Why Argentina failed

by on February 19, 2014 at 3:54 am in Economics, History, Political Science | Permalink

Argentina had become rich by making a triple bet on agriculture, open markets and Britain, then the world’s pre-eminent power and its biggest trading partner. If that bet turned sour, it would require a severe adjustment. External shocks duly materialised, which leads to the second theory for Argentine decline: trade policy.

The first world war delivered the initial blow to trade. It also put a lasting dent in levels of investment. In a foreshadowing of the 2007-08 global financial crisis, foreign capital headed for home and local banks struggled to fill the gap. Next came the Depression, which crushed the open trading system on which Argentina depended; Argentina raised import tariffs from an average of 16.7% in 1930 to 28.7% in 1933. Reliance on Britain, another country in decline, backfired as Argentina’s favoured export market signed preferential deals with Commonwealth countries.

Indeed, one way to think about Argentina in the 20th century is as being out of sync with the rest of the world. It was the model for export-led growth when the open trading system collapsed. After the second world war, when the rich world began its slow return to free trade with the negotiation of the General Agreement on Tariffs and Trade in 1947, Argentina had become a more closed economy—and it kept moving in that direction under Perón. An institution to control foreign trade was created in 1946; an existing policy of import substitution deepened; the share of trade as a percentage of GDP continued to fall.

Yes of course there was bad policy, but how did the country get into such a bad idea trap to begin with?  The entire piece, from The Economist, is of interest.

Brett February 19, 2014 at 4:22 am

I think the biggest problem was the rampant political instability for most of the twentieth century. Contrast that with PRI-led Mexico after WWII, which had collective farms, oligarchic business and unions, oil, and an authoritarian regime – but which still had a good period of growth for about thirty years called the Mexican Miracle. Just having political stability for most of the twentieth century would have led Argentina to be more prosperous, especially if it kept a democratic regime instead of bouncing from military coup to democracy to coup again over and over.

After that, it’s a mix of second-order problems. The country’s elite in the early twentieth century had interest in a strong agro-industry but little else (as the article mentions), and they dominated Argentina’s small financial sector and political system. They still could have had factories and industrialization happen by borrowing large sums of money from the British (that’s more or less how a big part of US industrialization got financed), but it didn’t happen for some reason, maybe because the regime wasn’t particularly favorable towards it or having an industrial policy.

Alexei Sadeski February 19, 2014 at 3:06 pm

I don’t think Mexico is a legitimate contrast in these debates; it’s proximity to the US would make it relatively prosperous regardless of internal factors.

Peter Schaeffer February 19, 2014 at 7:30 pm

Brett, AS,

“Contrast that with PRI-led Mexico after WWII, which had collective farms, oligarchic business and unions, oil, and an authoritarian regime – but which still had a good period of growth for about thirty years called the Mexican Miracle”

“I don’t think Mexico is a legitimate contrast in these debates; it’s proximity to the US would make it relatively prosperous regardless of internal factors”

In the period in question, Mexico was deeply autarkic and quite closed. Trade with the U.S. was not a key growth driver. Growth was very strong at around 6% per year making the ‘Mexican Miracle’ an accurate statement. Later Mexico opened its economy and embraced foreign trade. Growth collapsed and has never recovered.

Marian Kechlibar February 20, 2014 at 1:22 am

I think you underestimate just how much the internal factors can destroy society from within.

North Korea is close to South Korea and Japan, both very rich nations, and has regular famines.

Zimbabwe is close to South Africa and isn’t much better off.

Just another MR Commentor February 19, 2014 at 5:15 am

Of course there’s no mention here of differences in IQ between the population of Argentine and the rest of the world. This crucial factor is completely left out of the article rendering the article worthless.

Ray Lopez February 19, 2014 at 5:54 am

Don’t be stupid. Argentina has 1 point greater IQ than Greece yet lower per capita GDP. See the chart here for IQ by country from The Economist: http://media.economist.com/images/20100703/201027STC756.gif

The Economist is right: Peronism is the reason for the decline of Argentina, and zigging when the rest of the world was zagging on free trade (they were out of phase).

BTW a good book by Argentinian economists will come out soon and attempt to explain the 100 year old “Japan style funk” that the Argentinians have been living under; 100 years of solitude if you will.

Just another MR Commentor February 19, 2014 at 5:58 am

Greece’s GDP per capita is also kept artifically high with bailouts from Germany. Peronism was indeed a problem but the 20th century has also been the story of countries being properly sorted by IQ. I do not believe there is anything out of whack with Argentina’s placement. The fact that they embraced Peronism in the first place is due to low average IQ. That the Economist fails to mention this at all is just a sign of typical PC bias.

Peter Schaeffer February 19, 2014 at 7:36 pm

The IQ argument doesn’t appear germane. However, culture may be a very real issue. The most successful non-European countries are either East Asian or Anglo-Protestant (in culture if not religion). The U.S. and Canada are cliche Anglo-Protestant countries. So are New Zealand and Australia. Argentina is not.

Note that the (much reviled) Niall Ferguson places great stock in land ownership patterns as a predictor of future national success. No doubt he would point out that Argentina never had the tradition of yeoman farmers that prevailed in the Anglo-Protestant offshoots. He is right to.

Brenton February 19, 2014 at 8:59 pm

If it’s culture then why do IQ differences persist when middle and upper class parents adopt children of a different race? East Asians adopted by whites still do better than the average white child and African American children adopted by whites still do poorly compared to white children adopted by whites.

Marian Kechlibar February 20, 2014 at 1:46 am

“The IQ argument doesn’t appear germane.”

That is a very curt way of dismissing several decades of research which tends to go in the opposite direction.

Though I would also be skeptical with regard to the Peronism clause above; it is emotions, not cold rationality, what drives people to support political causes, and even very intelligent people can get behind pseudo-religious nonsense, if presented by charismatic personality which plays on their prejudice (see current ecological movement in Europe).

Anyway I do not see any reason why take this as either/or situation. Both low average intelligence and bad culture translate to bad judgment and consequently low productivity of the economy.

Peter Schaeffer February 20, 2014 at 3:36 pm

Folks,

Using the standard tables, Canada and Argentina have very similar IQs. Clearly, Canada is far more successful. Why is that? Of course, the answer isn’t obvious but it is worth noting that Canada’s PISA scores are very good and Argentina’s PISA scores are quite poor. Below Chris makes some very good points about how the toxic combination of the welfare state, protectionism, and export taxation brought down Argentina.

I would add that Argentina’s dismal educational results are either a cause of Argentina’s poor economic performance or perhaps another manifestation of a failed society.

Cliff February 19, 2014 at 10:33 am

I think you missed the satire

Alex' February 19, 2014 at 11:14 am

Or maybe not, sometimes it’s hard to tell on the internet.

msgkings February 19, 2014 at 1:44 pm

No, this guy is doing some serious teasing of a certain sort of poster here. It’s kind of amusing.

Adrian February 19, 2014 at 5:25 pm

well played

Brenton February 19, 2014 at 8:50 pm

When comparing IQ, Argentina is in pretty poor shape for its estimated IQ compared to its neighbors Chile and Uruguay in various indicators.

dearieme February 19, 2014 at 6:37 am

Perón essentially adopted the same policies as the British Labour Party – nationalise industries, give political power to the trade unions, and talk sentimental tosh about the workers. Argentina wasn’t strong enough to survive on that diet – nor, or only just, was Britain.

Steve February 19, 2014 at 7:20 am

Why did Argentina get into the mess? Open Borders.
http://www.nationalreview.com/agenda/349468/lessons-argentina

brickbats and adiabats February 19, 2014 at 8:41 am

Manbearpig

Peter Schaeffer February 21, 2014 at 2:24 pm

+1

Axa February 19, 2014 at 8:13 am

They even conquered and annexed Paraguay’s territory.

Lots of hypothesis: rich but uneducated by 1900, going down with Britain after WWI, and of course dictatorship from 1930 to 1983.

Alexei Sadeski February 19, 2014 at 3:09 pm

Dictatorship needn’t doom prosperity.

See: South Korea, Hong Kong under Brits, Spain (kinda?), Chile.

Marian Kechlibar February 20, 2014 at 5:32 am

Dictatorship causes poverty if any of the three conditions are met:

- it has a populist-redistributionist character (kill the rich and share the booty) – mostly Marxist movements,
- the dictator seeks out war / international conflict and gets it – Iraq under Saddam,
- the dictator is of the “openly plunder the country for gold and riches” type – Zaire under Mobutu.

If none of the conditions is met, the economic activity of the population will produce some prosperity.

Axa February 20, 2014 at 6:43 am

Hong Kong, was it more prosperous under the Brits compared to 2014?

Jimmy February 19, 2014 at 8:54 am

……all of the above (minus the IQ rubbish) and a fatal atraction to the heterodox plus an extraordinarily bad sense of timing (Peron, a fascist, becomes leader in June 1946, a year after it had been crushed in Europe).

Roy February 19, 2014 at 9:25 am

One thing about Argentina I wonder about is what internal reasons led to a rejection of the industrialization that occurred in Brazil? I suspect that it was related to the existence of a single Metrapole in BA as opposed to Brazil’s regional infighting. This strengthened wealthy agricultural interests which retarded industry in the pre war period and then led to the Peronism as a popular reaction in the post war period. That Peronism wasn’t able to triumph until after the Falklands War and the utter disgrace of the older order is a sign of how strong it was.

In Brazil the competing regional interests allowed a more dynamic society that was less interested in strangling industrialization. Of course it is pretty bad when Argentina has anything to envy about Brazil politically and economically, but I suspect we have reached that point.

improbable February 19, 2014 at 9:35 am

I’ve also read that immigration policies c 1900 were different to Brazil & the USA, offering less benefit to giving up your Italian citizenship, which made the imported urban artisan class of the time less invested in the place, and less of a political counterweight to the landowners.

Peter Schaeffer February 19, 2014 at 11:24 pm

i,

I can’t comment on the state of politics in Argentina in 1900. However, after WWII Argentina wasn’t suffering from a shortage of Italian immigrant political influence. Peron drew his support from the immigrant population and their descendants. He certainly wasn’t the product of the Spanish land-owning aristocracy. His policies were directed towards appropriating the income and wealth of the land-owning class in favor of the urban, immigrant descended population. If he had created a modern economy, he would be regarded as a success. In practice, he built a failed welfare state.

Thomas Aubrey February 19, 2014 at 9:52 am

Most of the government’s economic advisers after the first world war learnt their economics in Mussolini’s Italy. Not the greatest of Italian exports…

charlie February 19, 2014 at 10:16 am

Wasn’t the entire problem that Argentina was (effectively) part of the British empire, until the 1932 tariffs?

Z February 19, 2014 at 12:27 pm

Argentina’s problem is they got the wrong Jews. Instead of getting the Ashkenazic Jews who are smart, industrious and great looking, they got the Sephardic Jews, who are slightly dimwitted and not industrious.

Roy February 19, 2014 at 1:55 pm

All my ubermenschen Ashkenazi friends from Argentina will be shocked to hear this. Granted they have almost all moved to Texas, so maybe that proves your point.

Your Satire is dead on though.

chuck martel February 19, 2014 at 12:45 pm

All the former Spanish colonies became, and remain, economic basket cases. Somebody had to be the worst, and that’s Argentina.

msgkings February 19, 2014 at 1:47 pm

Cuba says hi

Joe Smith February 19, 2014 at 2:49 pm

LOL

msgkings February 19, 2014 at 3:16 pm

I screwed it up. Shoulda typed ‘Cuba says hola’ or even better ‘Cuba dice hola’

chuck martel February 19, 2014 at 3:15 pm

I lobbed it in, you hit it off the wall.

Stephen February 19, 2014 at 2:10 pm

Um, Venezuela? Cuba?

Chris February 19, 2014 at 3:33 pm

Peronism is the problem, but Peronism isn’t just one problem, but several rolled into one.

1) Argentina established a welfare state whose benefits were far more expensive than what Argentina could provide. This created problems with Argentina’s government debt.

2) Argentina’s successful exports were taxed heavily to provide for said welfare state. This sucked money out of the export businesses who no longer had the incentive to modenize and thus their exports became less and less competitive.

3) Argentina through up high import tariffs to encourage import substitution. However, Argentina’s internal market was not large enough to create competitive industries on its own. Instead, inefficient industries developed that could not compete on the international marketplace. Tthe products they made were more expensive and had less quality than foreign products, making their Argentine customers less adaptable than non-Argentine companies which had access to better quality raw materials.

4) Peronism was demoagogic and authoritarian. It destroyed the rule of law in Argentina which had a pernicious effect on both economic dynamism and individual liberty. It subverted the independent actors of civil society by interposing the state instead. Labor unions, the media, and corporations were subverted, and more things became politicized.

The reasons why Peronism was able to become so successful in Argentina is another question which has its own answers. At one time or another, other countries had one or more of the above problems as well. One can look to many Western countries that succumbed to the same sort of self-defeating economic populism in the 1970s, but unlike Argentina these platforms were defeated and rejected in other countries. In Argentina, they became more successful than ever with even Peron’s opponents adopting many of these same elements.

jmo February 19, 2014 at 4:29 pm

One can look to many Western countries that succumbed to the same sort of self-defeating economic populism in the 1970s

Were any nearly as based on extractive industries as Argentina?

If you live in a country where almost all weath comes from the ownership of land, rather than the ownership of a business, the case for redistribution is much stronger.

Roy February 19, 2014 at 11:31 pm

But if that redistribution leads to less growth in, ir even the collapse of other sectors?

The redistribution ate up all the capital needed to invest in non extractive industry.

Peter Schaeffer February 19, 2014 at 7:49 pm

Chris,

+1

it’s common to see Argentina’s economic problems blamed on protectionism, because ‘free trade’ is part of the religious dogma of our time. However, the welfare state is rather large sacred cow in its own right. As a consequence the socialist aspects of Peronism are almost never mentioned. The very toxic interaction of the welfare state, taxation, and protectionism never get mentioned.

londenio February 20, 2014 at 6:00 am

Chris nails it.

Peter Schaeffer February 19, 2014 at 11:31 pm

One more comment on Argentina is warranted. Argentine students score astonishingly poorly on global standardized tests (PISA). A quote will help

“Poor country scores in PISA tests yet again”
http://www.buenosairesherald.com/article/146671/poor-country-scores-in-pisa-tests-yet-again

“Argentina ranks 59th out of 65 nations tested by OECD

After years of allocating more than 6 percent of its gross domestic product to education, the country’s students are scoring just as badly as they did in 2000, according to results released yesterday by the Organisation for Economic Co-operation and Development (OECD).

Argentina ranks 59th among 65 nations (sixth out of eight Latin American countries), falling one spot compared to 2009, the year of the previous report.

This means 15-year-old Argentines not only performed below the international average in math, science and reading — but also that more than half of the country’s students are below the basic standard for each subject.

In the math test, local students scored 388 points, compared to the 494-point average of OECD members, while a very small improvement was seen in science, where Argentina scored 406 points — five points more than 2009, but well behind the 501-point average.

The most disappointing result was in reading, where the country scored just 396 points, two fewer than in the previous test.”

The obvious question is one of causality. Since Argentina isn’t that poor and spends heavily on education, a lack of money can’t account for Argentina’s dismal showing. Of course, it really isn’t clear that low education standards account for Argentina’s poor economic performance. Perhaps both the low scores and poor economic performance reflect deeper failings in Argentina’s culture and society.

MF February 20, 2014 at 9:54 pm

What a question?!

Argentina have always failed.

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