Economy

Argentine Malaise: The Bill Arrives For Bad Economic Choices

How did the Argentine economy arrive at a point of complete exhaustion, asks Brazil's leading daily. Here's a checklist of the errors made over the past decade.

At a standstill, in Cordoba
At a standstill, in Cordoba

- Editorial -

SAO PAULO — The peso’s plunge in value is just the latest symptom that Argentina’s economic and political model of the past 12 years is close to exhaustion. The country suffers from a growing scarcity of hard currency, particularly dollars, and it remains cut off from international financial markets since it defaulted on its debt in 2001-2002.

Government interventions — including controls on prices and foreign commerce — have driven away investment. Argentina counts solely on foreign commerce to acquire other currencies and pay for what it imports, but now this revenue source has been drying up. Slow global growth since 2008 has limited both the price and quantity of exports, while government intervention is restricting production capacity. Inflation, which is high and rising, causes costs to climb, which badly affects the country’s commercial balance.

Since the end of 2010, Argentinian reserves in hard currency have fallen 43%. To avoid a stronger dip in reserves, the government imposed new restrictions on trade and on the purchase of dollars. Such measures have driven inflation higher, causing Argentines to spurn the peso, creating a frantic demand for dollars.

Indeed, inflation is the root of the problem, and it is fueled by economic policies that are either extravagant or untenable. Argentina has had a budget deficit problem since 2009. It spends too much on salaries, social benefits, energy and public transport subsidies. And although the deficits are rather small, they are financed by inflation, maintaining economic growth above Argentina’s means. The country’s Central Bank finances the government, on top of playing the role of a development bank.

Excessive spending produces inflation, making Argentina less competitive and leading to a scarcity of dollars. And if devaluation is seen as among the solutions to the problem, it will actually achieve nothing if inflation continues to rise, because it cancels out any competitive gains.

It seems greater control of public spending and interest rate increases are unavoidable. This would eventually mean a policy of temporary recession, of salary restrictions and welfare spending, which would of course cast doubt on the pact that has kept intact the Peronism of the Kirchner presidencies since 2003 — first Néstor Kirchner and now his wife, Cristina, who has been president since 2007.

Argentina was very successful at overcoming the crisis of 2001-2002. It didn’t, however, have the capacity to see that some adjustments were necessary, at least from 2009 onward. Fiddling with economic policies now won’t solve the huge imbalances that have been accumulating since then.

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Society

Debt Trap: Why South Korean Economics Explains Squid Game

Crunching the numbers of South Korea's personal and household debt offers a glimpse into what drives the win-or-die plot of the Netflix hit produced in the Asian country.

In the Netflix series, losers of the game face death

Yip Wing Sum

-Analysis-

SEOUL — The South Korean series Squid Game has become the most viewed series on Netflix, watched by over 111 million viewers and counting. It has also generated a wave of debate online and off about its provocative message about contemporary life.

The plot follows the story of a desperate man in debt, who receives a mysterious invitation to play a game in which the contestants gamble their lives on six childhood games, with the winner awarded a prize of 45.6 billion won ($38 million)... while the losers face death.


It's a plot that many have noted is not quite as surreal as it sounds, a reflection of the reality of Korean society today mired in personal debt.

Seoul housing prices top London and New York

In the polished streets of downtown Seoul, one sees endless cards and coupons advertising loans scattered on the ground. Since the outbreak of the pandemic, as the demand for loans in South Korea has exploded, lax lending policies have led to a rapid increase in personal debt.

According to the South Korean Central Bank's "Monetary Credit Policy Report," household debt reached 105% of GDP in the first quarter of this year, equivalent to approximately $1.5 trillion at the end of March, with a major share tied up in home mortgages.

Average home loans are equivalent to 270% of annual income.

One reason behind the debts is the soaring housing prices. In Seoul, home to nearly half of the country's population, housing prices are now among the highest in the world. The price to income ratio (PIR), which weighs the average price of a home to the average annual household income, is 12.04 in Seoul, compared to 8.4 in San Francisco, 8.2 in London and 5.4 in New York.

According to the Korea Real Estate Commission, 42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s. For those in their 30s, the average amount borrowed is equivalent to 270% of their annual income.

Playing the stock market

At the same time, the South Korean stock market is booming. The increased demand to buy stocks has led to an increase in other loans such as credit. The ratio for Korean shareholders conducting credit financing, i.e. borrowing from securities companies to secure stock holdings, had reached 21.4 trillion won ($17.7 billion), further increasing the indebtedness of households.

A 30-year-old Seoul office worker who bought stocks through various forms of borrowing was interviewed by Reuters this year, and said he was "very foolish not to take advantage of the rebound."

In addition to his 100 million won ($84,000) overdraft account, he also took out a 100 million won loan against his house in Seoul, and a 50 million won stock pledge. All of these demands on the stock market have further exacerbated the problem of household debt.

42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s

Simon Shin/SOPA Images/ZUMA

Game of survival

In response to the accumulating financial risks, the Bank of Korea has restricted the release of loans and has announced its first interest rate hike in three years at the end of August.

But experts believe that even if banks cut loans or raise interest rates, those who need money will look for other ways to borrow, often turning to more costly institutions and mechanisms.

This all risks leading to what one can call a "debt trap," one loan piling on top of another. That brings us back to the plot of Squid Game, "Either you live or I do." South Korean society has turned into a game of survival.

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