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Luis Servén: The cataclysmic magnitude of the Argentine crisis has triggered a soul-searching literature looking for the causes of the collapse and the lessons to be drawn from it. The various contributions to this literature revolve around three main themes: the hard peg, fiscal policy, and investor expectations. What differentiates them is the emphasis placed on the role of each of these ingredients in leading to the crisis.

This paper belongs to the group stressing the third of those factors. However, unlike other analyses underscoring the role of expectations, which attach a major weight to self-fulfilling investor pessimism in precipitating the collapse by coordinating on a sudden stop of external financing, this paper places much of the blame on overly optimistic expectations. ¹

The paper offers a detailed chronicle of events in Argentina, but its line of argument can be summarized in a few words. In the framework of convertibility, perceptions of booming future dollar incomes led to the accumulation of large dollar liabilities. Those expectations were proven wrong, and the debts unserviceable, by major unanticipated shocks, whose adverse effects were amplified by the failure on the part of the authorities to put in place adequate precautionary policies and institutions during the boom years.

In support of the central role of expectations euphoria, Galiani, Heymann, and Tommasi note that pressure on the exchange rate and concern with the deteriorating fiscal situation were largely absent until late in the game. Further, the paper argues that the overspending was not confined to the public sector, but also involved the private sector, thereby reflecting what must have been upbeat anticipations about future income.

I come back to these arguments later, but first let me comment on the role of unfulfilled expectations. Every economy is affected by unpredictable shocks that render expectations wrong ex post. While expectations must surely have been greatly disappointed, the striking feature of Argentina is the fact that the shocks of the late 1990s led to a crisis of unprecedented severity, unlike in other emerging economies suffering similar disturbances. As I argue below, this characterizes the Argentine episode as one of missed opportunities—opportunities to adopt the policies that could have prevented the crisis—as much as, or even more than, one of unfulfilled expectations.

Unfulfilled Expectations and Missed Opportunities

Argentina's meltdown must have resulted from either much greater shocks than those felt elsewhere or a much higher degree of vulnerability of the economy, or both. The distinction between these two ingredients, bad luck and bad policies, is essential for drawing lessons from the crisis. The paper is not very precise on the nature and magnitude of the shocks—indeed, the term shock is used to refer to both exogenous and endogenous events, such as terms-of-trade changes, deposit runs, and revisions of expectations. An international comparison based on run-of-the-mill terms-of-trade and financial shocks quickly reveals that Argentina's luck was not particularly bad. ² The fall in its terms of trade in the late 1990s was very modest compared to that suffered by other Latin American countries (indeed, its effective dimension was virtually negligible given the fact that Argentina is a very closed economy), and until late 2000 its capital inflows and sovereign spreads evolved more favorably than Brazil's and on par with Mexico's.

But Argentina was severely affected by two specific real shocks in the late 1990s—the appreciation of the U.S. dollar and the devaluation of the Brazilian real. Unlike with terms-of-trade or global financial disturbances, however, the country's vulnerability to these shocks was largely a result of its policy choices, relating particularly to the exchange rate regime. Rather than bad luck, the main problem was the vulnerability built into Argentina's policy framework.

This brings me back to the usual suspects—the hard peg and the fiscal policy stance. I will take them in turn. The paper devotes considerable attention to the convertibility regime, but the discussion needs to give...