Foreign investment and the commodity market can be extremely volatile. Because Argentina's economy relied so heavily on foreign credit and a demand for its agricultural products, it was particular susceptible to these periods of volatility, which brought about severe repercussions for the country's economic growth. Foreign investment for Argentina, then, was a double-edged sword. While it contributed to the long period of growth between the late 1800s and early 1900s, foreign investment dried up during World War I. Because national markets had not yet matured, the domestic economy was unprepared to make up for losses incurred by the international market shock and the economy as a whole saw a fall in performance.

Post-World War II

The period between 1914 and 1945 devastated the Argentine economy. Foreign investment disappeared during World War I to finance the European war effort, and failed to return after the peace. While the U.S. and Wall Street began to feature prominently on the international stage, the 1929 stock market collapse marked the end of Argentine hopes for a return to the export-led growth model.

Import substitution industrialization

After World War II, a new model of economic growth began to emerge. Import substitution industrialization, or ISI, was adopted into Argentina's economic policy. Where the government adopted a more laissez-faire approach with export-led growth, ISI meant direct government intervention. In an effort to limit the country's dependence on the international market, government-induced economic measures like the nationalization of domestic industry were aimed at encouraging a more internal, self-sustaining development.

While Argentina was able to harness a modest level of growth through ISI, the level economic development was not sufficient enough to bring Argentina to developed-level status. Analogous to export-led growth where the Argentine experienced some industrialization but did not become "industrialized", in the mid-twentieth century Argentine underwent development but did not become "developed".

Modern era

Convertibility and liberalisation

When President Carlos Menem took office in 1989, the economy of the country was in a critical state. Argentina had piled up huge external debt, and output was plummeting. Inflation during had reached an annual rate of 3,080% in 1988, and in July 1989 it was almost 200%.

To combat the crisis, the government embarked on a path of trade liberalisation, deregulation, and privatisation. In 1991, it implemented radical monetary reforms which pegged the Argentine peso to the United States dollar and limited the growth in the monetary base by law to the growth in reserves. Inflation fell sharply in subsequent years. The 1991 "Convertibility Law" (Ley de Convertibilidad) established a quasi-currency board.

The government privatised most state-controlled companies, opened the economy to foreign trade and investment, and created private pension and workers compensation systems. As a result of these policies, Argentina experienced a boom in economic growth in the early 1990s, followed by a period of somewhat more erratic growth in the second half of the decade.

International crises

In 1995, the Mexican peso crisis produced capital flight, the loss of banking system deposits, and a severe, but short-lived, recession; a series of reforms to bolster the domestic banking system followed. Real GDP growth recovered strongly, reaching 8% in 1997.

In 1998, international financial turmoil caused by Russia's problems and increasing investor anxiety over Brazil produced the highest domestic interest rates in more than three years, halving the growth rate of the economy.

While macroeconomics recovered fairly quickly from the effects of the Mexican crisis of 1995 (known as the Tequila Effect), Argentina could not return to strong growth after the recession that followed the successive shocks from East Asia, Russia, and Brazil.

Effects

The structural reforms provided stability and boosted confidence after decades of decline and chronic bouts of high inflation, and fostered major new investment in services and industry in the 1990s, particularly in the telecommunications, food processing, banking, energy, and mining sectors. As a result, Argentina's exports more than doubled, from about $12,000 million in 1992 to around $25,000 million in 1999. However, one of the drawbacks of the fixed low exchange rate soon became evident, as the trade balance turned strongly deficitary (except for minor surpluses in 1995 and 1996).

The opening of the economy and the deregulation of the labour market also fostered unemployment, which went from less than 7% in 1991 to over 12% in 1994, then increased sharply propelled by the Mexican shock, and remained afterwards always over 12%.

In spite of these problems, Argentina was still considered a model for free market reforms among developing countries, and allowed to indebt itself to support this model. The national public debt, composed in large part by bonds denominated in dollars, increased continuously, growing by more than 60% between 1994 and 1999.

The crisis

In 1999, following the 1998 international crisis, GDP fell by 3% and Argentina entered fully into recession. President Fernando de la RšČa, who took office in December 1999 following the 10-year administration of Carlos Menem, sponsored tax increases and spending cuts to reduce the deficit, which had ballooned to 2.5% of GDP. The new government also arranged a new $7,400 million stand-by facility with the International Monetary Fund for contingency purposes ĄȘ almost three times the size of the previous arrangement. The new government passed laws intended to change the country's labour code, and attempted to address the precarious financial situation of several highly indebted provinces.

The issue of Argentina's massive public debt became a subject of considerable controversy, and increased tension between Argentine governments and the IMF. In 2001, capital flight increased, and the government found itself unable to meet debt payments. The crisis exploded after the corralito (an almost complete freezing of bank deposits) caused massive protests. After the December 2001 riots, President De la RšČa resigned.

On December 23, 2001, interim president Adolfo RodršȘguez Sašą declared a short-lived debt moratorium. After a few days, Argentina officially defaulted on $93,000 million of its debt.

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