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Foreign Affairs
From Poster Child to Basket Case
By Manuel Pastor and Carol Wise
Manuel Pastor is Professor of Latin American and Latino Studies at the University of California, Santa Cruz, and co-editor of Modern Political Economy and Latin America. Carol Wise is Associate Professor of Political Science at the School of Advanced International Studies, Johns Hopkins University, and author of Reinventing the State: Economic Strategy and Institutional Change in Peru.
Bearish in Buenos Aires
Several years ago, during the heyday of Argentina's market restructuring, a prominent local economist was interviewed about the country's long-term prospects. Despite a backdrop of rapidly expanding output and low inflation, he was surprisingly pessimistic. "Argentina has always been a country with mediocre growth, believing that spectacular growth and riches are right around the corner," he warned. "And when a good year comes, Argentines say, 'Ah, here comes the life we've been waiting for and so deserve.' "
The good life seems to have eluded Argentina once again. Unable to shake a deep recession triggered by Brazil's currency devaluation in January 1999, a country that once enjoyed emerging-market status is looking more like the same old underachiever. Three years of recession have led to an unemployment rate of nearly 17 percent, adding misery to a labor force already hard hit by deep economic adjustment in the early 1990s and rising joblessness after Mexico's 1994-95 currency crisis.
Despite bailouts from the International Monetary Fund (IMF) — comprising a $40 billion package in December 2000 and an $8 billion package last August — acute financial stress is the order of the day. An external debt of nearly $130 billion is looming, and the central bank's cash and gold reserves have fallen by 25 percent since June 2001. Although the worst of the crisis hit in July, when government-bond yields tripled, bond-rating services are still predicting a 30 percent chance of default. The resulting liquidity crisis has slammed the door on Argentines trying to secure new loans and prompted a new wave of desperation among pension-fund managers and investors with deposits in the country's banks.
Meanwhile, the political situation is chaotic. President Fernando de la R?a has switched economics ministers and policy directives to little effect. Voters are increasingly angry over rising inequality, falling job prospects, and failed adjustments. Adding spice to the mix are tales of spectacular corruption. Most dramatic has been the case of former President Carlos Menem, now under house arrest for his role in various arms-smuggling schemes that fueled civil conflicts in Ecuador and Croatia. It is a plot worthy of Latin America's literary tradition of magical realism. But the consequences for both the international financial system and the Argentine people are sadly far more real than magical.
What has gone wrong? After all, Argentina won over international investors in 1991 by launching its "Convertibility Plan," which tied the peso to the U.S. dollar under a currency board and ushered in a new era of economic prosperity and price stability. The country then weathered the fallout from the Mexican peso crash by creatively loosening reserve requirements, tightening fiscal policy, and revamping its banking system.
In part, the illusion of macroeconomic stability under the Convertibility Plan turned out to be just that. Moreover, international approval of Argentina's avid commitment to market reforms actually masked a series of unresolved problems within the economy itself. To understand the choices facing Argentina, it is necessary to revisit the recent chain of events that led it . . .