Global Crisis, Local Effects: How does the financial crisis affect Argentina and other developing countries?
We are all aware of the fact that the current crisis (probably the worst since the Great Depression) started in the US financial market which is the center of a network of interconnected financial systems.
As a consequence, the crisis spread rapidly and became global in nature. Nevertheless, the impacts and effects of the crisis vary from country to country because they have different institutions, economic structures, idiosyncrasies and histories which condition the macroeconomic outcomes. Today, I will discuss a little bit how the crisis affects developing countries in general and Argentina in particular.
To begin with, there is a fundamental difference in the way financial crises arise in developed and developing countries. In developed countries, they follow a classical Minskyan boom-and-bust cycle governed by endogenous recurring elements which are the agents’ risk perceptions and expectations (this model successfully explains how the current crisis was originated in the US). On the other hand, in developing countries, there is an important differentiating aspect which is that the booming cycle is not triggered by internal financial innovations. Instead, it is driven by macroeconomic policies that promote speculation and arbitrage between domestic and foreign assets. A typical example of these policies is the predetermination of exchange rates which triggered the Argentinean financial crisis in 2001. Nevertheless, we have already stated that the current crisis was originated in the US. As a consequence, this point is not strictly relevant for the current analysis but should definitively be taken into account when adopting measures towards global sustainability.
