The land of Evita, Che, Borges and Maradona, the land of the Pampas and Patagonia, the land deriving its name from the Latin for silver is in anarchy. Three presidents in the past month. A default on its $155 billion external debt. Total collapse of investor confidence. Run on bank deposits. Violent rioting. All this and more in a country that had European standards of living in 1900 but then went on a steep downward spiral, a country blessed with a variety of riches and whose appalling performance must rank as one of history's greatest puzzles.

The only mitigating circumstance is that the latest Argentinian crisis has not resulted in contagion. The debt default has not destabilised world markets. What explains this unusual phenomenon? Three factors. First, the Argentinian crisis was a slow-bleed and the tragic drama was playing itself out for the past six months at least. In the language of finance, markets had "discounted" what was happening in Argentina. Second, markets are getting better informed and countries are being distinguished according to their special features, unlike in the past when a crisis spread like a virus. Third, this time the international creditor response has been tepid. High-profile interventions impart a global dimension and their absence heighten the localised flavour of the crisis. In the past, Argentina has been bailed out by the International Monetary Fund (IMF) with American support-$40 billion in December 2000 and $8 billion in August 2001.

Why did Argentina collapse? It was after all a country that averaged an economic growth of 5.7 per cent during 1991-98, a country that privatised aggressively and attracted about $90 billion of foreign investment in the 1990s largely from the US and Spain. Paradoxically, Argentina became a victim of its own success. In the 1980s, it was torn apart by hyperinflation. In 1989, the annual inflation rate crossed an astronomical 3,000 per cent. It was then that it adopted an unorthodox system called the currency board. The peso: dollar parity was fixed at 1:1 with full convertibility. Peso supply could not expand without a corresponding increase in the supply of dollars. With this move, Argentina abandoned monetary independence in trying to assure exchange rate stability and free capital mobility.

The effect was astounding. Hyperinflation was licked by the mid-1990s itself. Argentina weathered the Mexican crisis of 1994-95 and the East Asian and Russian shocks of 1997-98 relatively well. But beginning January 1999 with the currency devaluation in Brazil, Argentina's main trading partner, the adverse effects of the currency board began to be felt. The peso started appreciating, exports became uncompetitive and current account deficits mounted. The currency board depended on external borrowing and as a result the debt burden accumulated rapidly. With fiscal indiscipline, interest rates zoomed. The net result was a recession and growing unemployment. Argentina's fiscal abandon during 1995-99 destroyed any possibility of using fiscal stimulus to revive growth. The absence of growth magnified the debt and deficit burden. It is the combination that proved lethal.

The obvious response to the growing crisis would have been an abandonment of the currency board. That did not happen since the Argentines felt that such a move would threaten a return to high inflation. Devaluation has also been anathema to foreign investors and local companies and families holding dollar debts. As things turned out, it was only on January 7 this year that a devaluation took place but recovery will be a long and painful process.

Undoubtedly, there are other factors responsible for Argentina's predicament. Over half of its exports are food and farm commodities, prices of which have been depressed in the past few years and trade in which continues to be strangulated by huge subsidies in the US, Japan and Europe. Its unions wield enormous power and prevent restructuring, making labour markets inflexible. The IMF may also not have been tough enough when it approved the August 2001 bailout and should have insisted on a devaluation then. Then there is Argentine politics-venal, populist, particularly in provinces, and deeply divisive.

The fundamental lesson from Argentina is that a country cannot make its currency freely convertible and be fiscally reckless at the same time. With a fiscal deficit close to 11 per cent of GDP, as compared to around 4 per cent in Argentina, India could be disaster-bound. What has saved us is that we still retain controls on both inflows and outflows of capital. Prudence has paid off but is it really such a good thing? In our case, the closed capital account and public ownership of banks act like aspirin-it keeps the fever down while the bacteria of fiscal profligacy keep eating away at our innards. Argentina exploded into an external crisis. India is imploding into a growth crisis-somewhat like Japan.

(The author is with the Congress party. These are his personal views)