NEW YORK – Thirteen years ago, Argentina was in dire straits. Its peso was pegged to the dollar at a level that far exceeded its value. Its external debt was unsustainable. And political pressure from the United States prevented its weak government from renegotiating a bailout program that even the International Monetary Fund knew was unrealistic.
Today, with Greece facing many of the same challenges, it is worth taking a closer look at the lessons learned from Argentina’s crisis. At the time, we called the policy response “economic and political lunacy…. Each further round of budget cuts has worsened the recession, increased social tension, and further reduced confidence… Neither the IMF nor anybody else would advise any developed country to adopt such masochistic and self-destructive policies…. It is time for this to stop.”
For the most part, we were right. It was indeed time to stop. The government quickly collapsed and was replaced by one that devalued the currency and defaulted on the country’s debts. And yet, the widespread predictions of catastrophe did not come to pass. The economic crisis was real enough, but it had already bottomed out. Growth resumed a few months later – averaging an astonishing 8% for the next five years.
We were wrong, however, about one thing: our assumption that no developed country would have such damaging polices inflicted upon it. Economists may have learned from history, but politicians seem doomed to repeat it. Again, in Greece, the IMF has been pressured by short-sighted politicians into endorsing a program that it knows full well is neither sustainable nor in the country’s best interest.