Question

Financial crisis Chile

4. What was the adverse impact from Chile? (lessons)

5. How much did the crisis cost?

6. In Argentina, what was the convertibility plan? Why was it implemented?

Answer 1

4. From 1973 onwards, Chile faced serveral financial crisis in the past. Though in this particular case, exact event is not mentioned, we will look into the adverse impact in general for various crisis like 1973 crisis. In short, from 1971 onwards taken expansionary macroeconomic policies resulted in severe high inflation and huge fiscal deficit in 1972-73. All those resulted in uncontrollable inflation, sharp fall in production and economic investment activitiies, increase in black market activities and overall economic future of middle class became darker. However, 2008 global financial crisis didn't hit that much mainly because of rational free market concept adoption during 1973-90 military regime. However from 2014 onwards, Chilean economic growth started to slow down. Poor economic policy during the leftist rule from 2014 onwards resulted in longest mining strike in Chile since 1973.All those pushed Chile in technical economic recession in 2016.Falling commodity price also didn't favour world largest copper producer. This economic crisis again is opening the road for right-wing politics in Chile and expectation of moderate growth under right-wing government than the failed socio-economic model of leftist regime and multiple corruption scandals.

5. Considering the latest 2016-17 economic crisis, the economic cost is huge. In 2014, Chile's economic growth was 1.9%, lowest since 2008 financial crisis.Mining strike in 2016 hit the GDP by almost 2.0% and mining sector shrinked to 17%. For the past 3 years(2014-17), economic growth averaged less than 2%. Overall Chilean economy as in 2018 is still weak and recovery indication still missing.

6. In Argentina, during 1991 and 2002, currency board decided to peg the Argentine Peso to USD. Currency board was permitted to hold 1/3 of its USD denominated reserves in Argentina govt. issued bonds.Currency board implemented fixed pegging and provided guarantee for full convertibility of Pesos in USD. This was in short convertibility plan in Argentina.

It was implemented:

a.To stabilize Argentine currency Peso.

b.to achieve sustainable economic growth.

c.an act of encouragement for both domestic and international investment.

d.To combat hyperinflation, very low or negative GDP growth, lower rate of capital investment and overall lesser confidence level in government during 1975-90.