Argentina Is Recovering

The first glimpses of Argentina's recovery can be seen. To many, what happened, and what is happening there seems a mystery. Abandoning "convertibility," i.e. a fixed exchange rate system, was supposed to be a disaster - and it was. Output fell and unemployment increased dramatically. Fear of these costs, combined with IMF bailouts, kept Argentina from abandoning its currency board long after it was clear that the system could not be sustained. This stubbornness made matters worse when things finally fell apart.

But what primarily kept Argentines wedded to a system that could not work was fear of hyperinflation. When I asked people, during my visits to Buenos Aires, why Argentina persisted in this economic folly, a single answer came back: "Yes, when Brazil went off its peg, its inflation remained moderate; but Brazil is Brazil, and we are Argentina." There was almost pride in the lack of confidence Argentina's people had in their institutions and their ability to manage without the shackles of convertibility.

The feared hyperinflation, so far, has not materialized. To be sure, there has been the normal inflation associated with large increases in import prices that always follow large devaluations, but rather than setting off a spiral of price increases, inflation rates appear to be dampening. Argentina seems set to join the long list of countries - Brazil, Korea, Russia, Thailand, and Indonesia - that managed devaluations without runaway inflation.

To an economist, Argentina's recovery is no surprise. Devaluation incites several restorative forces. Exports are cheaper, and revenues from exports (measured in pesos) are up dramatically. Tourism and related industries are booming. Import substitution takes place before your eyes: a clothing store that last year sold only imported apparel, now sells only domestically produced goods.