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Gaucho Banking Redux
An Argentine economic experiment has come to an ignominious end. The attempt to establish a stable currency has given way to an unplanned float, and a fourfold devaluation has rendered null any chance of restoring the old parity. In addition to a widespread economic malaise following some years of a boom, one of the major casualties of the crisis is the banking sector, where the search for a long-run cure has barely begun. The fiscal health of the government remains under a cloud of suspicion. Foreign investors in government bonds, badly burned, are ill disposed toward the country. Most observers agree that the political class has failed, and some have suggested that nothing less than placing the country in "economic receivership" and turning its affairs over to an independent foreign administrator will rectify the situation:
Investors here, with minds disorganized by the fate which has overtaken those concerned in the reckless speculations and borrowings of the past years, seem to conclude that Argentina is ruined because they, themselves, have lost money. Reckless speculators in the Argentine republic have lost money because they carried their speculation to undue lengths; but the Argentines have profited and the country is profiting by the sowing broad-cast of [foreign] capital in the country.
A solid administration is required under an honest President. Some assistance in the formation of a bank upon sounds principles is needed, with improvement in the currency. It is possible that the system of taxation might be varied so as to provide for the provincial and municipal loans which were too readily granted; though probabilities disincline an observer to conclude that local taxation will be increased without great difficulty. [End Page 1]
Suggestions have been hazarded relative to foreign financial control. Foreign financial control may be needed, and may be possible in the case of a feeble or a decaying state. 1
As the reader may have guessed from the florid tone and antiquated style of this prose, the year is not 2002. It is 1891. A certain W. H. Bishop is writing for a new publication called the Economic Journal as Argentina gropes its way through the wreckage of what we have previously characterized as the world's first full-fledged emerging market crisis, the Baring Crash of 1890. 2 The year 1890 has stood ever since in the Argentine historiography as a fateful year of unmatched economic calamity.
Given the scale of the present crisis, and the economic, social, and political wounds it has opened up, Argentine economic history will perhaps have to be rewritten from a very different perspective, with 2001 seen as a turning point. Yet the lessons from the past are hauntingly familiar, and they are here once again to be relearned. How will history be rewritten? It is not just that the events of 2001-02 are more catastrophic than those of 1890-91. Indeed, Argentina has suffered a steady stream of economic crises throughout its history. One purpose of this article is to highlight the common features of these episodes and place the present debacle in some historical perspective. There are also differences, which we are careful to spell out, that separate the present from the past.
In this paper, we argue that Argentina's inability to ever develop sound banking institutions plagued all previous attempts to reform the monetary regime using exchange-rate-based stabilizations. We see the twin crisis problem noted by Kaminsky and Reinhart as endemic to Argentina. 3 One of the deep causes that have doomed so many reform programs is crony leadership. The Asian developing countries were also faulted for their crony capitalism after the 1997 crisis. In both Asia and Argentina, cronyism reached deep into the financial sector. The failure of key banking and financial institutions to follow prudent, transparent, accountable, and noncorrupt practices is as central to understanding the Argentine crisis of 2001 as it was to understanding the Asian crisis of 1997.
It is also a recurring theme in...