by Arnav Singh
“There are four kinds of countries in this world: Developed countries, undeveloped countries, Japan and Argentina.”
- Simon Kuznets, Nobel Laureate in Economics
On May 22, Argentina defaulted on its debt failing to repay $500 million in interest payments on its borrowings. Since the country’s independence from Spain in 1816, this is the ninth time it has defaulted on its debt, two of which have occurred in the 21st century.
The country has been in recession for the past 2 years after a currency crisis that has thrown the economy into freefall. Argentina’s total public debt has reached $414 Billion amounting to 93% of its GDP.
According to Argentine Consulting firm Elypsis, the economy has already declined 25% since March 2018. However, things weren’t always like this.
At the start of the 20th century, Argentina was one of the wealthiest countries in the world. This was possible because of the resource-rich country’s vast amounts of highly fertile land called the pampas.
The nation capitalized on this and became an important exporter of wheat and meat, amounting to 7% of total global trade by 1910. By 1913, Argentina was richer than France or Germany and almost twice as prosperous as its former colonizer Spain.
This high economic growth attracted migrants from Europe and Latin American countries to work on fertile pampas and it is estimated in 1914 half of the Bueno Aires population was foreign-born.
A running Brazillian joke states the obvious “ Only people this sophisticated could create a mess this big.”
The country’s reversal from one of the richest in the world to below 45th position today is regarded as the Argentine Paradox or the Argentine Exceptionalism.
Economists point to political instability and a succession of military coups in Argentina, the first in 1930, followed by others in 1943, 1955, 1962, 1966, and 1976 to result in the decline. The 1989 elections marked the first year when a civilian president handed power to an elected successor.
Argentina’s economic decline has long posed a conundrum to economists and social scientists with many failing to provide a single hypothesis to address the fundamental issues that drove the economic decline.
Rafael di Tella remarked, “If a guy has been hit by 700,000 bullets it's hard to work out which one of them killed him.
Still, the decline can be broadly put down to three main reasons:
A weak Industrial Base leading to failure in adopting new technologies,
protectionist trade policies, and
instability due to military coups and bad politics.
Weak Industrial Base
During the economic boom from the 1870s to 1930s, vast tracts of land were owned by landlords who resided in great estates left behind by the Spanish creating an elite aristocracy similar to the landowners in Europe.
The landowners did not care about educating the workers as long as they performed cheap labor and most of the money earnt from the boom in exports went straight to the landlords who spent it on consumer goods or acquiring more land.
Moreover, the large immigrant population from Europe was largely composed of low skilled Italians and Irish. As a result, by 1914, a third of Argentina’s population was still illiterate.
The lack of education and the presence of landowners who saw no reason to risk their elite status hampered the expansion of the manufacturing industry and the onset of industrialization on a large scale.
Argentina fell behind the United States and European powers in technological innovation and mainly used technology sourced from abroad rather than developing its own. The failure to develop human resources prevented Argentina from reaching its full potential and fuelling technological innovation.
Another factor that played an important role was foreign capital. The investment boom was largely financed by capital from its biggest trading partner Britain, who had invested about 157 million in railways, agriculture, and the meat industry. This dependence on foreign capital left the country very vulnerable to external shocks.
The First World War saw levels of investment in Argentina recede as Britain shifted to acquiring resources from its colonies leaving Local Argentine Banks and Financial Institutions struggling to fill in the gap.
The Great Depression & Adoption of Protectionist Policies
Above: Argentina’s Trade Openness from 1900 to 2000.
Source : Brambilla, Galiani, and Porto, 2018.
In the aftermath of the First World War, the economy substantially recovered and in fact, started to regain its shine in a world that was recovering from the war.
However, the Great Depression of 1929 hit and dealt a huge blow to world trade as policymakers scrambled to prevent deflation and currency depreciation. Governments around the world imposed tariffs and exchange controls to restrict spending on foreign goods resulting in a massive contraction of global trade.
Latin American trade declined by upto 40% and Argentina’s meat exports to Europe, its biggest trading partner, fell by two thirds.
Argentina raised import tariffs from 16.7% in 1930 to an average of 28.7% in 1933. At this time, the economy used to export agricultural commodities and imported high value manufactured products. This left the economy vulnerable to external market shocks and the production of goods in other industrialized nations.
Unfortunately, there was no apparent end to external shocks at the start of the 20th century with the occurrence of two world wars and the Great Recession.
Governments from 1930 to 1970s imposed high tariffs on imports and pursued a strategy of import substitution industrialization (ISI) to protect the economy.
The ISI is an industrial policy that entails the replacement of imports by developing local industries capable of substituting imports. The higher tariffs increased the cost of foreign goods for consumers thereby promoting the local industry to manufacture and sell goods at a lower cost.
The Second World War prompted Argentina to deepen the adoption of ISI as the availability of foreign goods took a hit. The IAPI - Argentine Institution for Promotion of Exchange was created in 1946 to control foreign trade. The Institution used money earned from agricultural exports to finance the development of new public companies in manufacturing.
In the meantime, the Second World War was brought to an end and the United States and European countries started reopening trade. This presented a strange conundrum to the Government officials in Argentina, the irony was the IAPI had focused on developing manufacturing industries neglecting agriculture resulting in Argentina losing the comparative advantage it had earlier possessed in the Primary sector as production declined.
Argentine Politician Arturo Frondizi lamented that no agricultural machinery had been imported for many years. The Industrial program was constructed on the grave of the agriculture sector. Exports fell from 10.2 million metric tons to only 4.4 million in the 40s throughout the 1950s. Thus, Argentina sought to industrialize within its borders.
The economy soon started falling behind and by the time the 1970s arrived, the average Spaniard was twice as rich as the average Argentine. The ISI model was ineffective in Argentina as there was no incentive for local industries to be productive and become competitive with the growth of industrial output per worker falling by 0.5% per annum in the latter half of the 1960s.
In February of 1946, the Presidency was won by a nationalist and a populist leader, General Juan Peron in a democratic election. Peron left a legacy that continues to shape Argentine Politics and Economic policies today. Earlier, the General had led the United Officers Group who were responsible for hatching the plot for the coup of 1943.
It was under his rule Argentina went from a market-friendly regime to an interventionist and protectionist one. The formation of the IAPI and nationalization of most industries resulted in Argentina growing more slowly than its neighbors Brazil and Chile.
Juan Peron degraded the authority of existing institutions by amending the constitution to run for another term, replacing Supreme Court Justices who did not agree with him and awarding contracts to people who supported his policies and agendas.
Raul Prebisch, General Manager of the Bank of Argentina characterized the regime as nothing more than, “ bureaucratic politics, featherbedding, and incompetence.”
During his term, inflation soared upto 23.2% in 1949 as the budget deficit skyrocketed. The election of Peron heralded the start of Argentina’s decline with a shift to populism, protectionism, nationalization of companies, and curbs on freedom of speech.
Later, Peron was overthrown in the revolution of 1955. In total Argentina suffered from 53 years of instability, military coups, and revolutions between 1930 and 1983.
According to Rob Spruk’s research on the Rise and Fall of Argentina, in the long run, the absence of institutional breakdowns is associated with a 45% increase in per capita output. This implies that Argentina’s per capita income would be on par with Spain today, had it not been for the country's political environment.
The story of Argentina is full of twists and turns and lost potential. In the end, the trade barriers, political instability, weak human resource development, and institutional decay all took a toll on its economy and led to where it stands today.
The Argentine Paradox should serve as a stark reminder to the people showcasing how the political state determines the future of a nation. Political failure in Venezuela is another example of the state ruining a nation's economic state.