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Friday, April 26, 2013

Argentina’s Post-Crisis Economic Reform: Challenges for U.S. Policy

J. F. Hornbeck
Specialist in International Trade and Finance

U.S.-Argentine economic relations have long history of mutually beneficial engagement. In recent years, however, they have been strained at times, in part because of Argentina’s struggle to maintain macroeconomic stability, and also because of specific policy choices that have made the business environment difficult to navigate since the country’s 2001 financial crisis. Following a steep currency devaluation and the largest sovereign default in history, Argentina entered a deep recession with high unemployment and social upheaval. It brought to power a new government, and with it a shift in economic policy away from market-oriented policies toward greater government control of the economy in pursuit of “social equity.” The initial policy responses intended to restore order and address the most pressing social problems evolved into permanent social programs. Government policies introduced many distortions into the economy, including high inflation, which have required regular adjustments in the international accounts to maintain economic stability. These include managed trade, capital controls, and limited currency conversion, among other policies that have earned the ire of international stakeholders.

Argentina’s economic policies reflect priority for financial independence, social equity, and what may be considered a commitment to “populist” macroeconomic solutions. Even in recognizing that countries can govern themselves well under alternative policy frameworks, what stands out for many is the sense that Argentina’s policy choices, with attendant economic distortions, increase the risk of a new financial crisis. The resulting spillovers into international economic policy are unavoidable. Trade protection, managed exchange rates, and capital controls, for example, are policy adjustments required to address problems that materialize in a constrained economic system (e.g., subsidy-driven fiscal expansion, price controls, inability to borrow internationally) that cannot easily accommodate current account deficits, a market exchange rate, or standard macroeconomic responses to high inflation.

Congress and private U.S. stakeholders have opposed many of Argentina’s policies that include a sovereign default on debt owed to both private investors and countries, including the United States; refusal to pay awards ordered by the International Centre for the Settlement of Investment Disputes (ICSID); nationalization of foreign assets; trade protectionism; capital and currency controls; and refusal to abide by International Monetary Fund (IMF) reporting requirements. Some U.S. investors are suing the government of Argentina in U.S. federal courts; the Obama Administration has invoked financial restrictions, revoked trade preferences, voted against loans for Argentina in the development banks, and filed cases before the World Trade Organization (WTO). Some Members of Congress have expressed dissatisfaction in hearings, resolutions, and proposed legislation.

International stakeholders, both public and private, find themselves challenged by this system, along with some Argentines. One indication of the breadth of international dissatisfaction over Argentina’s policies is the call for effectively removing Argentina from the G-20, despite the lack of precedent and formal procedure for doing so. Irrespective of these initiatives, Argentina has not been moved to change course, and the 113
th Congress may decide to consider once again U.S. options for addressing bilateral concerns with Argentina.

For details on the sovereign debt issue, see CRS Report R41029, Argentina’s Defaulted Sovereign Debt: Dealing with the “Holdouts,” by J. F. Hornbeck.

Date of Report: April 15, 2013
Number of Pages: 22
Order Number: R43022
Price: $29.95

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