Faced with a financial crisis in your target export market? It pays to keep your dance card open. In January 2002 I visited Argentina, then in the midst of financial crisis. While I was in Buenos Aires, there were endless demonstrations outside the famous Casa Rosada, from where Eva Peron (the beloved first lady of Argentina, often known simply as Evita) addressed the massive working class crowds (the “shirtless ones”) in the 1940s.
However, in 2002, the masses were not showing the same adulation to their current political leaders, and there seemed to be a severe lack confidence in the country’s political institutions as a result.
It’s amazing to imagine how such a prosperous country could end up in such a state. After all, one hundred years ago, Argentina — which was rich in commodities and fertile land — was one of the richest countries in the world. Buenos Aires (and Melbourne) had one of the highest per capita incomes in the world.
The phrase “as rich as an Argentine” came into common usage, and the pampas became a wealth magnet for immigrants from the old world.
So what went wrong in modern times? While Argentina does have a history of boom and bust, the most recent 2002 crisis concerned “the three Ds”: dollarisation, devaluation and default.
First, dollarisation. To combat hyperinflation in the early 1990s, the (then) Peronist president Carlos Menem pegged the Argentine peso to the US dollar. Unfortunately for Argentina, the strength of the US currency over the course of the decade left Argentina with an uncompetitive economy (contrast this to Australia, which had floated its currency enabling the exchange rate to take the burden of adjustment).
Second, devaluation. The dollarisation policy eventually had to come to an end, but devaluation of the currency was also an unpopular measure as many Argentines held their debts in US dollars while earning their incomes in pesos. Many Argentine exporters who paid their mortgages in US dollars also had to wait for their rebates.
And so to default, as the devaluation eventually led to default for many companies and the national government itself.
However since then, there has been some good news.
First, some of the reforms brought in to handle the crisis have had positive effects. Economic growth, which was in negative double digits in 2001 and 2002, is now in positive territory and Argentine per capita incomes have also slowly recovered.
Second, the devaluation did make Argentine exports competitive for the first time and also prompted a mini-tourism boom in Argentina as neighbouring South American visitors took advantage of cheap holiday deals.
Third, there have been benefits for some Australian companies who stuck it out through the crisis. Examples include logistics companies like the Brambles Group and other Australian players involved in services to mining and agriculture.
The bottom line for Australian exporters is that during a crisis the quality of your business relationship really matters. After all, as I learned in Buenos Aires, in business as in life, it takes two to tango.
Tim Harcourt is chief economist at Austrade and author of Beyond Our Shores