Introduction
In the economic world, most countries at one time have experienced Hyperinflation, which has had a significant economic impact on a country’s growth. Hyperinflation is defined as an excessive increase in prices in an economy. Hyperinflation can be confused with inflation, but these two differ. As inflation focuses on measuring the pace at which a country’s commodity prices increase, Hyperinflation is the rapid increase of inflation, which accounts for more than a 50% increase in monthly costs (Ocampo,2021). Hyperinflation rarely occurs in developed countries, but past events indicate that these countries are not exempt, as it has occurred in nations such as China, Russia, and Germany throughout history. Like other chronic-inflation economies, Argentina has had its share of Hyperinflation, which continues to increase over the years. Globally, Argentina has been the top-ranking country experiencing high inflation rates since 1945 up until the 1990s when other nations such as Chile, Brazil, Uruguay, and Peru created a distinction (Beckerman, 1995). However these countries have successfully reduced inflation over the last decades, but Argentina seems to be taking the opposite direction, and instead, inflation continues to increase. Currently, the government’s expenditures exceed the amount of money taken from taxes and other revenues, except debt which has resulted in a fiscal deficit of 8.5%. The fiscal deficit limits the country from accessing local and international loans, and its risk premium levels imply an 80% growth in money supply and sovereign default per annum (Ocampo,2021). Following this information, researchers in Argentina believe that the country is likely to experience an excessive increase in prices, which is more worrisome since it has been having an obstinate upward trend in inflation. That said, the research paper focuses on identifying the origin of Argentina’s Hyperinflation, its impact on the country’s economy, and the solutions to curb this situation.
The origin of Hyperinflation in Argentina
In recent years, inflation has been rising in Argentina, with an annual rate of 300% between 1975 and 1990. The annual rate indicates that the price of commodities increased after a few months, on average. A significant price increase was depicted in 1989; before inflation was controlled, it spiked up to 1,000%. The main explanation given for Argentina’s hyperinflations in 1989 is that the implementation of the stabilization programs resulted in debt distress, especially in the Central bank. These programs were a basis for price anchoring on the increased exchange rates, which made monetary policies sustainable, leading to sustainability in high-interest rates (Ocampo,2017). The government and the Central bank accumulated massive domestic debt amounts, exceeding their surplus in non-interest activities (Beckerman, 1995). So, they continue to borrow to capitalize on the due interest rates with the aim of financing interest without making money. The continued increase in debts results in upward pressure on interest rates. This creates pressure on the exchange rates and Hyperinflation when the debt the public holds exceeds what financial markets are encouraged to hold at a reasonable interest rate (Ocampo,2017).
Argentina has experienced the highest inflation rates globally since 1945 and attempts to stabilize the country’s currency have failed multiple times. In their study, Dornbusch and Fischer (1986) state that Argentina’s main problems that result in inflation are actual wage demands and budget deficits. These problems have also contributed to payment crises, lack of competitiveness, and depreciation in the economic market, and in past years, the problems have continued to accelerate. Inflation rates have progressively surpassed the 50% level in Argentina, which has resulted in a higher inflation crisis (Kiguel & Liviatan, 1995). Besides their association with monetary and fiscal mismanagement, Hyperinflation is also associated with political instability. For instance, Peron, the president elected in February 1946, implemented two policies that characterized Argentina’s economy. They include the corporate relationship between the government and labor unions and the radical protection of the inefficient production industry (Buera & Nicolini, 2019). The first policy divided the country’s productivity and wages, and the second broke the relationship between domestic and international prices. Through implementing these policies, the government had the power to make decisions regarding the allocation of economic resources for the country, which resulted in the struggle among individuals leading to chronic inflation and sub-par economic growth (Ocampo,2021). The government consisted of the Peronist party and a blend of labor unions, which led to long-lasting political influence. However, it also resulted in political instability. The economic system at this time was populist, and its persistent nature resulted in the isolation of monetary and fiscal policies (Buera & Nicolini, 2019). Hence, leading to an excessive increase in the country’s products and services price.
Researchers have argued on numerous reasons for the origin of the Hyperinflation that took place in 1989. Beckerman (1995) believes that the borrowing capacity of the public sector increased, and its costs surpassed the amount the government could generate from taxes or the funds borrowed from both domestic and foreign entities. The country faced a challenge in controlling its public finances, where the tac revenues declined drastically from 20% of GDP to about 13% in the years the country experienced Hyperinflation. Although the treasury managed to decrease the number of operating deficits monthly following the implementation of stabilization policies and increased surpluses, it still failed to curb the hyperinflation issue that emerged in 1989. Beckerman (1995) further believes that the presidential election campaign steered Hyperinflation by unsettling financial markets that resulted in an exchange crisis. A devaluation instigated the end of the Primavera plan. It accelerated the hyperinflation curve because the public believed devaluation increased inflationary episodes in past years. The uncertainties in the country’s politics also contributed to Hyperinflation, and the increase in real wages led to inflationary pressure in the country (Beckerman, 1995). Although scholars have different perceptions of the origin of Hyperinflation in Argentina, the main reasons for political instability and the increase in real wages remain constant.
The country faced a higher rate of inflation in 1989, and Kiguel & Neumeyer (1995) believes that it was due to the contributions of the Central bank resulting from money absorption through the issuance of interest-bearing loans since it lacked a better policy system. Ideally, the interest rates were liberalized to absorb money. The central bank increased its interest bills and the requirements for borrowing, which became the primary source of money creation (Kiguel & Neumeyer, 1995). The central bank entered into debt distress and lost its ability to add to debts, resulting in interest monetization. Monetization of the interest rates made the bank accumulate the first debts leading to Hyperinflation (Beckerman, 1995). Hyperinflation may have also resulted from high-interest rate payments on the country’s money. The experience Argentina has related well with Hungary’s hyperinflationary experiences after the post-war, where the government founded the index-linked deposits. The public shifted their holdings, and the indexation through the creation of money, as financed by the government, increases the money issues leading to Hyperinflation. Argentina’s experience is considered unpleasant monetarist arithmetic, as stated by Beckerman (1995), where the country’s macroeconomic authorities finance the public deficit. It does so through borrowing money in domestic markets instead of creating it or selling public obligations to hinder money creation from a surplus in the balance of payments as it increases interest rates in the domestic financial markets. A vast public debt with high-interest rates will increase a country’s public deficit in the future (Kiguel & Neumeyer, 1995). However, in cases where the interest rates and debt stock are increasingly high, it is advisable for a nation to monetary finance a current deficit and accept inflation as the price to pay to relieve future public deficits. Therefore, a country controls current inflation rates to avoid the occurrence of Hyperinflation in the future.
The Impact and Solutions to Hyperinflation
Hyperinflation resulted in government failure in Argentina when Raúl Alfonsín was president. The era of this governance makes up the worst-case scenario of inflation. During his term of the ruling, the president was enthusiastic about leading the country after seven years of a dictatorship government. However, He was left to deal with the aftermath of the debt crisis that occurred in 1982 (Casullo, 2022). The government faces high foreign debts and prices, with lower wages due to increased inflation. These factors affect the country’s operations, which affects economic growth. Following inflation’s negative impact on the country’s economy, the president developed Plan Austral in 1985, intending to stabilize inflation. It included measures to control prices, devaluation, and new currency creation. The plan was successful as it decreased inflation rates to around 2% per month. In November 1985, an election was conducted, and Raul won (Casullo, 2022). With the excitement of this victory, the president implemented a new political program with lofty objectives. However, in 1988, inflation started to increase and was out of control as of 1989, resulting in Hyperinflation. Due to the increased inflation rates, hoarding goods and services was rampant, and there were shortages in food supplies. The excessive increase in price levels decreased the country’s money value because inflation gives it less purchasing power (Ocampo, 2021). Therefore, consumers spend much money to buy fewer commodities, thus affecting their GDP, which impacts the economic growth of a country equally. The increased food shortages in Argentina and looting in supermarkets increase the monthly inflation rate. Following the massive price increase, Raul’s governance fell since he changed the election dates to June from October, and the opposition leader, Carlos Menem, won.
Although the country experienced political instability, which resulted in inflation, Cristina Fernández de Kirchner’s governance in 2007 tried to maintain high inflation rates with political stability. At this time, the inflation rate had declined to 26%, and during her time ruling, the president managed to keep the inflation rate stable despite its fluctuation over the years (Casullo, 2022). However, inflation is considered one of Argentina’s most significant economic challenges during this era. Still, it did not threaten the political stability of president Cristina’s government. The main elements that ensure stability in the government are the stability in inflation, the increase in real wages, and the creation of social programs such as universal child subsidies and social security benefits (Ocampo, 2021). maintaining these elements resulted in a stable government that knew how to navigate the increasingly high inflation rates that the country continues to face. Given this information, Argentina’s inflation stability depends on the ruling government and how it controls the country’s economic resources. For instance, Macri’s government which ruled between 2015 and 2019, failed because it did not succeed in controlling inflation rates. Though it failed, it did not result in a crisis like that depicted in Alfonsín’s governance. A leader who fails to control inflation will likely lose elections, but being victorious over inflation shows hope of success. Carlos Menem entered the president’s office after the 1989 hyperinflationary episode that left the country in a mess (Casullo, 2022). With a good government, the minister, Domingo, came up with different ideas, including having a dollar peg for the Peso, which led to a drastic decrease in the inflation rates. Through these actions, the president won re-election in 1995 and was able to change the constitution and introduce structural reforms that were a big step toward changing the state of Argentina’s economy (Ocampo, 2021).
Argentina continues to face high inflation rates, and the memories of past hyperinflationary episodes have significantly harmed the country’s economy. The interest rates in the financial markets increase to compensate for the increasingly high inflation rates. The government has to make payments of 25% in interest rates to be allowed to borrow pesos for a short term (Kiguel & Neumeyer, 1995). Following the inflation the country is experiencing, the lenders are not willing to offer long-term loans at fixed interest rates due to unpredictability in the market prices. In case inflation occurs, it will affect the value of their loans and bonds negatively (Feldstein,2017). Also, businesses and investors hesitate to borrow funds to invest in long-term projects from short-term creditors due to the unpredictability of inflation rates in the market, which may lead to high-interest rates. The history of Argentina’s experiences with Hyperinflation has significantly affected the domestic mortgage market since most households fear taking a mortgage while purchasing a home. Feldstein (2017) believes that with increased inflation in previous years, businesses are reluctant to borrow for fear of increased interest rates that might drive them to bankruptcy in the coming years.
Another industry that has been affected by inflation rates is life insurance. With the uncertainties in inflation, people fail to know the value of the Peso and thus may fear taking the insurance because they do not know the Peso’s worth when they claim the insurance in the future. However, Feldstein (2017) believes that economists might argue that insurance contracts and mortgages can be indexed to current price levels, which adjusts payments to the current inflation rates. Although this argument seems valid, it might be challenging to determine the current inflation rate when it keeps changing. Although indexation helps a nation that experiences an excessive increase in prices of its goods and services, it is likely to contribute to the apathy that makes it hard for the central bank to reduce inflation. Indexed agreements, such as wages, may continue to increase even after inflation has declined or stopped (Maute, 2018). The costs of wages continue to increase and make organizations continue increasing prices after the monetary growth that causes inflation has stopped.
In attempts to curb the inflation issues, the government allows the people of Argentina to convert their currency to the United States dollars and invest them outside the country. Most people invest their wealth in the United States, leaving Argentina with low investments, productivity, and growth (Feldstein,2017). The effect hyperinflation has on the country results in these decisions to invest outside the country since people fear going bankrupt and have low purchasing power, where they buy less for more. The high-interest rates suppress demand leading to a decrease in the real GDP, thus affecting the country’s economic growth. Wealthy individuals are the ones who keep their investments in the US, while the less wealthy citizens hold bills worth $100 (Feldstein,2017). Another way to hedge inflation is through tangible assets not associated with the financial sector. Most individuals from countries with high inflation rates tend to hold their wealth in durable commodities such as gold, houses, or even rice than having financial assets such as deposits at the bank (Maute, 2018). Individuals in countries with hyperinflation economies take these measures as defense mechanisms to protect their wealth and avoid the adverse effects of excessive inflation.
Conclusion
From the research, it is essential to note that a stabilization plan may work in an economy that experiences inflation over an extended period. Cutting on government expenditures and eliminating the budget deficit is another way a country can gain stability after years of facing a fluctuating increase in the prices of its products and services. That said, critical lessons derived from the Argentina issue of Hyperinflation is that the stability of price levels is fragile, and inflation rates can increase abruptly. The high rates of inflation, regardless of the time they occur, remain a memory in the citizens’ minds, which results in adverse effects for the country in the future. A country needs stability in its price levels and maintain it to help manage its monetary policy to target a low inflation rate.
References
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