Argentina's Economy
Convertibility: The Peso-Dollar Peg
How Argentina's 1991 Convertibility Plan fixed one peso to one dollar and ended hyperinflation, and why the rigid peg later became a trap.
In 1991, economy minister Domingo Cavallo launched the Convertibility Plan.
How it worked
- One peso = one US dollar by law.
- The central bank had to hold dollar reserves backing the peso, similar to a currency board.
- It couldn’t print money freely.
Success
- Inflation fell from hyperinflation to near zero within a few years.
- Growth returned in the early 1990s.
- Privatisations and foreign investment followed.
Problems
- The peg made Argentina’s exports expensive when the dollar strengthened in the late 1990s.
- Brazil’s 1999 devaluation hurt competitiveness further.
- Argentina couldn’t devalue or use monetary policy in recessions.
- Borrowing in dollars grew, as did public debt.
The trap
Leaving the peg risked collapse; staying meant recession. Argentina entered recession in 1998.
Lesson
Pegs buy credibility but remove flexibility, and can end badly if fiscal discipline and competitiveness aren’t maintained.
The expensive exports
In 1999, Brazilian goods became much cheaper after Brazil's devaluation, while Argentine exporters, tied to the dollar peg, lost customers.
Thinking a fixed exchange rate solves inflation permanently
Pegs need fiscal discipline and can become traps.
Key takeaways
- Convertibility (1991) fixed one peso to one dollar.
- It ended hyperinflation quickly.
- The peg later hurt competitiveness and flexibility.
- Argentina entered recession in 1998.
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