Introduction
From 1991 up to 2002, the Argentine Currency Board sought to peg the country’s currency (peso) against the U.S. dollar. This was a move that was aimed at stimulating economic growth in Argentina, in addition to eliminating hyperinflation (Baer, Elosegui & Gallo, 2002, p. 67). Although this move received profound success at first, nonetheless, the actions by the board failed, in the long-run. Contrary to the perceptions of many, the supposed pegging was nonexistent, save for the initial stages of the plan. Later, the government only turned back to its foreign exchange reserve as a means of sustaining the peg after it had been hit by a massive recession, forcing many of the banks to withdraw from the plan (Gurtner, 2003, p. 211). Prior to the currency board implementation, debate was rife regarding the most suitable currency for use as a yardstick with which the peso could be pegged on. A majority of the economists maintained that the currencies of the main trading partners to Argentina should have been the basis of the pegging exercise, and not the U.S. dollar (Hanke, 2002, p. 205).
Actions of the Goverment
On the other hand, there are those who maintained the need to use the dollar as a yardstick for pegging peso, since it would offer a high safety level, simplicity of understanding, enhanced international credibility as well as improved terms of trade. The latter policy was eventually adopted. The intention of the government was to establish global credibility, in addition to limiting the control with respect to fiscal and monetary policy. Besides helping stabilize the peso, the currency board also had the intention of encouraging local as well as foreign investment, along with pushing for improved economic growth. However, there were several flaws in the implementation of the currency board. For example, it manipulated interest rates on several occasions, by creating discount rate, in effect assuming the role of the central bank. It lend out money to the government, meaning that it had assumed discretionary powers that made it impact on monetary policy. It failed to sustain unlimited and absolute convertibility of coins and notes as well as the currency against which these had been pegged on. The board further placed restriction on the capital and current account transactions. The only rule that the Argentine currency board did not violate, was that pertaining to fixed rate of exchange.
Results
When exchange control rates were implemented, this led to the jeopardizing of full convertibility of the Argentine peso, relative to the U.S. dollar. Consequently, the intent of the Argentine government witnessed reduced credibility. In addition, the peso was exposed to speculative pressure, the peg notwithstanding. The Argentine currency board was also affected by external shocks, such as the 1994-1995 crises in Mexico (Bird, 2002, p. 161). The ensuing liquidity crunch led to a sharp rise in interest rates, increased unemployment and staled growth. The Asian and Russian economic crises of 1997 and 1998 respectively also affected the currency board in argentine, as did the 1999 Brazilian crisis. In the latter quarter of 2001, the Argentine currency board was under massive pressure to dissolve. This was not an easy task since already, a majority of the debts that the country had were in terms of the U. S. dollar (Edwards, 2002, p. 144). Breaking the existing peg would therefore have been very costly. After considering various options, one of them that proved disastrous was the restriction by the country’s finance minister that bank deposits withdrawal should not exceed 1000 pesos/dollars on a monthly basis, at least until March 3 2002. The plan, popularly known as Corralito, proved very unpopular, lading to the resignation of de la Rua, the then argentine president, along with Cavallo, his finance minister.
Reference List
Baer, W., Elosegui, P., & Gallo, A. (2002). The Achievements and Failures of Argentina’s Neo-Liberal Economic Policies. Oxford Development Studies, 30(1): 63-85.
Bird, G. (2002). Argentina’s Currency Board: Cry for Argentina – But not for its currency board, New Economy: Surrey Centre for International Economic Studies, 158-165.
Edwards, S. (2002). The Great Exchange Rate Debate after Argentina. The North American Journal of Economics and Finance, 13(3): 237-252.
Gurtner, F. J. (2003). Currency Boards and Debt Traps: Evidence from Argentina and Relevance for Estonia. Oxford: Blackwell Publishing Ltd.
Hanke, S. H. (2002). On Dollarization and Currency Boards: Error and Deception. Policy Reform, 5 (4): 203-222.