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Why is the Argentinian economy in such a mess?

Graham Watson

8th September 2023

An excellent Economist piece that looks at the state of the Argentinian economy, with an economy in pieces - crippled by hyperinflation - and as a result, an extreme candidate well-placed to win the 2023 Presidential election, promising to dollarize the economy.

But why is Argentina in this position? In short, decades of economic mismanagement: consistent overspending by successive governments, financed by printing money, high levels of borrowing, and trade controls that have prevented the efficient allocation of resources. The solutions are not straightforward, and might inflict substantial short-term pain, before the economy sees longer-term improvement.

Short background

There are a number of reasons why the Argentinian economy is in such a mess. First, the country has a long history of excessive government spending and low savings rates. This has led to high levels of debt and inflation, which in turn have led to currency depreciation and a lack of investor confidence.

Second, the country is highly dependent on commodity exports, which means that fluctuations in global commodity prices can have a significant impact on the economy.

Third, Argentina has experienced a number of political crises in recent years, which have made it difficult for the government to implement long-term economic reforms.

Dangers of persistently high inflation

The dangers of very high inflation are numerous and serious.

First, inflation can cause a loss of purchasing power for consumers, as prices of goods and services increase faster than wages. This can lead to a decline in living standards and economic hardship.

Second, inflation can cause uncertainty and volatility in the economy, as businesses and investors have difficulty planning for the future. This can lead to a decline in investment and economic growth.

Finally, inflation can lead to social unrest and political instability, as people become frustrated with the government's inability to control prices.

Graham Watson

Graham Watson has taught Economics for over twenty years. He contributes to tutor2u, reads voraciously and is interested in all aspects of Teaching and Learning.

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