THE GLOBALIZATION PARADOX: DEMOCRACY AND THE FUTURE OF THE WORLD ECONOMY
Problem 1 – Monetary mismanagement
– Lack of trust in Argentinian government from private sector and foreign investors.
– To restore trust, Argentinian government must commit to a clear set of rules → particularly
strict monetary policy to prevent government from printing money at will.
Solution 1
– Convertibility Law → 1 peso = 1 US dollar → restores price stability and confidence in the
economy, leading to large capital inflows.
o If money was flowing in → money supply can increase and interest rates lowered.
o If money was flowing out → money supply must be cut and interest rates raised.
– Now that confidence in Argentina is rebuild with the Convertibility law, domestic
investment would rise as money flows in the country which makes the economy grow.
o Imports forces domestic producers to be more competitive and productive.
Problem 2 – Uncompetitive currency
– Asian financial crisis hit the country hard as money managers became less attracted to
emerging markets + Brazilian currency devaluation by 40% against the dollar allowed
Brazilian exporters to charge lower prices on foreign markets → Argentina couldn’t
compete and peso looked overvalued → doubts about Argentina’s ability to service its debt
multiplied, confidence collapsed.
