How the Optics of Wealth Fuelled the Argentine Debt Boom

Megan McArdle and Tyler Cowen are talking today about the optics of wealth, concentrating on Cuba. Why would people think that Cuba is doing better than northern Mexico, when the opposite is true? And more broadly, why do rich countries like Iceland and Korea feel much poorer than they are, while the opposite is true in countries like the Czech Republic?

Bob, in Cowen's comments, makes an excellent point:

The general rule is that countries that are historically poor, but become richer in a short span still don't have much accumulated wealth, and thus look poor to our eyes.
In contrast, previously rich places that are struggling still have the lingering wealth accumulation. Cuba fits this pattern. As does much of Europe.

I'd add that this effect has very real repercussions, well beyond touristic attitudes. My favorite example is Argentina during the 1990s, which went on a debt-fuelled spending spree. Every week one investment banker or other would fly down to Buenos Aires, put his team up at the Alvear Palace hotel, eat great food, drink great wine, enjoy a lively and vibrant culture, and pitch the finance ministry on a new bond issue. BA felt so prosperous and European (and, it must be said, white) that people ended up believing the evidence of their own eyes rather than the numbers in front of them.

In fact, large swathes of Argentina - and even of Buenos Aires, outside the parts visited by foreigners - were desperately poor all along. And eventually Argentina ended up defaulting on a hundred billion dollars or so of foreign debt. If Buenos Aires had looked more like Sao Paulo or Manila, I doubt that Wall Street would have been willing or able to finance the unsustainable boom for as long as it did.

In other words, becaues Argentina used to be incredibly wealthy, back at the turn of the century, it still felt wealthy at the end of the century. Which sowed the seeds of the disastrous crash of 2001-2.

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