Argentina's snub of conventional wisdom pays off

Left for dead by the global financial community in 2002 after defaulting on more than $100 billion worth of debt, Argentina today is enjoying the sixth year of one of the unlikeliest economic expansions in memory.

The economy purrs at a growth rate of better than 8%. The peso, once so suspect that individual provinces printed their own currencies, is sound. And foreign-exchange reserves are bountiful.

"Over the past four years, Argentina has recovered its hope," says Mercedes Marco del Pont, a member of Congress.

Argentina's resurrection is especially compelling measured against the extraordinary depths of the 2001-02 financial crisis. Stiffing international bondholders intensified the worst economic downturn any developed country had experienced since the 1930s, beggared a prosperous middle-class and plunged more than half the population below the poverty line.

But most noteworthy is how Argentina climbed out of its financial hole: by defying the conventional economic wisdom the United States has peddled throughout Latin America for the past generation. President Nestor Kirchner has thrust the state deep into the economy, taxing exports, freezing key prices and shunning the Washington-based International Monetary Fund in favor of deep-pocketed Hugo Chávez of Venezuela. Today, Argentina's turnaround is Exhibit A for those who doubt globalization's one-size-fits-all policy prescription.

"The biggest significance of this recovery is they just rejected the orthodox economic advice … and they've been the fastest-growing economy in the Western Hemisphere over the last five years," says Mark Weisbrot, a left-of-center economist at the Center for Economic and Policy Research in Washington.

Now, as newly elected President Cristina Kirchner prepares to succeed her husband next month as Argentina's chief executive, there are worrying signs about the economic comeback's longevity. Inflation is gathering steam amid widespread allegations that the government is deliberately manipulating official price statistics. Energy shortages, which many analysts link to price controls that have discouraged new investment, are a chronic concern.

Government officials, who continue to operate under an "economic emergency" law, insist they can steer the economy forward without sharp policy changes. Cristina Kirchner has indicated she plans to bring labor and business leaders together to agree on "social pacts" that will control wages and prices, but market-oriented economists are skeptical. "It's a mess of a theory. … This will not work," said Federico Thomsen, an economist here who advises multinational corporations on the local market.

Spurning the IMF

Argentina's current approach is a stark contrast to the 1990s, when an earlier government enthusiastically implemented market-oriented policies known as the Washington Consensus. Then-President Carlos Menem sold off state-owned industries, opened the economy to trade and attacked inflation by linking the peso to the dollar at an artificial 1-to-1 level.

At first, the economy expanded, and inflation, which peaked at an annual rate of 4,923%, cooled to near zero. But amid a recession that began in 1999, Argentina ultimately was forced to abandon its 1-to-1 exchange rate, sending the peso into free fall and impoverishing millions who owed payments on dollar-denominated mortgages and other loans.

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