1. The Cuban Missile Crisis
In the early 1900s Argentina experienced high growth rates from the exportation of beef and wheat and was one of the strongest economies in the world. The First World War and Great Depression were hard on primary product exports, and, like many other Latin American countries, Argentina responded with import substitution industrialization. Its government erected trade barriers in an attempt to stimulate the domestic economy and become self-sufficient. This approach was successful during the Great Depression, but in the long-run resulted in low growth rates.
In addition to the effects of import substitution policies, the post-World War II Argentine economy further struggled because of military rule and internal conflict. From the late 1940s to 1980s bad economic policies and political turmoil resulted in a stagnating economy. The government would run fiscal deficits because of irresponsible spending and low tax revenues from the poor economy, and to fix this problem would print new money, resulting in variable rates of inflation. By 1989 the inflation rate became so out of control, reaching as high as 4,924 percent annually, that amidst the economic chaos, then president, Raul Alfonsin, stepped down, and Carlos Menem immediately took over.(3).
In an attempt to stabilize the economy, Menem took a free-market approach, privatizing many poorly-run government businesses, deregulating the trade industry, and cutting taxes. However, the focus of Menem's 1991 reforms was the "Convertibility Law", which pegged the Argentine peso to the U.S. dollar at a one to one ratio. By adopting this policy, the hope was a control on the country's hyperinflation and a restored confidence in both Argentine citizens and international investors. This is exactly what happened. By pegging the peso to a strong currency like the U.S. dollar, the confidence of the international community began to grow because foreign investors believed they could invest in a growing economy without the fear that the purchasing power or value of their investments would shrink.