Global Policy Forum

Christina Kirchner and Argentina’s Good Fortune

In 2001, Argentina’s banking system practically collapsed, giving rise to “the mother of all financial crises.” According to IMF chief economists Kebn Rogoff and Carmen Reinhart, crises of such magnitude must be followed by slow and painful recoveries. Argentina’s rapid recovery after its $95bn default on international debt, however, provides a compelling refutation of Rogoff’s and Rainhart’s theory. The Argentine economy has grown 94 percent and considerable progress on social indicators such as poverty rates, employment records and inequality levels has also been made. What can Europe and weaker Euro-zone economies learn from Argentina’s success?   

To read Mark Weisbrot’s full report on “The Argentine success story and its implications” click here.

By Mark Weisbrot

October 22, 2011

Under the Kirchner administrations, Argentina has achieved the fastest growth in the west – after defaulting. Listening, Europe?

Cristina Fernandez de Kirchner is expected to coast to re-election as president of Argentina on Sunday, despite having faced hostility from the media for most of her presidency, and from many of the most powerful economic interests in the country. So it seems a good time to ask why this might happen.

Yes, it's the economy. Since Argentina defaulted on $95bn of international debt nine years ago and blew off the International Monetary Fund, the economy has done remarkably well. For the years 2002-2011, using the IMF's projections for the end of this year, Argentina has chalked up real GDP growth of about 94%. This is the fastest economic growth in the western hemisphere – about twice that of Brazil, for example, which has also improved enormously over past performance. Since President Fernandez or her late husband Nestor Kirchner, who preceded her as president, were running the country for eight of these nine years, it shouldn't be surprising that voters will reward her with another term.

The benefits of growth don't always trickle down, but in this case, the Argentine government has made sure that many did. Poverty and extreme poverty have been reduced by about two thirds since their peak in 2002, and employment has increased to record levels. Social spending by the government has nearly tripled in real terms. In 2009, the government implemented a cash transfer program for children that now reaches the households of more than 3.5 million children. It is probably the largest such program, relative to national income, in Latin America.

Inequality has also been considerably reduced in Argentina during this remarkable expansion. This is in contrast to most other fast-growing economies in the world (and some of the slower-growing ones like the United States), where inequality has increased over the past decade. In 2001, Argentines in the 95th percentile of the income distribution had 32 times the income of those in the 5th percentile. By last year, that ratio had fallen by nearly half, to a multiple of 17.

I can already imagine the comments that I will get for this piece: people will shout about Argentina's inflation rate, which, according to some private estimates, is running between 20 and 25% at present. Yes, that is too high, and will likely be brought down in the months and years ahead (it was much lower through most of the past nine years). But it is important to remember that it is real income (adjusted for inflation) and employment, as well as the distribution of income, that determine people's living standards. If inflation is high but your income is rising faster than inflation, you are better-off than if inflation is much lower and your income does not keep up with inflation – or if you don't have a job at all.

Argentina's experience over the last nine years has important implications for how we look at economic policy, and especially certain myths that are currently used to justify the miserable economic performance of the United States, most of Europe, and other countries since the 2008-2009 economic crisis and world recession. A theory recently popularized by former IMF chief economist Ken Rogoff and Carmen Reinhart maintains that recessions caused by financial crises must be followed by slow and painful recoveries. This is widely accepted in much economic reporting, and has served as an excuse for governments that are incompetent or beholden to special interests (sound familiar?) to avoid blame for presiding over years of high unemployment and economic stagnation.

Argentina, however, provides a compelling refutation of this theory. Argentina's financial crisis by the end of 2001, and into 2002, was the mother of all financial crises. The banking system practically collapsed. But after Argentina defaulted on its debt at the end of 2001, there was only one quarter of economic contraction before the economy embarked on its remarkable recovery. Within three years, the country was back to its pre-recession level of national income.

If we look at the weaker eurozone economies (Greece, Portugal, Spain, Ireland), for example, it is difficult to see when they will ever return to normal levels of employment – especially if they continue to follow the pro-cyclical policies demanded by the European authorities (the European Commission, European Central Bank and the IMF). Argentina recovered quickly because it freed itself not only from an unsustainable debt burden, but also from the destructive policies imposed by creditors and their allies.

Greece, in particular, whose economy is shrinking at a 5% annual rate while it waits for the European authorities to restructure its debt, would have to consider that it might be better off going the Argentine route. It sure worked for Argentina.


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