Argentina: The anatomy of a crisis

Argentina: the Anatomy of a CrisisJiri Jonas 1 underdeveloped country.Unlike some other countries in Latin America, it did not have rich deposits of precious metals (not that having one would have automatically ensured a more prosperous economy, though!), its more moderate climate did not allow it to grow tropical products like coffee, which was an important export commodity of other countries in the region.And the geography did not cooperate either: being so distant from main markets in Europe did not provide much impetus to trade anyway.Argentina's economic fortune began to change only in the last quarter of the 19 th century.Two important technological innovations have helped Argentina: improvement in storage and conservation of agriculture products, mainly meat, and progress in transport technology.Cheaper transport and better conservation made remote markets in Europe and North America suddenly accessible to Argentinean exporters. 2Thanks to a very fertile soil of pampas, Argentina's export of agriculture products, mainly to European markets, began to grow fast.A poor and underdeveloped Spanish colony began to turn quickly into a relatively prosperous country.Success breeds success, and Argentina became an attractive destination for labor and capital from Europe.Together with Canada, Australia and United States, Argentina attracted large amount of capital particularly from the United Kingdom, major capital-exporting country of that time. 3 However, large inflow of foreign capital brought a problem well known to emerging market countries one hundred years later: financial crisis.Two powerful forces combined to accelerate capital flow to Argentina and other -at that time "emerging" -countries, Australia, United States and Canada: investors' expectations about high returns, and loose liquidity conditions and low interest rates in countries exporting capital, mainly United Kingdom.Unfortunately for Argentina, large inflow of foreign capital in the 1880s has stimulated not only investment, but also consumption.While Argentina's exports rose as well, country's capacity to improve its export earnings on a sustainable basis in order to be able to service future debt repayment did not improve sufficiently.At the same time, poor governance of domestic banks resulted in such unhealthy practices as connected bank lending and bank financing of government deficits and development projects.When monetary conditions were tightened as Bank of England increased interest rates in second half of 1889, capital flow to Argentina suddenly stopped and the country had to sharply adjust its current account balance from a deficit to a surplus, by tightening macroeconomic policy.Excesses of But while a timely exit from the gold standard may have been a positive step and while protective measures could have brought a temporary relief, they were not helpful in the longrun.The Great Depression marked the beginning of a different economic strategy -strategy based on import substitution and closing of the economy.Initially, this policy strategy has brought encouraging results.The economy has recovered rapidly from the crisis and began to grow strongly after 1932, at the time when many other countries were still deep in recession.But this recovery was not to last and instead, Argentina began its long descend on the ladder of relative economic performance (see table 1).Table 1.Product per capita in selected countries (in 1985 PPE dollars 1/) USA

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