When Argentina defaulted on its sovereign debt in 2002, few predicted that the country would soon bounce back -- much less rank as one of the fastest-growing emerging economies over the next decade. Yet, aided by aggressive fiscal and monetary stimulus, Argentina has enjoyed an Asian-style 7.6 percent average annual growth rate since 2003, with commensurate gains in employment and declines in poverty. Indeed, Argentina's success in thumbing its nose at foreign creditors has emboldened some observers to suggest that Greece and the other debt-ridden eurozone economies try default as an alternative to the harsh austerity prescribed by the IMF and the European Union.
It seems that Argentina managed to turn "Washington consensus" policy on its head and get away with it. Or maybe not: A closer look at Argentina's post-crisis economy suggests the boom is living on borrowed time, that the chickens will soon come home to roost.
The model for Argentina's post-crisis boom was the Perónist policies of the 1940s and 50s. Corporatist Perónism accommodated the interests of business, labor, and the poor through collective bargaining managed by the state. Resources were skimmed from the country's highly productive agricultural sector to cover the cost of wages and profits in excess of competitive levels.
But Perónism promised more than it could possibly deliver. Expansionary macroeconomic policies led to ever-rising inflation, stagnant productivity, and battles among highly organized interest groups that spurred popular unrest and increasingly repressive government reactions. Argentina was left with anemic public services, crumbling infrastructure, profitless industries, and paralyzing union demands for wage increases unsupported by productivity gains.
Juan Perón was overthrown by a military junta in 1955. Yet the legacy of Perónism survived, its peculiar mix of corporatism, populism, and nationalism rising and ebbing across the tumultuous 1980s and 1990s. Argentina was especially hard hit by policy experiments designed to curb inflation that left the economy uncompetitive in global markets, burdened by a huge external debt and committed to an overvalued exchange rate pegged to the dollar. Its economic troubles culminated in a financial crisis in 2001-02, with the collapse of the fixed exchange rate and a sharp recession accompanied by fierce unemployment and a wave of bankruptcies.
The economic policies of the post-crisis administration of Néstor Kirchner (2003-2007) appear to have initially taken into account the hard lessons of unsustainable policies. While Perónist in spirit (and optics), Kirchner's economics initially amounted to a pragmatic response to the massive income redistribution precipitated by the financial crisis and subsequent recession. On the one hand, the crisis wiped out household savings, increased unemployment to twenty-four percent, and impoverished large segments of the middle class. On the other, the depreciation of the currency made exporters (and domestic industries vying for market share with importers) more competitive and greatly reduced the burden of their debts denominated in pesos.