Introduction

Over the past decade, Brazil and Argentina have found very different answers to a very similar problem: an excruciating debt burden denominated in a foreign currency, a phenomenon that has haunted a range of emerging market economies over the past decades. While Brazil toed the line prescribed by Washington-based institutions – the IMF in particular – Argentina defaulted on its foreign debt in 2002 instead of giving in to creditor pressure. And while Argentina reacted against the ‘rules’ of the system to carve out its own ‘policy space’ to ease the domestic costs of adjustment and debt workout, Brazil followed the recipe and appeared to suffer (somewhat) greater costs. Two questions follow: how can the highly divergent policy responses of these two countries be explained? And how are the two policy routes to be evaluated with the benefit of hindsight? These are the two central issues addressed in this chapter.

The divergent stories contain possible lessons: first and foremost, they show that the ‘policy space’ available to national economies during financial crises may be greater than is often assumed in the litera­ture or by those who designed the financial architecture. The case of Argentina contradicts common assertions that globalised finance leaves no alternative to ‘orthodox’ policies (see Chapter 11 by Zhang). Second, it shows that following heterodox policies was not only possible, but at least in Argentina's case, probably beneficial: in spite of hardships, Argentina in the end fared slightly better than Brazil.