Argentina: Premier Basket Case, who is next?

Today the NYT carries a story about how Argentinians who used to dislike Brazilians, are slowly learning to love them as their crisis has deepened without Europe or the US giving much of a helping hand. While the article seems somewhat exaggerated (for Argentinians, Brazil winning the World Cup was a non-event), it is interesting that the country that used to be the most “developed” in Latin America 100 years ago, has now become one of the biggest basket cases. As pointed out in the book Del Buen Salvaje al Buen Revolucionario by Carlos Rangel, in the 1850’s Argentina had a higher per capita income than the US. As a country, Argentina is bigger in area than India, which just passed the 1 billion mark in population, but has less than 37 million inhabitants. But decades of mismanagement, have turned Argentina into an economic basket case.

After years of hyperinflation, ten years ago Argentina pegged its currency to the US dollar. Argentinians really believed that their currency was pegged, which lowered inflation and helped growth for the next few years. But the peg was mostly an illusion as the Central Bank did not have the one to one equivalent between a peso and a dollar. In time, this illusion was revealed, forcing the current crisis.

It is interesting to understand however, why Argentina is in such dire straits and whether Venezuela or Brazil are anywhere where Argentina is today. What makes these three cases different is that Argentina, as a State, has few productive assets that it can sell to pay its debts. Unfortunately, most assets were sold ten years ago to create the illusive peg. In contrast both Venezuela and Brazil have real, productive assets which could be used if an extreme situation arose. Venezuela even has important assets abroad, such as Citgo, four refineries in the US and one in Germany, while Brazil has most of them at home. Thus, both countries are far from reaching a crisis like that of Argentina. Brazil has going for it the fact that it is an industrialized country, while Venezuela the huge (70-200 trillion barrels) oil reserves underground. While neither is immune to having serious difficulties, only the immense  incompetence and creativity of their politicians in the future could create an Argentinian-like crisis.

This entry was posted on August 5, 2002 at 7:59 am and is filed under LatinAmerica.