FROM Wednesdays to Saturdays, a would-be diner who turns up at a restaurant in the fashionable Barrio Norte of Buenos Aires at 9pm without a reservation may have to wait for an hour or more for a table. Calle Florida, the pedestrianised shopping street running parallel to the River Plate, is thronged with tourists taking advantage of the cheap peso and the shiny new shops selling fashion, consumer electronics and books. Farmers from the Pampas are splashing out on new harvesting machines and pick-up trucks.

Almost across the board, Argentina's economy is booming. The recovery gathered pace throughout last year: since September, GDP has expanded at an annual rate of 11%. And as the economy picked up, the government's authority seemed to revive in parallel.

What makes this remarkable is that only two years ago Argentina was in chaos. In 2001 it suffered its worst economic collapse in more than a century. In December of that year, after $20 billion had fled the country and bank deposits were frozen, an incongruous combination of unemployed rioters and pot-banging middle-class protesters caused Fernando de la Rúa, the Radical president, to resign.

To a cacophony of que se vayan todos (kick them all out), the political system appeared to implode. Three stand-in presidents came and went in a week; one of them declared the biggest sovereign default in history, on public debt of $80 billion, to cheers from the Congress. A fourth, Eduardo Duhalde, a Peronist political boss, dismantled the currency-board system that had pegged the peso to the dollar at par for a decade. Leaving it was always going to be messy, but the way Mr Duhalde did it made it more so: he decreed that dollar deposits and loans be converted to pesos at different exchange rates. He also switched the utility tariffs to pesos and froze them. It was a misguided effort to help debtors, industrialists and the middle classes at the expense of banks, privatised firms and taxpayers.

But Mr Duhalde did manage to calm social tensions and steer the country to an election in April 2003, in which the main candidates were three Peronists and two former Radicals. Carlos Menem, the country's president from 1989 to 1999, won 24% of the vote, which put him ahead of Néstor Kirchner, a fellow Peronist but on the party's left. Polls suggested that Mr Kirchner would have won some 75% of the vote in the run-off ballot. Disgracefully, Mr Menem pulled out, depriving his opponent of a popular mandate.

Mr Kirchner was an unexpected president. He benefited from the paradox of Argentina's post-collapse politics: on the one hand, voters clutched at Peronism (in the shape of the Justicialist Party) as the only force offering authority, despite its internal splits; on the other hand they fervently wanted political renewal. Mr Kirchner managed to embody both qualities. He was backed by Mr Duhalde and his powerful political machine in Buenos Aires province. But he is also an outsider. Descended from Swiss and Croatian immigrants, he was the governor of Santa Cruz, a bleak if oil-rich Patagonian province the size of Italy but with just 200,000 people.

Despite his unpromising start, Mr Kirchner has achieved an unusual degree of political dominance, matched during Argentina's two decades of restored democracy only in Mr Menem's early years. In provincial elections for governors and federal congressmen in the second half of last year, the Peronists won handsomely. They hold comfortable majorities in both houses of Congress and 14 of 24 provincial governorships (another is held by a personal ally of the president). A year into Mr Kirchner's term, polls suggest that some 70% of Argentines approve of him.

Just as well, because he and his country face formidable tasks. Venture out of those packed restaurants at night, and the streets and parks of Buenos Aires, so elegant in the daytime, have been taken over by an army of the poor, picking over the city's rubbish or sleeping rough. The economic slump of 2001-02, which followed three years of recession, left the social fabric torn. Much of the growth of the 1990s was wiped out (see chart 1). In 2002, income per head was 22% below its level of 1998. Unemployment soared: at its peak it reached 18% (or 21% if those on an emergency welfare programme are included), though it has now fallen to around 15%. More than half of all Argentines dropped below the national poverty line.

The collapse caused other damage too. For a while under Mr Menem, Argentina looked to many outsiders like a great advertisement for free-market reforms. Mr Menem and Domingo Cavallo, his economy minister from 1991 to 1996, put an end to hyperinflation with their currency-board scheme. Known as “Convertibility”, this fixed the peso by law, not executive whim, and limited the money supply to the stock of hard-currency reserves. They also privatised almost all the enterprises once owned by the state and welcomed foreign investors. The International Monetary Fund swallowed its doubts about Convertibility and held up Argentina as a model for other emerging economies. So when the country's economy collapsed, it became a grim exhibit in the case against globalisation.

Economists still argue about why Convertibility fell apart. The conventional wisdom is that Argentina's fiscal policy was incompatible with the currency board. The country's fiscal deficits, though never large, were chronic. Even as the economy grew, public debt swelled under Mr Menem, from 29% of GDP in 1993 to 41% in 1998. That was partly because of his quixotic drive to spend his way to an (unconstitutional) third term. But another big reason was a pension reform involving a switch to individual accounts. In the long run that should save the government money, but first it produced an extra annual bill equal to 1.5% of GDP.

In hindsight, Convertibility was doomed once Russia's 1998 debt default provoked a stampede of capital from emerging markets. That threw Argentina into recession, aggravated by devaluation in Brazil, its main export market. Unable to devalue, Argentina had to hope that deflation would eventually improve its competitiveness. But deflation is painful for democratic governments, and Mr de la Rúa's was anyway weak and divided. His last throw was to bring back Mr Cavallo, whose costly efforts to stave off devaluation precipitated financial collapse.

Nowadays it is hard to find anyone with a good word for Mr Menem. Living in Chile, he has defied summonses from three different judges investigating allegations of corruption during his rule. By contrast, Mr Kirchner is seen as personally honest. He has promised to make Argentina “a serious country”, and launched a rhetorical assault on the symbols of Menemism: the IMF, with which he has wrestled over his economic programme; the holders of the defaulted debt, who have been brushed off for the past two years; and the privatised utilities.

The 2001-02 collapse was exceptional in its severity, but wild economic fluctuations have been the norm in Argentina for decades. In 1913, the country's income per head was on a par with that of France and Germany, and far ahead of Italy's or Spain's. That was thanks to three decades of growth averaging 5% a year, driven by exports from the Pampas, foreign (mainly British) investment, especially in railways, and immigration (mainly from Spain and Italy). Since then, Argentina has lost ground against western Europe almost continuously (see chart 2).


A puzzling decline

Argentina is thus not a “developing country”. Uniquely, it achieved development and then lost it again. That is a haunting condition: it may help to explain why psychoanalysis and the nostalgia-ridden tango are so popular in Argentina. It is reflected, mockingly, in the fading Belle Epoque splendour of Buenos Aires.

What went wrong, and when? According to one school of thought the decline began in 1913, as the Pampas became fully settled: growth slowed because the country proved unable to industrialise and diversify effectively. Liberals, for their part, have traditionally blamed the governments of Juan Péron (1946-55), with their quasi-fascist pursuit of autarky and a state-run economy. Leftists have a more precise date: March 24th 1976, when the most vicious dictatorship of South America's recent history took power. In this view, shared by many of those close to Mr Kirchner, the dictatorship's economic policy prefigured Menemism, running up unsustainable debt and destroying the state's capacity to regulate the economy.

There is some truth in all three views. What made matters worse is that Britain cast Argentina adrift after the second world war, and the United States never showed much interest in sponsoring the country's development.

Yet the most powerful factor in Argentina's decline has been its unstable politics since 1930, when a (not very bloody) military junta took power, ending seven decades of civilian constitutional government. The rule of law has been repeatedly trumped by executive power ever since. That is one reason why the state has been able to expropriate private savings so often, through hyperinflation or devaluation—and why Mr Cavallo thought it necessary to set up the currency board.

It is hardly surprising that Argentines are holding perhaps $100 billion abroad. Credit from the country's banking system to the private sector equalled only 25% of GDP at its peak in the 1990s, low even by Latin American standards. As a result, Argentina's economy is hostage to the in- and outflow of capital.

This survey will argue that Argentina and its president now have an extraordinary opportunity to do better. The country's democracy has shown resilience, with little suggestion of a return to authoritarian rule. The turmoil claimed few lives. Although prices rose by 40% in early 2002 as the peso slid, Roberto Lavagna, brought in as economy minister by Mr Duhalde and kept on by Mr Kirchner, steadied both the exchange rate and prices.


Seize the moment

After a slow start, recovery has been swifter than many expected, and similar to that in other countries that have unpegged their currencies. It has been greatly helped by outside factors: prices for Argentina's farm exports soared after a long period of stagnation (though last month they dipped again). So far, growth has come from bringing idle capacity back into use. But bottlenecks—notably, energy shortages—are starting to appear. New investment is needed. Mr Lavagna points out that investment last year increased by half; it reached 17% of GDP by the last quarter of 2003. But merely maintaining the capital stock requires investment of 18% of GDP, says Luis Secco, an economic consultant.

If Argentina is to make the most of its opportunity, Mr Kirchner will have to take swift, perhaps unpopular, action to clear up the unfinished business left over from the collapse. But above all he will need to draw the right lessons from its travails. A good place to start is the rule of law.