Order Code RS21113
Updated August 17, 2005
CRS Report for Congress
Received through the CRS Web
Argentina: Political and Economic Conditions
and U.S. Relations
Mark P. Sullivan
Specialist in Latin American Affairs
Foreign Affairs, Defense, and Trade Division
Summary
With the restructuring of over $100 billion in defaulted bond debt in June 2005,
Argentina appears to have emerged from its economic and political crisis. While the
country was under considerable stress in 2001 and 2002, the democratic political system
weathered the crisis. President Néstor Kirchner, elected in 2003, has made bold policy
moves in the areas of human rights, institutional reform, and economic policy that have
helped restore Argentines’ faith in democracy. Economic growth has rebounded, from
a decline of almost 11% in 2002 to 8.8% in 2003 and 9% in 2004. Nevertheless, the
center-left Peronist government still faces considerable challenges, including the ability
to build the political consensus needed in order to ensure future sustainable economic
growth and financial stability. For additional information, see CRS Report RL32637,
Argentina’s Sovereign Debt Restructuring.
Political and Economic Background
Argentina’s political upheaval in late 2001 and 2002 should be viewed in the context
of its historical political development. Before 1930, Argentina enjoyed some 70 years of
political stability that facilitated rapid economic development and made Argentina one
of the world’s wealthiest countries. It ranked seventh in the world in per capita income
in the 1920s.1 In contrast, from 1930 until 1983, Argentina experienced significant
political instability, characterized by numerous military coups, 25 presidents, 22 years of
military rule, and 13 years of “Peronism.”2
1 Thomas G. Sanders, “Argentina and the Politics of Economic Distress,” UFSI Field Staff
Reports, 1988-89, No. 4, p. 1.
2 Carlos Waisman H. “Argentina: Autarkic Industrialization and Illegitimacy,” in Democracy in
Developing Countries, Volume Four: Latin America, edited by Larry Diamond, Juan L. Linz, and
Seymour Martin Lipset, Boulder, Colorado: Lynne Rienner Publishers, 1989, p. 63.
Congressional Research Service ˜ The Library of Congress

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When the military intervened in 1943, the regime came to be dominated by a colonel
serving as Secretary of Labor, Juan Peron, who went on to build a formidable political
base through support from the rapidly growing union movement. Peron was elected
president in 1946 as the candidate of the Argentine Labor Party, which later became the
Peronist Party. During his presidency, Peron bestowed considerable benefits on
Argentina’s working class through wage increases, fringe benefits, and the creation of a
social security system. He also emphasized rapid industrialization of the economy by
establishing state-run industries protected by trade barriers, a process also known as
import-substitution industrialization.3
Peron’s mobilization of the working class had an enduring effect on Argentina’s
political system over the next four decades. Even when Peron was ousted by the military
in 1955, Peronism as a political movement survived despite attempts by the military and
anti-Peronist sectors to defeat it. After his ouster, a series of civilian and military
governments ruled until 1973 when Peron was reelected to office after 18 years of exile.
Just a year later, however, Peron died and was succeeded by his second wife Isabel, who
had little political experience. Economic and political chaos ensued, with political
violence surging and Argentina experiencing its first bout of hyperinflation. As a result,
the military intervened once again in 1976, but this time ruled directly until 1983, when
it fell into disrepute in the aftermath of its failure in the Falkland Islands (Islas Malvinas)
war with Great Britain in 1982. It was during this period that the military conducted the
so-called “Dirty War” against leftists, guerrillas, and their sympathizers, and thousands
of Argentines “disappeared.”
In 1983, Argentina returned to civilian democratic rule with the election of Raul
Alfonsin of the moderate Radical Civic Union (UCR). Alfonsin was widely credited with
restoring democratic institutions, but economic conditions during his tenure were chaotic,
with hyperinflation and considerable labor unrest. As a result, Alfonsin left office six
months before his six-year term ended, letting the winner of the 1989 election, Carlos
Menem of the Justicialist Party (PJ, or the Peronist Party), take office early.
Menem transformed Argentina from a state-dominated protectionist economy to one
committed to free market principles and open to trade. Most state enterprises were
privatized; hyperinflation was eliminated; and the economy was opened up to foreign
trade and investment. In 1991, under the direction of Minister of Economy Domingo
Cavallo, the government pegged the Argentine peso to the U.S. dollar and limited the
printing of pesos to the extent that they were backed by U.S. dollars, a policy which
helped keep inflation in check, but as is now known, became a major factor in Argentina’s
recent financial turmoil. (The dollar peg led to an overvaluation of the peso, and
continued overspending led to large increases in external debt.) What made Menem’s
transformation of Argentina even more extraordinary was that he broke with the
traditional Peronist protectionist policies favorable to the working-class and labor. Under
Menem, the PJ began to attract middle-class voters and even some business interests.4
Yet increasing corruption and high unemployment at the end of Menem’s second term
3 William Ratliff and Roger Fontaine. Changing Course: The Capitalist Revolution in Argentina.
Stanford, California: Hoover Institution, 1990, pp. 12-13.
4 Manuel Pastor and Carol Wise, “From Poster Child to Basket Case,” Foreign Affairs,
November/December 2001.

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were factors that led to the defeat of his party in the October 1999 elections; Menem
himself was prohibited constitutionally from seeking a third term.
From De la Rua to Duhalde. Fernando de la Rua won the October 1999
presidential race as the candidate of a coalition known as the Alliance for Work, Justice,
and Education, that brought together de la Rua’s moderate Radical Civic Union (UCR)
and the leftist Front for a Country in Solidarity (Frepaso). Although there was initial
optimism when de la Rua took office in December 1999, that optimism had faded by the
end of 2000 because of doubts about the government’s ability to bring about economic
recovery and because of corruption in the administration. While the government
negotiated several financial arrangements with the International Monetary Fund (IMF) in
2000 and 2001, it was unable to fulfill IMF-imposed conditions relating to spending cuts.
The IMF ultimately declined further financial support in December 2001, because
Argentina could not produce a balanced budget. Argentines began rapidly withdrawing
dollars from banks until the government limited withdrawals to $1,000 per month. The
denial of access to bank funds, combined with already high poverty and unemployment
rates after four years of recession, sparked widespread opposition to the government.
As confidence in the government evaporated, widespread demonstrations erupted
around the country, with thousands calling for the President’s resignation. Protests turned
violent with rioters battling police with stones and bottles; 27 people were killed in the
protests and hundreds were injured. Some blamed riot police for overreacting to peaceful
demonstrations. As a result of the violent protests, President de la Rua fled the
presidential palace and resigned on December 20, 2001, paving the way for a series of
interim presidents from the Peronist party. Peronist Senator Eduardo Duhalde ultimately
became president on January 1, 2002, with a mandate from Congress to serve out the
remainder of de la Rua’s term. Duhalde, who had been Vice President under Menem
from 1989-1991, Governor of the Buenos Aires province, and the PJ’s 1999 presidential
candidate, was one of the most well-known and powerful Peronist leaders.
President Duhalde faced daunting political and economic challenges when he
assumed office, most significantly the ability to quell social unrest associated with the
country’s financial instability. Protests against banks and politicians continued in the first
half of 2002, but the widespread social violence of December 2001 was not repeated, and
the Duhalde government survived. Duhalde initially promised such populist measures as
increasing the state’s role in the economy and protecting local industries, but he did not
pursue a protectionist economic model. In the end, the Argentine economy stabilized
under the Duhalde government. As part of his economic plan, Duhalde abandoned the
Argentine currency’s one-to-one peg to the U.S. dollar that had been in place since 1991
and ultimately adopted a unified floating exchange rate in February 2002. While the
Duhalde government was unable to secure IMF financing in 2002 because of lack of
progress on key fiscal and other structural reforms, it did secure a seven-month IMF
arrangement in January 2003, valued at almost $3 billion. The Duhalde government was
also able to clear Argentina’s arrears with the World Bank and the Inter-American
Development Bank, which allowed new loans in early 2003 to finance social safety net
programs in order to reduce the impact of the economic crisis on the poor.

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Challenges for the Kirchner Government
Kirchner’s Election. Provincial governor Néstor Kirchner, a center-left Peronist,
was inaugurated to a four-year term as president on May 25, 2003. Kirchner had emerged
from the crowded 19-candidate first presidential election round held April 27 with 22%
of the vote. Former President Carlos Menem, a center-right Peronist, topped the field
with 24.36% of the vote, and the two candidates were scheduled to compete in a second
round on May 18. But when it became apparent that Kirchner was forecast to win with
nearly 70% of the vote, Menem pulled out of the race. During the campaign, Menem had
advocated a neo-liberal free-market strategy to resolve Argentina’s economic problems,
including adoption of the U.S. dollar and increased economic linkages with the United
States. In contrast, Kirchner advocated a continuation of Duhalde’s economic policies
and pledged to keep on the current Minister of Economy, Roberto Lavagna, viewed as the
man behind the country’s recent economic recovery. He attacked Menem’s neo-liberal
rhetoric and vowed to demand a reduction in debt and interest rates when negotiating with
international creditors. Kirchner was viewed as somewhat of a political outsider, not
associated with the corruption legacy of the past, and his candidacy attracted
independents, an important factor given that traditional politicians have been discredited.
Progress and Challenges for Kirchner. President Kirchner’s bold policy
moves in the areas of human rights, institutional reform, and economic policy have helped
restore Argentines’ faith in government. He has attacked corruption in the federal police
force and in Argentina’s Supreme Court, which had been stacked with the supporters of
former President Menem. Upon taking office, President Kirchner purged the military’s
top officers and vowed to prosecute current and retired military officials responsible for
human rights violations conducted during the last era of military rule. At a dedication of
a Museum of Memory commemorating the thousands of Argentines killed in the so-called
“Dirty War,” Kirchner asked “for forgiveness on behalf of the state for the shame of
having remained silent about these atrocities during 20 years of democracy.”5 He strongly
supported the Supreme Court’s June 2005 overturning of two amnesty laws from the
1980s that had blocked prosecution for killings under military rule, a move that could
open the door to hundreds of prosecutions.
In the economic arena, the Kirchner government has overseen a strong revival of the
Argentine economy, with economic growth rates of 8.8% in 2003, 9% in 2004, and an
estimated growth rate of 6.6% in 2005. Unemployment has decreased from a high of
about 24% in 2002 to about 13%in 2005. 6 In September 2003, after several months of
tough negotiations, Argentina reached a three-year stand-by agreement with the
International Monetary Fund (IMF) that provided a credit line of about $12.5 billion.
Although IMF accords are not normally politically popular, the accord was widely praised
in Argentina as an agreement with realistic fiscal targets that would enable Argentina to
deal with such issues as employment and social equity. Argentina suspended its IMF loan
program in August 2004 because of IMF pressure on completion of debt negotiations with
bondholders and on Argentine progress in implementing key economic reforms. In 2005,
the Kirchner government ultimately was successful in restructuring more than $100
5 Hector Tobar, “Argentine Ceremonies Cast Light on ‘Dirty War’,” Los Angeles Times, March
25, 2004.
6 “Argentina: Country Report,” Economist Intelligence Unit, July 2005.

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billion in defaulted bond debt at about 34 cents on the dollar, saving the country more
than $67 billion in the largest debt-reduction ever achieved by a developing country.7 The
agreement had been reached in early March, but the debt exchange was held up until June
by two hold-out creditors that had obtained a court order.
In June 2005, Argentina requested negotiations for a new IMF economic program.
IMF officials lauded Argentina for its strong recovery since 2001 but maintained that the
government needs to take action in a number of areas in order to sustain the recovery.
These include continuing responsible macroeconomic policies in order to guard against
inflation; implementing structural reforms to boost productivity and growth; strengthening
the financial system; normalizing relations with creditors; and ensuring that the benefits
of economic growth are equitably shared and that the vulnerable are adequately
protected.8 Although Argentina’s macro-economic recovery has been impressive, many
poor and middle-class Argentines have yet to see major improvements in living standards.
Although poverty rates have declined over the past three years, some 40% of the
population was still estimated to be in poverty at the end of 2004, with some 15% of the
population living in extreme poverty.9
In the political arena, President Kirchner has maintained strong popularity, with over
60% of Argentines supporting his leadership. The PJ is the only party with national
organization, holding a majority of provincial governorships, 41 of 71 Senate seats, and
116 of 257 seats in the Chamber of Deputies. However, there is currently a struggle in
the party between supporters of President Kirchner and former President Duhalde. In the
upcoming October 2005 legislative elections, one-third of the Senate and one-half of the
Chamber of Deputies will be contested. In some races, the pro-Kirchner faction of the
party will field candidates under the banner of the Front for Victory (FV) running against
Duhalde candidates as the official PJ candidates. Some observers believe that the
Kirchner faction will emerge strengthened from the October election. The UCR and other
opposition parties have objected to the PJ’s fielding multiple candidates under separate
banners as an attempt to flood the ballot with Peronists to the detriment of opposition
parties.
U.S. Relations
U.S.-Argentine relations have been strong since the country’s return to democracy
in 1983 and were especially close during the Menem presidency. U.S. officials commend
Argentina’s contributions to peacekeeping operations worldwide, including a contribution
to the current U.N. peacekeeping mission in Haiti. Because of its military contributions,
the United States designated Argentina as a major non-NATO ally in 1997, a status that
gives Argentina access to grants of surplus military hardware. In terms of trade, the
United States exported $3.4 billion in goods to Argentina in 2004 (with machinery,
7 Adam Thomson, “Argentina Closes Door on Dollars $110 billion Debt Exchange,” Financial
Times, June 3, 2005.
8 “IMF Executive Board Concludes 2005 Article IV Consultation with Argentina,” International
Monetary Fund, June 30, 2005.
9 Country Report,” Economist Intelligence Unit, June 2005, p. 29.

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organic chemicals, and electrical machinery exports topping the list) and imported $3.7
billion in goods, about half consisting of oil imports.
Although U.S.-Argentine relations are close, at times there have been irritants in the
bilateral relationship. The tough U.S. approach toward Argentina during its political and
financial crisis in 2001-2002 caused some friction in the relationship. Many in Argentina
perceived that the United States was deserting a close ally in time of need. This turned
around to some extent in 2003 when the United States supported Argentina in its
negotiations with the IMF. U.S. officials supported the September 2003 IMF agreement
for Argentina and lauded the country’s economic recovery, although they emphasized the
need for the government to undertake fiscal, monetary, and banking reforms in order to
maintain long-term economic growth and reduce poverty.
In 2004, United States Trade Representative (USTR) placed Argentina on the Special
301 Priority Watch list regarding intellectual property rights protection because of serious
concerns over the lack of adequate protection for copyrights and patents. Although the
country made some improvements to its patent law, USTR kept Argentina on the Priority
Watch List for 2005 because its overall copyright, patent, and data protection regimes do
not appear to meet international standards, with copyright piracy a significant problem.
U.S. officials have highlighted concerns about the tri-border area (TBA) of
Argentina, Brazil, and Paraguay because of activities of the radical Lebanon-based
Hizballah (Party of God) and the Sunni Muslim Palestinian group Hamas (Islamic
Resistence Movement). According to the State Department’s April 2004 report on
terrorism worldwide, the TBA “has long been characterized as a regional hub for
Hizballah and Hamas fundraising activities, but it is also used for arms and drug
trafficking, contraband smuggling, document and currency fraud, money laundering, and
the manufacture and movement of pirated goods.” The State Department’s April 2005
report on terrorism asserts that there is no credible evidence that operational Islamic
terrorist cells exist in the TBA countries. U.S. officials have lauded engagement with
Argentina on counter-terrorism issues, including efforts to crack down on Middle East
fund-raising activities in the TBA. Argentine security officials, according to the State
Department, have been especially vigilant in monitoring illicit activity and potential links
to radical groups in the TBA.
The 108th Congress expressed concern regarding Argentina’s investigation into the
July 1994 bombing in Buenos Aires of the Argentine-Israeli Mutual Association (AMIA)
that killed 86 people. Allegations have linked Hizballah to that bombing as well as to a
1992 bombing of the Israeli Embassy in Buenos Aires that killed 30 people. Both the
House and the Senate approved similar resolutions (H.Con.Res. 469 and S.Con.Res. 126)
on July 22, 2004, that urged Argentina to provide resources to investigate all areas of the
AMIA case. In 2004, all 22 Argentine defendants charged in the 1994 bombing were
acquitted by a three-judge panel that faulted the investigation of the original judge and
prosecutors. The acquittal prompted protests by Argentina’s large Jewish community.
No one else has been charged in the attack, although an Argentine court re-confirmed the
validity of international arrest warrants for 12 Iranian nationals and one Lebanese official
believed to head Hizballah’s terrorist wing. In early August 2005, the judge responsible
for the AMIA investigation was removed from office for bribery and other irregularities.

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