of domestic credit is a bottleneck for small and medium industries, as well as for those struggling to adjust to the devaluation of the Brazilian real.
As the Central Bank runs out of pesos, some cash-strapped provincial governments resort to alternative currency bonds, which many businesses refuse to honor. The 2002 devaluation of the peso ends 10 years of parity with the U.S. dollar. The peso loses 70 percent of its value against the dollar and is undermined by repeated debt-payment defaults. The economic crisis drives many Argentines to barter.
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