Argentina: Political and Economic Conditions and Relations with the United States in 2000

Argentina: Political and Economic Conditions and Relations with the United States in 2000

Order Code RS20781
Updated January 12, 2001
CRS Report for Congress
Received through the CRS Web
Argentina: Political and Economic Conditions
and Relations with the United States in 2000
nae redacted
Foreign Affairs Analyst
Foreign Affairs, Defense, and Trade Division
Summary
In Argentina’s presidential election, held on October 24, 1999, Fernando de la Rúa
of the Alliance coalition defeated Peronist candidate Eduardo Duhalde, ending the 10-
year rule of the Peronist party. President de la Rúa has continued the economic reform
and trade liberalization measures implemented by his predecessor, Carlos Menem, which
were effective in stabilizing the Argentine economy after the hyperinflation of the 1980s.
In recent years, however, economic conditions have deteriorated and the success of
President de la Rúa’s administration will likely depend on the success of his economic
reform program. In addition to labor law reform to address the unemployment problem,
President de la Rúa has taken steps to improve economic conditions, reduce levels of
public spending, and eliminate corruption. In December 2000, the Argentine government
announced a financial package agreement with the International Monetary Fund (IMF)
and other lending institutions to strengthen Argentina’s economic reform program.
Some analysts believe that the financial package combined with additional structural and
labor law reform will achieve the administration’s economic goals. However, others
maintain that Argentina must change its exchange rate policy to improve economic
conditions.
Political Situation
In Argentina’s presidential election held on October 24, 1999, Fernando de la Rúa
defeated Peronist candidate Eduardo Duhalde, ending the 10-year rule of the Peronist
party. President de la Rúa represented the coalition called the Alliance for Work, Justice,
and Education, a partnership between the centrist Radical Civic Union (UCR) party and
the mostly leftist Front for a Country in Solidarity (FREPASO) party formed for the
October 1997 elections. President de la Rúa won the election with 48.5% of the vote,
while 38.1% of the votes went to Eduardo Duhalde and 11% to Domingo Cavallo of the
Action for the Republic (AR) party. In the chamber of deputies, the Alliance coalition
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won the largest single block of deputies, but not the majority, with 122 out of 257 seats.
The Peronists maintained the majority in the senate with 35 of the total 67 seats.
Historical Background. The December 1999 presidential elections were the
fourth since Argentina returned to civilian democracy in 1983, after seven years of military
rule. Argentina's successful return to a stable civilian democratic rule is regarded as
remarkable by many observers, considering the country's extensive period of political
instability. From 1930 to 1983, the government had numerous military coups, 25
presidents, 22 years of military rule, and 13 years of rule by the authoritarian populist
leader Juan Domingo Perón.1 Perón, who initially ruled as elected president from 1946
until his ouster by the military in 1955, established a formidable political base through
support from trade unions. Peronism survived as a political movement despite attempts
by the military and anti-Peronist sectors to defeat it. Perón was exiled until 1973 when he
returned to win the presidency once again. In 1976, the military again intervened and
ruled until it fell into disrepute in the aftermath of Argentina’s defeat in the 1982 Falkland
Islands war with Great Britain. In 1983, Raúl Alfonsín of the UCR was elected President
for a six-year term. While Alfonsín was credited with restoring democratic institutions
during his tenure, he left office in 1989 before his term was up because of a chaotic
economy characterized by hyperinflation.
In 1989, Peronist Carlos Menem was elected president for a six-year term and was
reelected in the May 1995 elections for a four-year term.2 President Menem was
successful in launching a major overhaul of Argentine domestic policy, turning the
country's economic situation around. Although Argentina's successful return to
democratic rule and stable economic conditions were widely hailed, the Menem presidency
faced problems. Some observers characterized his government as authoritarian, claiming
it weakened the powers of the Congress and the judiciary. Other political problems
included charges of corruption in high-level governmental circles. Some high profile
unsolved crimes, such as the 1992 bombing of the Israeli embassy and the 1994 bombing
of a Jewish community center, both in Buenos Aires, contributed to charges of corruption.
President de la Rúa’s Administration. Since taking office in December 1999,
President de la Rúa has continued the previous administration’s economic policy of
structural reform and open markets. In his inaugural address, President de la Rúa
emphasized that the three priority areas for his administration would be to reduce levels
of public spending, address unemployment, and eliminate corruption. The president has
followed a program of spending cuts, tax revenue increases, and provincial revenue sharing
reform to lower the fiscal deficit. He has pursued labor law reform measures to ease
existing hiring and firing restrictions to allow for a more flexible labor market, which
would stimulate employment and allow the economy to react more readily to external
shocks. In addition, President de la Rúa has taken anti-corruption actions such as cracking
down on tax evasion, creating an Anti-Corruption Bureau, investigating alleged
1 Waisman, Carlos H. "Argentina: Autarkic Industrialization and Illegitimacy," in Democracy in
Developing Countries, Volume Four: Latin America, Ed. By Larry Diamond, Juan J. Linz, and
Seymour Martin Lipset. Boulder, Colorado: Lynne Rienner Publishers, 1989, p. 63.
2 Argentina’s constitutional reforms in 1994 changed the length of the presidential term from six
to four years.

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wrongdoing by former officials, and “tightening” disclosure rules on official discretionary
expenditures.3
When President de la Rúa took office in December 1999, unemployment levels were
high (14.5%), the fiscal deficit was higher than the target level, and the country was in a
recession. In the first few months of his administration, President de la Rúa moved fast
to initiate key portions of his political program. Some of the his early successes included
winning congressional approval for major fiscal deficit reductions, initiating labor reform
measures, and developing political support from sectors of the Peronist party for key parts
of his political program.
Another significant accomplishment for President de la Rúa’s administration in 2000
was concluding two sets of talks with the IMF and other international lending institutions
on financial package agreements to strengthen the Argentine economic reform program.
In March 2000, the administration successfully concluded negotiations on a three-year
stand-by arrangement from the IMF supporting the government’s 2000-2002 economic
program. In December 2000, the government announced another agreement with the IMF
and other international lenders on a financial package of nearly $40 billion (see below).
Key elements of the agreement include continuing commitments to structural reforms and
reducing the fiscal deficit.

President de la Rúa’s government had high public approval ratings in the first few
months of his administration, but increasing doubts over economic recovery, a recent
corruption scandal, and a second set of unpopular spending cuts affecting government
salaries and pension payments have diminished public confidence in his abilities. In
November 2000, President de la Rúa’s approval ratings dropped to 23%, down from the
70% approval rating only ten months earlier. The president is also having political
difficulties within his cabinet and the governing coalition. A recent bribery scandal in the
senate prompted him to make cabinet changes, but not to the satisfaction of some
government officials within the coalition. He replaced some cabinet members, but held on
to two officials who had been associated with the corruption scandal. In protest, Vice
President Carlos Alvarez, who argued the two officials should be removed, resigned
immediately. Other influential officials also resigned amid the cabinet reshuffling.4
The future success of President de la Rúa’s administration may depend on how well
the economy does. Some analysts believe that the IMF loan agreements combined with
additional structural and labor law reform will help the struggling economy. Others
believe that financial packages and economic reform measures are not enough and that
Argentina must change the currency board policy to achieve economic growth and
international competitiveness. However, changing the fixed exchange rate would likely
prove politically difficult for the administration since the U.S. dollar is so widely used
within the country and most Argentines support the currency board policy.
3 Business Monitor International, Ltd. Latin American Monitor (LAM): Southern Cone, April
2000.
4 LAM, Nov. 2000, pp. 1-2.

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Economic Situation
With a nominal GDP of $283 billion in 1999, Argentina’s economy is the second-
largest in South America. During most of the 1990s, the Argentine economy expanded
as real GDP increased by an average annual rate of 5.2%. After Brazil’s 1998 financial
crisis and currency devaluation, however, Argentina’s economy went into a recession,
largely because Brazil is Argentina’s largest export market. Real GDP decreased by 3.1%
in 1999 (see Table 1). In 2000, slight economic growth resumed, but unemployment
remains high at an estimated 15%. The overall fiscal deficit as a percentage of GDP
decreased between 1996 and 1998, but increased considerably in 1999. Managing the
fiscal deficit remains one of the government’s primary economic goals.
Table 1. Selected Economic and Financial Indicators: 1985-2000
1985
1990
1995
1996
1997
1998
1999
2000*
Real GDP (1997 US$b)
191.5
187.0
256.8
271.0
293.0
304.4
294.8
300.8
Real GDP Growth
-7.6
-2.4
-2.8
5.5
8.1
3.9
-3.1
1.7
Unemployment rate (%)
6.1
7.5
17.5
17.2
14.9
12.8
14.2
15.0
Inflation - CPI (%)
672.2
2314.0
3.4
0.2
0.5
0.7
-1.8
0.4
Current Acct. Bal. (US$b)
-1.0
4.6
-5.0
-6.5
-12.0
-14.5
-12.2
-10.8
Overall Fiscal Balance**
-3.0
0.7
-2.3
-3.2
-2.1
-2.1
-4.1
-2.3
(% of GDP)
* Estimated
** A negative number indicates a budget deficit
Sources: 1) IMF (report on Argentina) 2000; Standard and Poor’s DRI, The World Outlook. An Analytical Guide to
International Business, Third quarter 2000; LAM, November 2000.
During the 1990s, the Menem Administration dramatically reversed Argentina's
economic decline by implementing aggressive free market policies and macroeconomic
reforms. These included the establishment of a currency board which establishes a fixed
exchange rate of the Argentine peso on a one-to-one basis with the U.S. dollar, trade
liberalization, privatization of state industries, and public administration reform. As a part
of the free market reforms, the Menem Administration opened up the Argentine economy
more fully to international competition by liberalizing foreign investment and trade
regulations and joining a regional common market (MERCOSUR) along with Brazil,
Paraguay, and Uruguay. As a result of these policies, Argentina experienced a strong
period of economic growth in the early 1990s. In the second half of the decade, however,
Argentina experienced two recessions, partially as a result of external shocks caused by
the 1995 Mexican financial crisis, the stronger value of the U.S. dollar, and the 1998
devaluation of Brazil’s currency.
The establishment of a currency board is widely credited as the main instrument
responsible for Argentina's reduction of inflation in the early 1990s. The currency board
effectively prohibits the government from stimulating the economy by printing new
currency not backed by gold or dollars. Former President Menem had considered a
proposal to replace the Argentine peso with the U.S. dollar, but there is no clear indication
whether President de la Rúa has intentions of implementing such a policy. While adopting

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the U.S. dollar as an official currency may benefit the economy, primarily by stabilizing
inflation, there are also potential economic costs.5
The currency board was successful in eliminating the hyperinflation of the 1980s,
which averaged 355% annually. By 1993, Argentina’s inflation rate had dropped to 10.6%
from more than 3000% in 1989.6 With the currency board, however, the Argentine
government cannot devalue the currency to stay competitive in the international market
and is limited in fiscal policy adjustments to stimulate the economy. To improve the fiscal
balance after the economic shocks in 1995 and 1998, the government cut spending and
increased taxes, putting more deflationary pressures on the economy.
Although some analysts maintain that Argentina’s economy is fundamentally sound
because inflation is under control and the fiscal deficit appears to be manageable, there are
widespread concerns about sluggish economic growth and high unemployment. President
de la Rúa’s unpopular budget cuts and tax increases are adding to deflationary pressures
on the economy and stifling wage and employment growth. In November 2000, millions
of workers formed the largest strike in years to protest the government’s economic
policies. Continuing recent concerns about Argentina’s economic prospects have raised
the possibility among investors that Argentina may not be able to meet its debt obligations
in 2001, an outcome that could easily lead to financial crisis.
In December 2000, in a crucial move to avoid a financial crisis, Argentina unveiled
an economic program to enhance domestic and external confidence in the economy. The
program, a financial package of $39.7 billion, was agreed to by the Argentine government,
the IMF, the World Bank, the Inter-American Development Bank (IDB), the Spanish
government, and other lending institutions. It includes a $13.7 billion line of credit from
the IMF, $5 billion in loan commitments from the World Bank and IDB, and $1 billion
from the government of Spain.7 The goal is to provide Argentina with sufficient liquidity
to avoid defaulting on its debt and to restore investor confidence. Some analysts maintain,
however, that economic problems will continue unless Argentina eliminates the currency
board to allow for increased competitiveness of Argentina’s exports in the world market
and to provide a more flexible fiscal policy to respond to economic problems. Others note
that the present administration appears committed to the currency board on grounds that,
with Argentina’s “de facto dollarization” through a fixed exchange rate, a sudden change
could cause significant economic disruption, at least in the short run.8
U.S.-Argentine Relations
U.S. relations with Argentina since the country's return to democratic rule have been
strong. Under the Menem Administration, Argentina made contributions to peacekeeping
5 For more information see CRS Report RS20105. If Argentina Decides to use the U.S. Dollar,
What Does It mean for both Countries? by Gail Makinen. March 5, 1999, 6 p.
6 Standard and Poor’s DRI, The World Outlook, Third quarter 2000.
7 Washington Post article and IMF statement.
8 International Monetary Fund. Argentina: 2000 Article IV Consultation and First Review Under
the Stand-By Arrangement, and Request for Modification of Performance Criteria. September 5,
2000.

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operations worldwide. It participated in the Gulf War and made contributions to
peacekeeping operations in Haiti. In October 1997, the United States designated
Argentina as a non-NATO ally which gives Argentina access to surplus NATO hardware
and facilitates congressional approval of future weapons purchases from the United States.
Argentina has also actively cooperated with the United States on anti-drug measures.
President de la Rúa has maintained Argentina’s close relations with the United States. In
2000, the United States and Argentina signed a Memorandum of Understanding on anti-
corruption cooperation to promote government anti-corruption efforts, efficiency and
transparency. The two countries also signed an extradition treaty in 2000 that provides
for extradition of fugitives from justice, including each country’s nationals. Argentina has
also actively cooperated with the United States on anti-drug measures.
President de la Rúa’s administration is continuing the previous administration’s trade
liberalization policies and has stated it is committed to participating in the Free Trade Area
of the Americas (FTAA) negotiations. Argentina’s trade policy reforms have helped boost
U.S. trade and investment flows. Exports of U.S. goods expanded from $1.2 billion in
1990 to $4.9 billion in 1999, an increase of more than 300%. Major U.S. exports to
Argentina include non-electrical machinery (27%), chemicals and allied products (19%),
and electrical machinery and related equipment (17%). U.S. imports from Argentina
increased from $1.5 billion in 1990 to $2.6 billion in 1999, a 73% increase. Major U.S.
imports from Argentina include petroleum and natural gas (18%), food and kindred
products (16%), and petroleum refining products (11%). After years of trade deficits, the
United States had increasing trade surpluses with Argentina during most of the 1990s. In
1999, the surplus decreased to $2.3 billion (36%) from $3.6 billion in 1998.9
Despite the market opening measures of the 1990s, Argentina continues to maintain
a number of trade barriers. Since 1993, Argentina has maintained duties on footwear in
spite of a World Trade Organization (WTO) ruling against them. Argentina also applies
restrictions on certain U.S. agricultural products including fresh pork, Florida citrus, and
certain California fruit. Other trade issues involve intellectual property protection. In
pharmaceutical and agrochemical products, Argentina’s patent legislation is inconsistent
with WTO obligations. Piracy of computer software, video, cable television and recorded
music also remains a problem in Argentina. The United States has initiated WTO
consultations to address intellectual property rights issues. 10
Several bilateral agreements between the United States and Argentina help promote
U.S. foreign direct investment in Argentina. The agreements include an Overseas Private
Investment Corporation (OPIC) agreement and an active U.S. Export-Import Bank
program. In addition, the two countries have a bilateral investment treaty which gives
U.S. investors Argentina national treatment in a number of sectors and allows for
international arbitration of investment disputes. The stock of U.S. direct investment in
Argentina increased from $2.5 billion in 1990 to $16 billion in 1999. The United States
is the second largest foreign investor in Argentina.11
9 Data compiled by the U.S. International Trade Commission.
10 U.S. State Department. Argentina Economic Trends - May 2000.
11 U.S. Department of Commerce, Country Commercial Guide: Argentina, 2001.

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