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. Last Updated: 07/27/2016

Argentine vs. Russian Reactions to Crisis

It is said that the way you see in the New Year sets the tone for the rest of that year. Whether this is true or not, the events unfolding in Argentina should serve as a serious warning to the world's governments and financial elite. After enraged crowds surged onto the streets of Buenos Aires, many recalled that three years ago Argentina was presented as a model for Russia to follow. The business press published gushing articles about the "Argentine miracle" and the man behind it, Domingo Cavallo. Fortunately and surprisingly, the Russian authorities showed good sense: Rather than adopting tough fiscal measures like Argentina, Russia devalued the ruble and supported industry. The result was that the economy started to pick up.

As it turns out, Argentina's economic miracle was a catastrophe for the majority of the population from the word go. Once an artificially high peso exchange rate had been set, industrial output started to fall and continued on a downward trend for over four years, leaving most Argentinians penniless. The country that once looked down its nose at its impoverished Latin American neighbors started to experience mass poverty and shanty towns sprung up on the outskirts of Buenos Aires.

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None of this stopped the international press and the Argentine elite from trumpeting it as a success story. The social crisis was only noticed when it started to affect better-off sections of the middle class and the banking sector started to suffer.

The collapse we are witnessing today is in no way the result of poor management or errors committed by the Argentine government, but rather a reflection of the fundamentally flawed philosophy on which economic decision-making rests.

It is widely believed that a stable exchange rate and low inflation are a panacea for all ills, while the harsh reality has repeatedly provided evidence that the opposite is true, and that the stability of the financial system depends on the general state of the economy. Speaking in Buenos Aires in 1999, the English economist Alan Freeman was asked whether he thought that in order to boost production the peso would have to be devalued. He responded that he didn't understand the question and that if the economy was in deep recession the currency would have to be devalued whether this was desirable or not.

The reluctance of the elite to accept the facts and its profound lack of interest in the sufferings of ordinary people led to the government completely losing control of the situation.

During the New Year's crisis in Argentina the authorities quite literally found themselves on the street. No one wanted to rule.

What the political and business elite considers normal, natural and the only possible solution is absolutely unacceptable to the public. And what the population considers necessary is, in the opinion of the elite, impossible, senseless and absurd.

For example, any measures that might lead to increased inflation are decried, even if they stimulate production, and raise employment levels and living standards. Privatizations are irreversible, even when all (including the new owners) acknowledge that they have been a failure. State regulation has been declared ineffective, while market methods are "flawless," irrespective of the results attained.

Unfortunately, the experience of millions of ordinary people tell quite a different story.

It took five changes of president in three weeks for an Argentine leader to do the obvious, namely devalue the peso. Perhaps the financial crisis can be overcome, but it is already too late to overcome a most profound crisis of trust in government.

The drama is scarily reminiscent of the events that took place in Russia three years ago, but with one major difference: In Argentina the people took to the streets, while in Russia they sat and watched television. Perhaps it can be explained by differences in temperament and culture. However, the more likely explanation is that in Russia in the 1990s -- unlike in Argentina -- people not only lost respect for the authorities, but also for themselves.

Boris Kagarlitsky is a Moscow-based sociologist.