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December 28, 2004

The "miracle" in Argentina

Three years ago, Argentina's economy was in complete meltdown.

In 2001, Argentina had a record debt default of over $100 billion. Unemployment was at 20 percent. In early 2002, Argentinians living below the poverty line had ballooned to a massive 53.4%.

In 2004, the forecast is exponentially rosier. So how'd they do it?

Argentina's recovery has been undeniable, and it has been achieved at least in part by ignoring and even defying economic and political orthodoxy. Rather than moving to immediately satisfy bondholders, private banks and the I.M.F., as other developing countries have done in less severe crises, the Peronist-led government chose to stimulate internal consumption first and told creditors to get in line with everyone else.

And how did they stimulate internal consumption? They went the FDR route:

Some of the new jobs are from a low-paying government make-work program, but nearly half are in the private sector. As a result, unemployment has declined from more than 20 percent to about 13 percent, and the number of Argentines living below the poverty line has fallen by nearly 10 points from the record high of 53.4 percent early in 2002.

The government provided public works projects for those who couldn't get work in the private sector. In other words, they put their money into the pockets of the Argentinian poor. And what do the poor do with money? They SPEND it on food and other goods. That in turn stimulates the economy. So instead of giving all of their money to creditors and the IMF, Argentina gave it to her people and are on the way to rebuilding their economy.

Now lay this in contrast to the Bush plan. They lowered taxes on the wealthy, who invest it in stocks, mutual funds, futures, etc. Employment figures have remained stagnant. Consumer confidence continues to fall...even as the economy tries to grow based on the investment of the wealthy. But how long can this really last? Consumers are the long term drivers of the economic engine. Without money in their pockets to spend on goods and services...there won't be companies whose stocks can be invested.

And in the end...who is hurt the most by Bush's plan? The middle class and the poor.

Posted by Carla at December 28, 2004 11:24 AM