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CIAO DATE: 9/5/2006
Picking Up the Pieces: Comparing the Social Impact of Finacial Crisis in Mexico and Argentina
Carol Wise, Manuel Pastor
October 2003
Center for International Studies University of Southern California
Abstract
After a committed process of macroeconomic stabilization that began during the mid-1980s in most of Latin America, many observers began to speak of the need for a “second generation” of reforms that could more firmly establish the bases for economic growth and correct for longstanding distributional inequities. By the mid-1990s serious reformers like Argentina and Mexico seemed to be on the cusp of tackling this distributional backlog by launching so-called second phase market reforms meant to correct for earlier shortcomings in the social realm (Naím 1995; Pastor and Wise 1999). However, in both cases, financial crises erupted: Mexico’s crash of December 1994, which saw a forty percent devaluation of the peso and a massive outflow of portfolio capital; and, more recently, Argentina’s 2002 meltdown, which while simmering since the Brazilian devaluation of 1999, finally caused the country’s commitment to a fixed exchange rate to be abandoned.
In this paper we re-examine these financial crises from the standpoint of social tensions and distributional concerns. While the data confirm that unemployment and wages took a major hit in the aftermath of these respective crises, we argue here that misguided attempts in both countries to ameliorate social stress prior to the crisis contributed to both the pace and severity of the shocks when they did hit. In other words, while there were many important financial factors and miscalculations that led to crisis, each country’s bout of severe financial stress was at least partially induced by efforts to paper over distributional tensions through some combination of exchange rate appreciation and “safety-net” spending that failed to directly tackle the growing social backlog. In the end, ironically, neither the macroeconomic strategies that were employed to avoid distributional pain (e.g. low exchange rates that favored domestic consumption) nor the use of slipshod safety-net programs (e.g. Mexico’s National Solidarity Program or Argentina’s reliance on loose provincial spending and a thin patchwork of national social programs) constituted the social cushion that market reformers had sought to provide.
