What went wrong with Argentina?
My home country is a paradigmatic case of economic decline. Why?
Had Pyrrhus not fallen by a beldam's hand in Argos or Julius Caesar not been knifed to death? They are not to be thought away. Time has branded them and fettered they are lodged in the room of the infinite possibilities they have ousted. But can those have been possible seeing that they never were? Or was that only possible which came to pass?
James Joyce, “Ulysses”
About a hundred years ago, Argentina had a GDP per capita similar to that of a European nation, to the point where “rich as an Argentinian” was a common French expression. Fast forward to today, and the country’s economy has not grown for two consecutive years in a decade, and GDP per capita has never surpassed its 1970s levels and hasn’t grown at all since 2008. What went wrong?
Did something even go wrong?
In the 1870s, Argentina’s GDP per capita was of, roughly, 70% of the richest nations on the planet. During the following two decades, it rose to nearly 90%. But ever since 1930, this fraction steadily declined to hovering around the 40% mark. Something clearly wrong. Or maybe not.
Only a handful of countries went from being similarly rich to similarly not rich: Uruguay (in the late 19th century) and Kuwait, Saudi Arabia, and Venezuela (all in the late 20th century). The latter were clearly just a temporary boom due to oil prices surging; Uruguay was caused by its abundance of cattle and sheep during a time when European demand for them was very high. All of these “development booms” were very short lived and tied to a specific natural resource. The Argentinian economy was slowly diversifying by the end of this period, with industrial development having already started by the 1920s. This doesn’t say much about whether development was inevitable or impossible, but it’s not exclusively one of those.
Let’s circle back to the early 20th century. The country had a generally inequitable distribution of income - how much more than other comparably rich countries is a matter of debate, but let’s just settle on “more”, and most of its growth came from exporting commodities and foreign investment in technology. Comparing a city like Chicago to Buenos Aires showed that investment per worker was much lower, despite large investment flows and a nascent industrial sector. Plus, the country was poorly educated compared to equally rich nations. So it’s plausible that the country was always going to fall behind due to poor fundamentals, and it was just a matter of when and how much.
Another problem is that the country’s level of income at the end of the period might be severely under or over stated. For the overstatement, the country’s statistics agency was interfered with during the early 2000s, which resulted in artificially lowered inflation figures that distorted real-nominal conversion and yielded untruthfully large improvements in real income and wages. Plus, even the country’s nominal GDP was too high due to questionable methodological decisions. On the other hand, the country’s price level could be severely overstated because of bad choices in inflation methodology during the late 80s and early 90s, which weren’t adjusted for changes in product supply or changes in consumer choice. Which effect is stronger or more pronounced is hard to say, but it would seem that, after adjusting for these changes in inflation, the country was already performing better economically by the late 90s (before the massive 1997-2002 recession, at least).
There is also the issue of the latifundia, large tracts of land owned by a small group of people, who also formed the political elite of the era. It might be that, because ownership of land was so concentrated, the economy performed worse - for instance perhaps small-scale farms were more productive. There isn’t too much evidence for this, although it could be that the country stopped favoring economically liberal policies because of the lack of redistribution of benefits from the wealthy landowners to common people fostered resentment.
Finally, income inequality. The country is much poorer than a rich country, obviously (GDP per capita is, roughly, 17000 dollars adjusting for purchasing power and inflation), but… is everyone much poorer than their developed world counterparts, or is it just some people? Data says, it’s just the poor: if you use income distribution data for each decile, the top 10% has an average individual income in the neighbourhood of 40,000 dollars, whereas the bottom 20% is in the 2,000 to 3,000 range (at best). This pattern also appears for other Latin American countries: the richest share of the population has incomes closer to those of an upper middle class person in a developed country, whereas the poor are really poor. Given that income inequality is much higher than it was even in the post-hyperinflation 80s, it’s not too wild a guess than it was close to what it was in the early 20th century, before the welfare state, meaning that this phenomenon might have explained part of the problem.
Regardless, this doesn’t really explain how the country’s economic status deteriorated, or why such a prosperous and fast-growing economy performed so poorly. Argentina’s GDP per capita doubled throughout the “rich period”, and it wouldn’t double again until the early 2000s, a far worse performance than most of the region. It’s also not very clear why Argentina continued getting poorer for basically all of the 20th century to become not even especially developed for Latin American standards today. There isn’t really much reason why the country didn’t flatten out at some point above 40% and 90% of a rich country’s GDP per capita, which would have resulted in income per person nearly twice as high as current levels.
It’s institutions, stupid
A common thread in modern explorations of economic growth is that institutions, particularly governments, or things like private property and respect for contracts, matter a lot for development. So perhaps it’s possible that Argentina got stuck with really bad ones, which constrained its ascent to developed status?
Argentina had a really tough time actually settling on a set of rules to rule the country between 1810 (when the country gained autonomy) and 1853 (when a constitution was actually written), and most issues of state organization weren’t solved until the 1880s. The country’s institutions were mostly set up by elites with really insular and undemocratic ideas about how the government should function, which led to frequent clashes with groups witht a more democratic mindset. It should be pointed out that these institutions weren’t egregiously undemocratic, that some other factors (like reticence of immigrants to get naturalized, high illiteracy, and plain old apathy) could account for the small voter turnout, and that even less democratic nations like Japan and Germany did actually develop economically.
Starting in 1930 and with a brief interval in 1946-1955 the country was immersed in political turmoil, with basically all institutions weakening significantly. The 20th century was characterized by frequent coups, violence even during civilian governments, electoral manipulation, and legal prosecutions of opponents. Plus a whole host of violations of economic institutions: barely lawful seizures of private assets (companies and bank deposits), frequent changes in policy, generalized breakdowns of contracts, etc.
The 1930s were known as the Infamous Decade, since they saw a series of rigged elections starting with a literally fascist coup, featured plenty of corruption and political violence, and ended with an explicitly pro-Axis military coup. During the 1940s, Juan Domingo Perón (an economically populist, socially idiosyncratic military leader) used his considerable popularity to win the Presidency with a large majority in Congress, which he used to enshrine his party in office via grotesque gerrymanders, and permanently maintaining his policies in place via a dubious constitutional reform.
Perón himself was deposed by a coup after a series of political miscalculations broke his alliances with the military and the Catholic Church, and his junta successors tried to undo his policies with limited success. The late 50s and 60s were marked by very weak Presidencies and strong congressional majorities, but frequent and short-lived coups, a conjunction that lent itself to policies being enacted purely on a basis of short-term political survival.
Finally, during the late 70s, an elderly Perón returned to the country after a 30-year stay in Francoist Spain, with a new set of advisors and a virulently anti-communist agenda, which resulted in an eruption of political violence to the point that every 19 hours a political killing occurred. After his death, his widow and (completely unqualified) successor María Estela Martínez took office, where she and her inner circle of union leaders and Peronist party elites enlisted the armed forces themselves to annhilate their political opponents. The President was deposed by another junta in 1976, which was especially violent (with roughly 30,000 people being “disappeared” in this period) and which gave up power in 1983 after an ongoing decade-long economic crisis and a disastrous defeat in a war with Great Britain.
The 80s were once again plagued by political weakness and, by the end of the decade, hyperinflation and an unsuccessful coup attempt. Institutional peace returned in the 90s, although this decade (and the ones that followed) also saw a drastic increase in the scope of corruption and the intelligence services becoming a major player in internal affairs. Rioting, political violence, corruption, and authoritarian power grabs weren’t unusual occurences in the past 30 years.
The effects of this succession of events and policies were twofold in economic performance. Firstly, they resulted in heightened uncertainty over future policies and commitments, especially since seizures of assets, profound changes to the tax code, large devaluations, and stringent price controls were common and wildly varied according to whether power was held by military juntas (often, but not always, free-market) and democratic governments (more protectionist and interventionist). This reduced investment and fueled distrust in basically all players in the economy, making cooperation across agents or trading short-term sacrifices for long-term gains inviable for any economic reform plan. Moreover, the remarkable volatility of the economy and of its institutional arrangements resulted in frequent breakdowns and renegotiations of contracts, which added to risks of everyone just defaulting on their loans and not paying them back
Plus, remember how all governments were extremely weak? This also applies to military juntas, with each leader lasting roughly two years in power. A theory of why New York went bankrupt in the 70s states that, when the Democratic Party machine that ruled the city died out, nobody was powerful enough to veto anyone’s demands, which is why the city spent incontrollably and went belly up. Similarly, profound weakness of the head of state led to the President always agreeing to various groups demanded, or to simply give them money so they wouldn't support a coup, resulting in unsustainable amounts of spending, taxation, and import protection. By the late 80s, the country spent roughly 10% of GDP on subsidies to private companies, and similarly ludicrous amounts on subsidized credit.
In addition, the Central Bank was never independent. Between 1935 and the present, a whopping one (1) Chair finished their six-year term, and it was the first one. Since spending had to be unlimited to keep the President in power, and taxes were a surefire way to lose support, then ordering the Bank to print more money was the only way to go - leading to endemic high inflation for most of the 20th century.
All of the above problems compounded each other. Countries with high, volatile inflation are more corrupt. Countries with active industrial policies are more corrupt. Countries were people think both the government and corporations are corrupt are prone to choose zero-sum, revanchist policies.
Not to say that specific choices didn’t play a role. Institutions set the rules of the game, but the game was still played very badly - particularly in two fields: fiscal policy, and trade policy.
As for fiscal policy, a statist-nationalist ideology and the weakness of presidential power led the state away from funding itself through traditional taxes (paradoxically, taxation was still painfully high) and towards more exotic levies, such as counterproductive export taxes, confiscations, or simply printing money. The complete absence of Central Bank independence went hand in hand with this; the enormous weight of the public sector and the complete lack of funding for its pharaonic undertakings resulted in large expansions of monetary aggregates, which fueled inflation (and/or exchange rate speculation, which then fuels inflation). Dominance of monetary policy by the fiscal sector was complete, and persistent inflation reduced savings and investment, fostered uncertainty, and weakened the economy in the long run. During the late 70s and early 80s, the inflation tax was replaced with foreign currency debt (partially because triple digit inflation made a domestic debt market impossible), which led to gaping current account deficits and made the peso simultaneously overvalued and undervalued.
Trade policy is a complicated issue, but needless to say excessive protectionism wrapped itself around the economy’s neck and slowly choked it out through massively increased costs of inputs, and of consumer goods (to a lesser extent). The winners of trade (the agricultural sector and its industrial offshoots) being vastly outnumbered from the losers or the non-winners, mainly due to concentrated property of land, resulted in zero-sum trade politics and in a powerful anti-trade coalition, which had adherents in both civilian and military governments. The lack of credible institutions made any gradual moves towards trade liberalization impossible, and protectionist policies strengthened the “autarkic coalition” more and more.
Trade shocks in an open economy
Trade and trade shocks have played a huge role in Argentinian economic history. Economic crises are frequently currency crises, and currency crises often have an external component: a current account deficit, international interest rate hikes, an overvalued exchange rate, etc.
Until World War One, Argentina had a very strong international position: commodity prices were high, demand for meat and wheat was growing, and international investors poured incredible amount of money into the economy. But the international prices of such staples declined strongly throughout the 20th century, and a stable and open global economy that coincided with the country not being in ruins didn’t happen until the 90s. Global protectionism until the GATT system, and domestic protectionism until the 1990s, harmed the country, and meager inflows of capital didn’t help the laughably insufficient savings rate - except during a brief period of the late 70s and throughout the 90s, when government expenditures were funded by hard currency debt exclusively (due to the weakness and untrustworthiness of the peso), which made exchange rate appreciation (which worsened economic prospects) impossible for the government, lest it wanted to default or tighten its belt to a politically suicidal degree.
The situation was also made worse off due to specific policy choices: tight controls on prices and exports of grains meant that the country specialized in meat and its derivatives, leading to stagnant agricultural output and low investment in technology. However, after economic liberalization allowed the advances of the Green Revolution to be brought into the farming sector, yields soared and agriculture replaced cattle ranching as the main activity.
Finally, the country’s dysfunctional political institutions and populist politics incentivized long-term protectionist policies. Import substitution policies weren’t very successful at developing any sector in particular (most of the “success stories” already existed in the country beforehand), but did manage to create powerful lobbyists that strongarmed the government into providing them with economic rents. The possibility of obtaining profits by having the right connections turned companies away from investment in technology or even in expanding their capacity (compounded, of course, by the previously mentioned issues of uncertainty and weak property rights).
In 1945 I was a young talented economist. I was at the height of my abilities. If someone had asked me what part of the earth would develop the fastest in the next 39 years, I would have said: Latin America - Argentina or Chile… I was completely off the mark.
The story of what went wrong is clearly a multi-faceted one. Faced with the facts, we can say a country that was punching above its weight in terms of wealth due to a fortuitous set of economic endowments, but with weaker political traditions and lower investment in physical and human capital. Even factoring it stunning levels of inequality, any narrative must account for a long history of underperformance given an interplay of paradoxical policy choices, weak institutions, and bad luck. A potential narrative to weave this into a legible story is given by Glaeser, Di Tella, and Llach (emphasis mine):
At one level, voters came to believe that the rich elites were not particularly productive and caring, and came to demand policies that harmed them. Populism and political instability ensued, and private investment suffered. Part of Argentina’s decline is explained by voter’s beliefs regarding the unproductive Argentine elite and how they become rich through corruption and favoritism, instead of hard work and creativity.
(…) These beliefs, as well as income inequality, then lead voters to demand policies to redistribute some of that ‘‘unfair’’ income. (…) Interestingly, such policies might introduce a vicious cycle particularly in a country such as Argentina, where there is also government failure and administrative corruption, leading to further demands for intervention and redistribution. (…) However, it is possible that anger against the rich who benefited from those corrupt policies is a powerful, persistent force leading people to vote for interventionist policies that are designed to bring about ‘‘fairness’’ rather than maximize material income.
The country only reformed its worstpolicies (aggressive protectionism and a bloated, underfunded public sector) after a critical consensus for change was built in response to the hyperinflation of 1989. The country’s trade policies weren’t especially useful in industrializing the economy, and productivity growth was weak, and trade rules purposefully harmed the agricultural sector and redistributed its gains from trade using virtually the only mechanism that aims to reduce them. Fiscal policy mostly consisted of enormous, inefficient transfers to the private sector (of double digit percentages of GDP in both direct assistance and subsidized credit) and used a variety of politically viable but highly distortive taxes to fund itself (such as seizures of assets, taxes on bank transfers, and the already mentioned export taxes), not to mention via inflationary seigniorage.
Protectionism, weak state capacity, inflation, and corruption are all part of the same game - the game of “unequal country with weak institutions”. The current crisis is living, breathing proof that the game hasn’t gone away, just changed radically.
Glaeser, Di Tella, and Llach (2018), “Introduction to Argentine Exceptionalism”
Míguez (2005), “El fracaso argentino"
Taylor (2014), “The Argentina Paradox: Microexplanations and Macropuzzles”
Not so rich then, not so poor now
Heymann & Ramos (2007), “Convergencia arriba, divergencia abajo: ¿a quién le fue tan mal en la economía argentina?”
Campante & Glaeser (2009), “Yet Another Tale of Two Cities: Buenos Aires and Chicago”
Gluzmann & Sturzenegger (2009), “An estimation of CPI biases in Argentina 1985-2005, and its implications on real income growth and income distribution”
Heymann (2007), “Macroeconomics of broken promises”
Sanz Villaroya & Prados de la Escosura (2004), “Institutional instability and growth in Argentina: a long-run view”
Sanz Villaroya & Prados de la Escosura (2006), “Contract enforcement, capital accumulation, and Argentina’s long-run decline”
Araóz (2011), “La calidad institucional en Argentina en el largo plazo”
Esther Fuchs, “A Tale of Two Cities”, The City Journal, 1992
Cerro & Meloni (2014), “Making explosive cocktails: Recipes and costs of 20 Argentine crises from 1865 to 2004”
Bozzoli, Della Paolera, & Irigioin (2003), “Passing the Buck: Monetary and fiscal policies”
Gabrielli, McCandless, & Rouillet (2004), “The Intertemporal Relation Between Money and Prices: Evidence from Argentina”
Kehoe, Nicolini, & Sargent (2020), “A Framework for Studying the Monetary and Fiscal History of Latin America, 1960–2017”
Galiani & Somaini (2018), “Path-dependent import-substitution policies: the case of Argentina in the twentieth century”
Brambilla, Galiani, & Porto (2018), “Argentine trade policies in the XX century: 60 years of solitude”
Cavallo & Mundlak (1982), “Agriculture and economic growth in an open economy: the case of Argentina”
Gerchunoff (2006), “Requiem para el stop and go... ¿Requiem para el stop and go?”
Just discovered your writing on Substack and want to congratulate you on your excellent writing. Please keep updating your commentary on Argentina and S.America in general ~ I don’t know of (m)any writers here focused on that area and I believe it is going to become increasingly important.
And Brazil, for many decades after WWII, was considered the "country of the future". Only problem is the future never came!