Caballero and Dornbusch on Argentina 2002

February 6th, 2012
in Op Ed

by Dirk Ehnts

The writers at Crooked Timber retrieve an interesting file out of the archives. It is a short note by Ricardo Caballero and Rudi Dornbusch regarding the collapse of the Argentinian economy in 2002. The file is available online from MIT. Since Greece has just rejected the idea of a technocratic budget overseer as something that would destroy sovereignty, the Argentinian issue of 2002 has some relevance. Here is the main part:

Follow up:

It is time to get radical. Any plausible reconstruction program must be built around three points:

  • The recognition that this will be an effort of a decade, not of a few years. Argentina’s productive economy, its credit and its institutions have been destroyed. Both its physical and moral capital will have to be built up and that takes a very long time.
  • Because Argentine polity has become overburdened, it must temporarily surrender its sovereignty on all financial issues. Financial soundness is the key area where a beach head of stability must be created to even start thinking about sound public finance, saving and investment.
  • The rest of the world should provide financial support to Argentina. But it must do it only upon Argentina’s acceptance of radical reform and foreign hands-on control and supervision of fiscal spending, money printing and tax administration. Any external loan is to bridge the gap between immediate fiscal needs and the day, a year or two down the road, where radical reform creates sustainable finance.

That this is coming out of a country that has gained its independence from the colonial power by arguing that there should not be taxation without representation makes you wonder. Anyway, Argentina declared a default on her foreign debt and this is how GDP growth (after 2002) developed:


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About the Author

Dr. Dirk Ehnts is a research assistant at the Carl-von-Ossietzky University of Oldenburg (Germany). His focus is on economic integration and economic geography, covering trade, macro and development. He is working at the chair for international economics since 2006 and has recently co-authored a book on Innovation and International Economic Relations (in German). Ehnts has written at his own blog since 2007: Econblog 101. Curriculum Vitae.



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