Feeling the heat

America is pushing the labour market to its limits

Low unemployment and inflation complicate economic policymaking

BY MANY measures, America’s economy is powering ahead. GDP is on track to grow at around 3% this year, and the unemployment rate is an impressively low 3.9%. For President Donald Trump, it is an unmissable opportunity to gloat. On September 10th he described the economy as “soooo good” and “perhaps the best in our country’s history”. But for others the very same figures present an economic puzzle.

The Federal Reserve has been raising its benchmark interest rate since December 2015, and will probably do so again this month, from a range of 1.75-2% to 2-2.25%. This is the central banker’s version of twiddling the bath taps, but on a national scale. It requires a delicate touch. Too much cold water, in the form of higher rates, will choke off demand and hence jobs. Too much hot, and rising inflation will eat away at people’s spending power. The aim is to find the perfect temperature, where employment is as high as it can be while inflation stays subdued.

But as Jerome Powell, the chairman of the Federal Reserve, reminded his listeners in a speech in Jackson Hole on August 24th, no one knows what that perfect temperature is. Policymakers must make their best guess of what “full employment” looks like, or when the “output gap” (the difference between where the economy is and its long-run potential) is zero. Inflation and employment are affected by temporary shocks and structural shifts, as well as by economic policy. Errors take time to show up. It is as if the rate-setters must adjust the flow of hot and cold water not only without knowing what temperature is most comfortable, but also without knowing how hot the bath is to begin with—or when they will be getting in.

Over time, those best guesses have changed. Six years ago the central estimate among members of the Federal Open Markets Committee (FOMC), the body that sets interest rates, was that in the long run, unemployment would settle at 5.6%. Now their estimate is 4.5%. Weak productivity growth has led them to cut their estimate of America’s long-run growth rate, too, from 2.5% in 2012 to 1.9%.

Whether they were right to do so is the subject of much debate. Some economists think policymakers have been too quick to conclude that dismal growth after the financial crisis indicates a new normal. A recent paper suggests that the standard ways of estimating an economy’s potential are overly influenced by blips in its performance. Others think that running the economy hot could spur productivity-enhancing innovation, as wage growth forces firms to economise on labour. Sceptics of that argument point out that the productivity slowdown started before the crisis, suggesting that it is unrelated to labour-market conditions.

As the Federal Reserve’s mandate refers to employment, not output, members of the FOMC must consider a narrower question: what does full employment look like? Here, the puzzle of the past few years has been why, even as the unemployment rate has plunged, inflation has been so stubbornly low. Hawks think that hidden inflationary pressures are building; doves, that behind that headline unemployment rate there is still excess labour capacity.

Until very recently, the doves have had the best of the argument. The most obvious interpretation of such a low unemployment rate is that the labour market could not improve much without pressing prices upwards. However, it has been soaking up not only job-seekers, but also people who reported that they had not been looking for work, or who had been working fewer hours than they wanted.

But arguing that the labour market still has hidden slack is becoming harder. Data released on September 11th revealed that Americans are quitting their jobs at the highest rate since 2001.

For each job opening, there are just 0.82 hires and 0.9 unemployed people hunting for a slot.

All of the main measures of labour underutilisation reported by the Bureau of Labour Statistics are at or below their pre-crisis trough, and near to where they were at the peak of the dotcom boom.

It is possible that still more people will be drawn into the labour market. The prime-age employment rate in August was 79.3%, a little below the pre-crisis peak of 80.3% and below the high of the past 70 years, of 81.9%. But those benchmarks may no longer be appropriate: male labour-force participation has been drifting downwards for decades.

Recent data have also favoured the hawks. Headline inflation has been above target for five months. Inflation excluding food and energy prices, generally regarded as more useful than the headline figure when it comes to predictions, is rising. It hit 2% for the first time since 2012 in July. According to a survey by the University of Michigan, inflation expectations appear to be rising gently, too. Even average hourly earnings seem to be accelerating, up by 2.9% in August compared with 12 months ago (though admittedly, that is not much more than inflation, and still below the pre-crisis norm).

Olivier Blanchard of the Peterson Institute for International Economics points out that over recent decades, inflation has become less influenced by the jobless rate, and is therefore less useful as a signal of whether the economy has hit full employment. Nevertheless, he sees enough evidence from the labour market to conclude that the economy is very close to full employment, and predicts an end to all the head-scratching.

One way to interpret the recent trends is as a vindication of the FOMC’s approach to interest rates. As the economy seems to be heating up, they are twisting the bathtap to what they think is a neutral position. So far, they have managed not to overdo it. Some have called for faster action, fearing a repeat of the 1970s, during which inflation, and inflation expectations, rose in a mutually reinforcing spiral. But as Mr Powell pointed out in his speech, although inflation has recently moved up to near 2%, there are no clear signs of an acceleration above that.

Whether congratulations are warranted will depend on whether recent trends are sustained. If they are, the debate between hawks and doves will not end, but change. Central bankers have managed to train the general public to expect low inflation, meaning that, for now at least, any fears of spiralling prices seem unjustified. But that may imply that the risks of running the economy hot have fallen. In other words, the stronger central bankers’ promises to control inflation, the more tempting it may be to break them. It’s enough to make you want a long, hot bath.

A crisis that opened the gates for China

The implosion of the western banking system was a stroke of good fortune

Philip Stephens

When historians cast around for 21st-century hinge points they will settle on two events during the late summer and early autumn of 2008.

At the Beijing Olympics in August of that year China laid out its claim to be counted one of the world’s great powers.

Weeks later, the west’s assumption of global hegemony was laid low by the collapse of Lehman Brothers. Just as China began to push on the gates to power, the west threw them open.

Fast forward a decade and the geopolitical map has been redrawn. The lavish spectacle of the Beijing games has slipped from memory amid anniversary ruminations on the causes and consequences of the financial crash. Yet the coincidence was pivotal; the west’s lost decade became China’s march to power.

Between the turn of the millennium and 2008 the size of China’s economy more than tripled. Hosting the Olympics was at once a celebration of this leap and a statement of intent. Topping the medals table, Beijing threw off the calculated modesty of the “hide and bide” policy pursued since Deng Xiaoping’s opening at the end of the 1970s.

The occasion had been an essential expression of national self-confidence, I heard a senior Communist party figure say some time later. China had drawn a veil over the centuries of humiliation.

The People’s Liberation Army soon moved to assert historic, but hitherto passive, claims to island chains in the south and east China seas. The “nine-dash line” delineating Beijing’s assumed sovereignty over most of the South China Sea suddenly looked rather solid.

President Xi Jinping’s Belt and Road Initiative has since added an overarching geopolitical purpose to the country’s expanding economic reach. Visitors to Beijing are now invited to acknowledge the “fact” of China’s great power status. Officials have shed their reluctance to speculate as to when China will overtake the US as the world’s largest economy.

By these lights, the implosion of the western banking system in September 2008 was an extraordinary stroke of good fortune. The wars in Iraq and Afghanistan had badly dented America’s post-cold-war primacy.

The financial crash was of a different order. It marked the collapse of the US-designed international system and of the liberal market worldview embedded in the Washington consensus. Previous crashes had hit Asia, or Latin America. This failure struck at the system’s core.

The resulting psychological boost for rising nations of the east and south — and for none more than China — was as significant as the heavy economic costs imposed on rich democracies by recession and austerity. China acted decisively to mitigate the deflationary impact of the crash. Europe opted for self-defeating fiscal austerity.

The emperor had shed his clothes. The end-of-history theorising so fashionable after the fall of Soviet communism was revealed as hubris — an impression bolstered further by the west’s slide towards populism and beggar-thy-neighbour nationalism.

Before the crash, Chinese policymakers never seemed quite sure how far they might have to travel towards liberal capitalism to sustain economic growth; nor were they certain they could hold the line against some loosening of control to the forces of democracy.

The west’s misfortunes removed the self-doubt. Mr Xi is unapologetic about state direction of the economy. He has tightened the party’s grip on power. We can forget about any notion of democracy with Chinese characteristics.

During the decade since the Olympics, the size of the Chinese economy has almost tripled again. The Belt and Road Initiative has emerged as a grand strategy to shrink the distance between east and west and thus establish China as the pre-eminent Eurasian power.

Its military might still trail far behind the US, but Beijing is investing heavily in aircraft carriers and expeditionary capabilities. By many calculations its military budget is more than twice that of Russia and three times that of India.

Washington’s rhetorical response has been to designate China, along with Russia, a “strategic competitor” — a revisionist power intent on shaping a “world antithetical to US values and interests”, as the US National Security Strategy puts it. Donald Trump has slapped import tariffs on Chinese products in response to “economic aggression”.

Yet all the while America has been surrendering its greatest advantage — the network of alliances, treaties and norms underpinning a US-designed global system. Chinese officials once fretted it would take decades to undercut the world order established after 1945.

China has few natural allies — think Cambodia, Myanmar. The US, in theory, has dozens. Washington gave itself a leadership role in the big international institutions. China mostly sat at the other end of the table.

Now, each successive attack by the US president on the post-1945 multilateral order creates more space for the new competitor. Beijing need not show fealty to a system now disavowed by the US.

None of this predetermines China’s trajectory. The country has its problems — an ageing population, a deeply unequal distribution of its riches, and growling resentment in poorer nations at the political price Beijing extracts for financial largesse.

All that said, if Mr Xi does stumble along the way, he can scarcely blame the west for failing to offer a helping hand.

Brazilian Democracy on the Brink

Robert Muggah  

bolsonaro rally brazil  elections

RIO DE JANEIRO – With Brazil’s presidential and state elections just days away, the country’s citizens are frustrated, disillusioned, and angry. Many are taking to the streets, disgusted by years of cynical politics, breathtaking corruption, economic stagnation, and obscene levels of crime. Although roughly 85% of Brazil’s 147 million voters agree that the country is heading in the wrong direction, they are more polarized than ever, both online and offline. These deepening divisions threaten to squeeze the life out of democracy in South America’s largest country.

Not since the restoration of democracy in 1985 has a Brazilian election been so contentious and unpredictable. At stake is the presidency, but also positions for 27 state governors, 54 senators and nearly 1,600 elected officials. Although 69% of Brazilians have faith in democracy, more than half admit they would “go along” with a non-democratic government so long as it “solved problems.” Despite efforts by a new generation of young leaders working to restore faith in democracy, Brazilians are ranked as the least trusting and most pessimistic people in Latin America today. And now, the rise of digital propaganda and fake news is making a bad situation much worse.

Still, the suffocation of Brazilian democracy is not inevitable. While hard to imagine at the moment, its revival will require a combination of foresight, self-awareness, humility, and the courage to confront seemingly insurmountable class and racial divisions, and even rifts within families.

Among the crop of presidential candidates in this cycle, a few thrive on division, while most – including Marina Silva, the only woman in the race – advocate a middle ground. Unfortunately, the populists are ascendant, and the pragmatists have struggled to break through. Opinion polls suggest that the election will most likely come down to a second-round contest between the ultra-right-wing populist Jair Bolsonaro and the left-wing Workers’ Party candidate Fernando Haddad, a former São Paulo mayor.

Despite spending 27 years in government, Bolsonaro is campaigning as a “drain the swamp” outsider. With the blessing of former President Luiz Inácio Lula da Silva, the jailed ex-leader of the Workers’ Party, Haddad is promising to restore economic prosperity. Although at least a third of Brazilians appear to be rallying around Bolsonaro, an even greater share of the electorate, including a growing coalition of women, adamantly opposes him.

Bolsonaro has gained a surprisingly wide, and in some cases fanatical, following. Some of his base – 60% of whom are men aged 16-34 – share his worldview. Many Brazilians, including women, also like his “tough on crime” message. And many of the country’s business elite see Bolsonaro – along with his running-mate, the retired army general Hamilton Mourão, and his Chicago School financial adviser, Paulo Guedes – as a bulwark against the return of the Workers’ Party.

It would be naive to dismiss Bolsonaro as a “useful idiot” for the conservative establishment. His turn to economic liberalism flies in the face of a long record of support for state-driven development. And, like US President Donald Trump, Turkish President Recep Tayyip Erdoğan, Philippine President Rodrigo Duterte, and Hungarian Prime Minister Viktor Orbán, Bolsonaro is an expert at sowing division. Following the populist playbook, he portrays Brazilian society as comprising two homogeneous and antagonistic groups: the “real people” and the “elites.” As Steven Levitsky and Daniel Ziblatt of Harvard University have shown, this attack on “mutual toleration” strikes at the foundation of democracy.

Brazil’s three major political parties also share blame for the country’s deepening divisions. Faced with mounting corruption scandals, both Lula and former President Dilma Rousseff, also of the Workers’ Party, routinely invoked us-versus-them rhetoric. They dismissed damning evidence unearthed during the “Operation Car Wash” investigations as an elitist conspiracy against a popularly elected government. The country’s other two main parties, meanwhile, confirmed Workers’ Party supporters’ fears when they voted to impeach Rousseff in August 2016. What Workers’ Party loyalists described as an illegal coup reinforced Brazil’s divisions. The new government was itself soon ensnared in corruption scandals, and its popularity plummeted.

For almost three decades, first as a city councilor and then as a congressman, Bolsonaro waited in the wings for precisely this moment. Promising “clean government” and “law and order,” and casting himself as the champion of the military and police, he has the credentials to lead an authoritarian backlash. Bolsonaro has repeatedly supported the military dictatorship that reigned from 1964 to 1985, when the government tortured and murdered its opponents. As far back as 1999, he called for the National Congress to be shuttered, and lamented that the dictatorship had not killed 30,000 more people, starting with former Brazilian President Fernando Henrique Cardoso.

Moreover, in a country with the world’s highest number of police killings, Bolsonaro has openly supported expanding official impunity, saying that police who kill “bandits” should be awarded medals, not penalized. Despite soaring gun violence and 45,000 firearm-related homicides in 2018, he objects to all gun regulation and is the only candidate calling for repeal of the country’s Disarmament Statute, which is credited with saving more than 160,000 lives. And in a country that already has more than 725,000 people in jail, he wants to reduce the age of criminal liability from 18 to 16 – or even 14 – and, not surprisingly, wants to restore the death penalty.

Having secured support from several influential evangelical leaders, Bolsonaro also supports religious interference in public life. Last year, Bolsonaro declared that Brazil is a Christian country; that there is no such thing as a secular state; and that those who disagree should leave or bow to the majority. He also adamantly opposes gay marriage, condones hate speech against LGBTQ people, and has been sanctioned no fewer than 30 times since 1991 by the Brazilian Bar Association for racism, xenophobia, and homophobia. In 2011, he said that he would rather have a dead son than a gay one.

Bolsonaro also routinely taunts women about rape and expresses misogynist views. He once told a female fellow legislator, “I wouldn’t rape you because you don’t deserve it,” and he is on record calling a female journalist a “whore.” Furthermore, Bolsonaro is openly hostile toward Afro-Brazilian communities, indigenous populations, and members of landless movements, whom he has described as terrorists.

Lastly, Bolsonaro fundamentally rejects climate science and favors Brazil’s withdrawal from the 2015 Paris climate agreement, claiming that climate change is a “fable” and nothing more than a “globalist conspiracy.” Brazil’s Congress, unlike the US Senate, actually ratified the Paris agreement, making withdrawal less likely. Even so, Bolsonaro and his three eldest sons – all of them elected officials – regularly describe global warming as a fraud.

Bolsonaro is frequently characterized as a comical character or a “Tropical Trump.” But if one takes his record at face value, it should be clear that his candidacy is no laughing matter. Like Trump, he is more a symptom of division than a cause. Like Trump, he has said he will reject the election’s outcome if he does not win. But he is also potentially more destructive than Trump, and Brazil’s democracy is much younger and more fragile than that of the United States. He was not considered a serious contender until quite recently – just as few saw Trump coming until it was too late.

Robert Muggah is the co-founder and research director of Instituto Igarapé and a co-founder and principal of the SecDev Group.

The Global Economy Ten Years After

Jim O'Neill  

LONDON – Much will be said about the tenth anniversary of the 2008 financial crisis, so I will focus on the global economy, which has not been nearly as weak as many seem to think.

According to the International Monetary Fund, the rate of real (inflation-adjusted) world GDP growth averaged 3.7% in 2000-2010, and would have been close to 4% if not for the so-called Great Recession. By comparison, the average annual growth rate so far this decade has been 3.5%, which is slightly lower than the average rate in the 2000s, but above the 3.3% rate in the 1980s and 1990s.

By my reckoning, China has contributed an even larger share of global growth in this decade than it did in the last, with its GDP having almost tripled from $4.6 trillion at the end of 2008 to around $13 trillion today. That additional $8 trillion accounts for more than half of the increase in global GDP over the past decade.

I have long attributed the financial crisis to imbalances within and between the United States and China, the world’s two largest economies. While the US’s current-account deficit was close to 5% of GDP in 2008 (and closer to 7% in some quarters of 2007), China was maintaining a whopping current-account surplus of 9% or higher.

Following the crisis, I predicted that the US and China would have to swap places to some extent over the course of the next decade. China needed to save less and spend more; and the US needed to save more and spend less. Judging by their current accounts today, both countries appear to have made significant progress. In 2018, China’s surplus will have fallen to around .5-1% of GDP, which is remarkable considering that its GDP has more than doubled since 2008. Equally remarkable, the US will register a deficit of 2-2.5% of GDP, which is within the 2-3% range that many economists consider sustainable.

Other global indicators, however, are not as encouraging. Back in 2008, the eurozone ran a current-account deficit of 1.5% of GDP, with Germany recording a surplus of around 5.5%. But Germany’s large surplus owed much to large deficits in other eurozone countries, and that imbalance gave rise to the euro crisis after 2009. Worryingly, Germany’s surplus has since ballooned to around 8% of GDP. As a result, the eurozone now has a surplus close to 3.5%, despite, and probably because of, years of weak domestic demand in the Mediterranean member states. This is surely a sign of further instability ahead. In fact, the slow-brewing crisis in Italy may be a harbinger of what awaits the bloc.

A central feature of the economy prior to the financial crisis was the US housing bubble, which itself resulted from the financial sector’s invention of increasingly intricate (and dubious) methods of recycling global savings. A decade on, it bears mentioning that many “global cities” like London, New York, Sydney, and Hong Kong now have home prices that only a very small minority of their permanent residents can afford, owing to the growing demand from wealthy investors abroad.

But as of this year, there are growing signs that housing prices in these and other cities may be undergoing a reversal. This may simply reflect actions taken by municipal governments to provide more affordable housing to their residents; but it also could indicate that marginally affluent new buyers are becoming scarcer.

To be sure, a gradual decline in house prices in these cities would be a welcome development in terms of economic and social equality. But one would search in vain for a time when declining home prices did not produce damaging side effects.

Having now assumed the chairmanship at Chatham House, I am eager to encourage more research into how factors such as housing costs relate to larger issues of income and wealth inequality. To my mind, the world needs much better metrics for tracing these interconnections.

For example, it is clear that wealth inequality has increased much more than income inequality over the past decade, with the rapid rise in urban housing prices playing a central role. In many developed countries, including the United Kingdom, economic inequality is a serious problem. Yet in terms of income, the latest data show that inequality has actually fallen back to the (still-too-high) levels of the 1980s.

If common perceptions about inequality tend to inflate what is actually happening, that is because many companies’ top executives are earning increasingly massive sums relative to the workers under them. Such compensation packages can be rationalized in the context of share-price performance, but that hardly makes them justifiable.

This is another issue that I hope we will be studying at Chatham House. The strange equity-market rally that has been proceeding almost uninterrupted since 2009 has been fueled in large part by major corporations’ stock buybacks. In some important cases, companies have even issued debt to finance the repurchase of their shares.

Does the growing prevalence of buybacks explain why fixed investment and productivity have remained so weak across the West? And might those macroeconomic factors explain some of the political upheavals in Western democracies such as the UK and the US in recent years?

On both counts, I suspect that the answer is yes. Unless we can recover a world in which business profits actually serve a purpose, the likelihood of more economic, political, and social shocks will remain intolerably high.

Jim O'Neill, a former chairman of Goldman Sachs Asset Management and a former UK Treasury Minister, is Chairman of Chatham House.

sábado, octubre 06, 2018



Argentina’s Latest Bust Cycle

This time the debt troubles should stay localized.

By Allison Fedirka   


Argentina, a country well-acquainted with defaults, is on the precipice of yet another debt crisis. Argentina’s external debt has increased rapidly over the past two years, with much of that debt denominated in U.S. dollars at a time when the domestic currency is weak. The risk of a repeat of 2001, when the country defaulted on $93 billion of external debt, declined because the International Monetary Fund has already issued funds to the country. And even in the event of a crash, it is unlikely to trigger a global crisis. But the austerity measures that come with IMF assistance won’t be popular at home. The ability of this government and future governments to forge ahead could be the difference that enables Argentina to break its long cycle of economic instability.
Booms and Busts
For 15 years after its 2001 default, Argentina was frozen out of international capital markets. When it finally regained access to those markets, the government was faced with the task of normalizing an economy that had become extremely distorted by populist and interventionist policies. To have the funding for necessary reforms, the government had no choice but to take on debt.

It has certainly done that. External debt totaled $253.74 billion in the first quarter of the year, according to the government statistics agency. This is about 40 percent of Argentina’s gross domestic product and five times as much as its international reserves, but one of the bigger issues is the rate at which it’s growing: Foreign debt increased by $30.79 billion in 2016, $52 billion in 2017 and $19.19 billion in just the first quarter of 2018.


Another issue is the seemingly bottomless fall of the Argentine peso. Argentina is part of the trend of emerging markets experiencing depreciating currencies and ballooning external debt with short- to medium-term maturities. Approximately 70 percent of Argentina’s foreign debt is held in U.S. dollars. At the same time, Argentina’s domestic currency has lost half its value against the dollar in the past nine months, significantly complicating debt servicing. Between now and the end of the year, it requires nearly $27 billion to meet its financing needs. It needs another $40 billion for next year. And Argentina’s central bank reserves cannot cover this alone. Its international reserves stand at $51.44 billion but were as high as $61.73 billion in March before the central bank started multiple spending sprees to stabilize the peso. Adding to the concern is the question of rollover ability since the government relies heavily on short-term debt issuances by the central bank in pesos and dollars.

That said, the likelihood of Argentina’s troubles affecting other countries fell once the IMF entered the picture. Buenos Aires has already received $15 billion of a $50 billion IMF loanand is in talks to expedite the release of the remaining funds. Argentina plans to use $13.4 billion of the funds already received this year and $11.7 billion next year to pay debts, while raising another $8 billion on local markets.

Even without the IMF assistance, the global financial system is somewhat less interconnected now than it was 10 years ago, according to a report by McKinsey Global Institute. The report also noted that global banks interested in correspondent relationships with local banks in emerging countries are now subject to stricter cost-benefit analysis. Investors interested in Argentina will also be well aware of the country’s financial past. Spanish, U.S. and U.K. banks have the highest exposure among counterparties resident in Argentina, according to the Bank for International Settlements, but all of these countries’ financial systems are large enough that Argentina’s individual impact on them would be minimal.

As far as individual institutions go, the two major ones holding Argentine debt are U.S.-based Franklin Templeton and Black Rock. Their assets under management as of June 30 were $724 billion and $6.3 trillion, respectively. Neither fund provides specifics on its Argentine holdings, but in the event of repayment issues, Templeton would be vulnerable only if it held a quarter or more of Argentina’s total external debt, while Black Rock could hold all of Argentina’s external debt and not face an existential risk. In other words, Argentina could exacerbate a crisis that starts elsewhere, but it’s unlikely to trigger any crisis outside its borders on its own.
40 Years of Debt Problems
Inside Argentina, however, it’s a different story. Until now, the administration of President Mauricio Macri has approached economic reforms and restructuring gradually. It feared that drastic moves would shock the economy and reignite political instability. But gradual proved to be too slow, and recovery came too slowly. Moreover, Argentina suffered a harsh drought whose effects on soy and corn crops drove the country toward recession. At that point, the IMF loan was unavoidable.

By accessing the IMF loan, the government is throwing gradualism out the window and replacing it with austerity. When the IMF grants a loan, it does so conditionally. In Argentina’s case, this means the IMF has a large say over the country’s 2019 budget. It requires the government to reduce its fiscal deficit from 2.7 percent of GDP this year to 1.3 percent next year and 0 percent by 2020. It also demands that government spending on social welfare be more targeted and that limits be placed on spending increases. The government, moreover, reintroduced export taxes on services and goods (particularly grains) to generate 68 billion pesos ($1.79 billion) this year and 280 billion pesos next year. And the plan calls for the central bank to post more reasonable inflation goals and act more independently from the government.

Austerity is hard for any country to swallow, let alone one as accustomed as Argentina is to large government subsidies and welfare spending – not to mention protests. Argentina has spent the past 40 years struggling with its debt problem. During the military dictatorship (1976-83), the government tried to open the economy, forsaking import substitution, and the country’s external debt exploded from $7 billion to $45 billion while GDP remained stagnant. Debt became more heavily concentrated in the public sector, and when the Latin American debt crisis hit in 1982, Argentina suffered immensely. For the next eight years, the country rationed international credit. But moves to again open up the economy accelerated indebtedness, culminating in the 2001 default.

Now, Argentina has again taken on large amounts of debt to normalize and open its economy. The IMF loan this time will likely help the country avoid falling into yet another debt crisis and default, but there will inevitably be a public backlash against austerity. This backlash will affect the ability of the current government and future governments to continue with austerity and to structurally reform the economy. After all, in 2001 when the IMF believed Argentina did not comply with the conditions of its support program, it suspended payments to the country.

Argentina has been labeled a potential regional leader given its location, size and resources. But these years of debt and economic crisis have prevented Argentina from making the most of its wealth, developing its economy and building its military. Government subsidies and trade schemes to keep the economy afloat during turbulent economic downturns have resulted in less competitive industry and manufacturing sectors. They have also discouraged investment and production in both energy and agriculture. And even as the country reconsiders its relationship with the military post-coup, there are no funds to modernize equipment and technology. Argentina’s ability to avoid another debt crisis this time could be the difference between continuing its period dive into economic malaise or breaking from the cycle – and potentially increasing its national power in the years ahead.