When the Argentine economy collapsed in December 2001, doomsday predictions abounded. Unless it adopted orthodox economic policies and quickly cut a deal with its foreign creditors, hyperinflation would surely follow, the peso would become worthless, investment and foreign reserves would vanish and any prospect of growth would be strangled.
But three years after Argentina declared a record debt default of more than $100 billion, the largest in history, the apocalypse has not arrived. Instead, the economy has grown by 8 percent for two consecutive years, exports have zoomed, the currency is stable, investors are gradually returning and unemployment has eased from record highs – all without a debt settlement or the standard measures required by the International Monetary Fund for its approval.
The bottom line: Yes, the transition costs of economic shock therapy are much higher than we had thought. But the Argentine reforms seem to have worked. Note that their government is now more or less ignoring international capital markets, and it is the market-oriented economists who are skeptical of the current upturn. Fiscal responsibility, however, is in fashion, and the country is mobilizing its entrepreneurial energies.
Here is the full story. Here is a good general discussion of capital markets; it debunks the common view that liberalization makes an economy riskier. And Brad Setser offers further commentary on Argentina.