Nov 14, 2020 in Politics

Argentina 1 Balance
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Balance of Payments in Argentina

Various factors can affect the economy of a country negatively and cause the economy to sink into depression. One of these factors is the balance of payments - a record of the transactions between residents and non-residents over some period. Thus, a negative balance of payments caused the Argentine Great Depression between 1998 and 2002. As the result of this economic recession, people lost their jobs and unrests were experienced in Argentina as well as the fall of the government. In this short essay, I exam the anatomy of a balance of payments crisis in Argentina in 2001. First, I start off by briefly explaining what balance of payments is. Next, I explain the source of the BOP crisis that affected Argentina, and finally, I examine some of the measures that the country had to take to deal with the crisis.

 

The balance of payments (BOP) is a summary statement of the monetary value of the flow of economic transactions between the residents of a specific country and the rest of the world over a period of one year. The balance of payments is represented by the summation of the current account balance and the capital account balance. For the balance of payments, both accounts should be zero. This equation shows that total receipts should be equal to total payments. Therefore, if receipts are more than payments, there is a surplus balance of payments. However, if payments are more than receipts, there is a deficit balance of payments.

The crisis in Argentina started to build up since the 1980s when the country suffered a substantial debt as well as very high inflation rates. By then, the government took measures to stabilize inflation by setting a peg of the Peso against the Dollar. The peg set by the government was one Peso to one Dollar (Halevi, 2002). The pegging of the Peso was meant to improve the peoples confidence in the currency of Argentina after the inflation. Therefore, such currency pegging supported capital inflows in the country. It decreased the cost of imports, thus increasing the number of imports into the country. On the other hand, there was not a very high demand for exports due to the reduced aggression in exports. As the result of the increased imports and decreased exports, the current account was higher than the capital account, leading to a deficit in the balance of payments. Consequently, the move by the government of Argentina to over-value their currency caused a reduction in the domestic demand, and as the result, there was a fall in GDP as of 1998. Additionally, capital inflows into Argentina decreased after investors had raised concerns about the state of the economy. Additionally, the fall in the exports was caused by the appreciating of the dollar, which the Peso was pegged to, against the Real of Brazil. Therefore, the Peso also went high against the Dollar, leading to decreased exports into Brazil, a major trading partner of Argentina.

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It was a requirement that the Argentine government took on several measures to manage the balance of payment deficit. One of the crisis management strategies was the devaluation of the Argentine Peso. With the devaluation, one US Dollar was now equivalent four Argentine Pesos (Pettinger, 2012). The devaluation ensured that the exports from Argentina became competitive again. Consequently, the imports into Argentina decreased since people now bought goods produced domestically. In other words, the government gave a platform for people to substitute imports. Additionally, the government improved the accessibility of credit for different businesses. Before the Argentine Great Depression, the government did not have a well-devised tax collection structure. To solve this issue, it developed a competitive tax collection plan. This plan ensured that tax collection was improved to ensure that the government had a huge financial resource for its expenditure. Using the financial resource, the government allocated high fund amounts to social welfare, but it kept the rest of spending in other sectors at minimum. Through the above measures, the Peso began to climb against the Dollar, reaching the ratio of three Pesos to one Dollar. The agricultural sector started exporting goods competitively, and tourists started flocking into Argentina, causing huge capital inflows of the dollar. To prevent the same situation that had occurred during the depression as the result of pegging the Peso to the Dollar, the government started to develop strategies to prevent more increasing on the part of the Peso. These strategies were to prevent budget balances by limiting exports. From here, the Argentine Central Bank was able to reconstruct its dollar reserves.

In conclusion, I have analyzed the emergence and consequences of the balance of payments crisis in Argentina. From my analysis, I have learned three things. First, the main cause of the Argentine balance of payments deficit was caused by the overvaluation of the Argentine Peso. The overvaluation of the Peso improved some imports to exports, causing the current account to be higher than the capital account. The second thing that I have learned is that the appreciation of the dollar against the Brazilian Real, which was the main trade partner of Argentina, caused the Peso to go higher and reduce exports into Brazil. The third lesson from the above study is that the devaluation of the Argentine Peso was what had solved the entire crisis.

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