Much before the Mexican debt crisis of 1980s to the present Argentine crisis and its contagion effects, economists around the world have always been vocal regarding the causes of financial catastrophes and how they could have been prevented. Nevertheless, crises happened frequently. Though the antecedents of the past two decades reveal that the emerging economies have been typically prone to financial crises, the developed nations have also experienced it time and again. Despite economists, central bankers and policymakers presenting an array of remedial policy prescriptions after each and every crisis many of these remain unattended as they insist on long-term gradual recovery through painful monetary and fiscal policy implementation. Several economies under crisis have preferred short-term recovery plans rather than adopting the tough route of economic restructuring. Though they start implementing reforms with a lot of fanfare, in the later stages they either deviate from the prescribed agenda or simply leave it incomplete in between. Hence, in most instances, economies recovered apparently remain weak within.
The fast food recipe of reviving economies in crises has been a practice for long. In 1989, due to gross negligence in fiscal management, the Argentine economy was in doldrums leading to widespread riots. The immediate solution was provided by the currency board when it decided that each peso issued would be backed by an US dollar. This constitutional restriction prevented the Government from recklessly printing notes. Inflation dropped and Argentina prospered more-or-less overnight. However, the advantages of the currency board were not capitalized upon in the late 1990s. Money that came effortlessly in the early 1990s was easily spent and laying a strong economic foundation for the future took a backseat. Increases in extravagant government spending coupled with bureaucratic red tape and corruption, increased manifold the federal debt burden. To meet the deficit the government raised the tax burden. This discouraged investment, hampered aggregate production and increased tendencies of tax evasion. Increased debt burden meant escalating borrowing costs leading to more expensive government spending, thus forming a vicious circle. Moreover, the dollar-peso-peg prevented the economy from adjusting its overvalued exchange rates that priced its exports out of the market. A crisis entrapping the economy in a foreign currency debt burden of over $155 bn was nothing but inevitable.
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