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Why Argentina ’02 Is Not Russia ’98

What accounts for the different responses of Russians and Argentines to severe economic crisis?

February 12, 2002

What accounts for the different responses of Russians and Argentines to severe economic crisis?

Argentina has, of course, defaulted on $132 billion of foreign debt and endured a 30% devaluation of the peso. And its politicians are having a very hard time to come up with a sensible economic reform package.

Optimists had initially sought comfort in the example of Russia — which weathered an apparently similar default and devaluation scenario in August 1998.

The answer can only be found by going beyond real (or perceived) differences in macroeconomic policies. One must look at how individuals in the two societies provide for their welfare — and the varying kinds of perceptions they have about their own situations. After all, people’s behavior — economic as well as social and political — is driven by subjective views of well-being and hardship, and not by objective indices.

Consider how Argentina’s anti-crisis measures differ from Russia’s in the way they are driven by political considerations. For instance, Argentina’s leaders have attempted to adopt a variety of complex exchange rate schemes.

This multiplicity of schemes is an attempt to protect consumers, home-owners, and pensioners — all of whom had dollar-denominated debts — from the negative effects of the devaluation of the peso. There is a strong assumption that the Argentine public will not tolerate the high costs associated with the now necessary devaluation.

How then could Russia implement a much more radical and painful devaluation without social unrest? Part of the explanation lies in the extent to which a large part of Russia’s economy was and remains “virtual” — outside the monetary, market economy.

Russians engage in extensive self-subsistence activity, beginning with food production. Russians — not only rural residents, but also middle-class urban professionals such as scientists, doctors and military officers — produce an astounding 50% of the nation’s meat supply and 80% of all vegetables and fruits on their family garden plots. As inefficient as it is, Russia’s “virtual” economy acts as a de facto safety net.

Middle-income Argentines, in contrast, are fully integrated into the monetized market economy, and as a result, they are highly vulnerable to market fluctuations. It was the protests by the middle class that brought down the de la Rúa government in December 2001.

Indeed, the trigger for the protests was not poverty or hunger, but government restrictions limiting bank withdrawals to $1,000 just prior to Christmas, traditionally a time of heavy consumer spending.

Perceptions, it turns out, are the key to understanding how this Argentine middle class will react to further cuts in its living standards. Using survey data from Latin America and Russia, researchers at the Brookings Institution are studying the gap between people’s real economic situation and their perceptions of where they are.

One of the findings is that most people who are making objective economic gains perceive that they are doing negatively or very negatively. A distinctive trait in Latin America is that this gap between reality and perception is much more marked for those in the middle of the income distribution than it is for the poor.

Since it is a well-established fact that individuals take losses more seriously than gains in assessing their own well being, this bodes ill for how middle income people in Argentina — who recently were making economic gains — will evaluate their situation when faced with dramatic drops in their living standards.

Another big difference between Latin America and Russia is how people choose the reference group for assessing their own progress. Latin Americans tend to measure themselves against the rich. In effect, what this means is that as the rich get richer, the Latin American middle class is continually raising the bar for itself — and becoming more frustrated as a result.

The eyes of Russia’s middle class, on the other hand, are figuratively directed downward, towards the poor. In fact, as poverty in Russia increased dramatically in the 1990s, the middle class’s reference norms shifted downward as well.

As a result, Russia may be the only country in the world where the “subjective poverty line” is falling. That is, the amount of money that Russians say that they need in order to stay out of poverty has been steadily falling over the past five years. It is even below the objective poverty line.

For the time being, at least, these curious Russian attitudes, along with the existence of the non-monetary virtual economy, have insulated the country against political upheaval. Not so in Argentina. The specter of falling into poverty is now all too real for large numbers of middle-class Argentines — and, unlike in Russia, there is no virtual economy to fall back on.

Clifford Gaddy and Carol Graham are Senior Fellows in the Center on Social and Economic Dynamics at the Brookings Institution in Washington, D.C.

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