The Costs of Financial Crises: Resource Misallocation, Productivity, and Welfare in the 2001 Argentine Crisis


  • We are grateful for comments from Susantu Basu, and seminar participants at the Banco Central de la Rep. Argentina, the Bank of England, the Bank of Spain, Universidad de San Andres, CREI, the Federal Reserve Banks of Dallas and St Louis, Harvard, HEC, IIER, MIT, the Paris School of Economics, PUC-Rio, UCLA, UCSB, UTDT, the 2009 LACEA Conference, and the 2008 and 2009 SED Conferences. We thank Fernando Giuliano and Nicolás Kohn for outstanding research assistance. Further comments welcome.


Financial crises in emerging market countries appear to be very costly: both output and a host of partial welfare indicators decline dramatically. The magnitude of these costs is puzzling both from an accounting perspective – factor usage does not decline as much as output, resulting in large falls in measured productivity – and from a theoretical perspective. With the aim of resolving this puzzle, we present a framework that allows us to do the following. First, we account for changes in a country's measured productivity during a financial crisis as the result of changes in the underlying technology of the economy, the efficiency with which resources are allocated across sectors, and the efficiency of the resource allocation within sectors, driven both by reallocation amongst existing plants and by entry and exit. Second, we measure the change in the country's welfare resulting from changes in productivity, government spending, the terms of trade, and a country's international investment position. We apply this framework to the Argentine crisis of 2001 using a unique establishment level dataset and we find that more than half of the, roughly, 10 percent decline in measured total factor productivity can be accounted for by deteriorations in the allocation of resources both across and within sectors. We measure the decline in welfare to be of the order of one-quarter of one year's gross domestic product.