This is Argentina’s capital Buenos Aires a 100 years ago, a rich, rapidly developing city with inhabitants that, on paper, looked to be on the path of becoming as rich as Britain, just like other up-coming nations like Canada and Germany. However, after 1930, Argentina stagnated, and then declined after 1976, while the other countries kept growing, along with Britain.

This century of relative decline earned Argentina the questionable honor of being the only country in the world that regressed from advanced to developing economy status.

So, what happened? What caused Argentina’s unique decline?

Milei supporters will tell you that protectionism and state interference under people like Peron and the Kirchners is to blame while opponents will tell you that actually hardcore free market fundamentalism has been tried in Argentina many times, under the military Junta in 1976, Menem in the 90s, Macri in 2015 and this always ended in a massive economic crisis.

But, what if both of them are right? What if there is a much deeper story that can explain Argentina’s terrible economy, under both left and right wing approaches.

If you are interested in THAT story, then this video is for you. So, sit back, and relax as we take a deepdive into the sad story of

Argentina: a 100 years of economic decline

Starting with, the growth miracle years in which Argentina ‘supposedly’ became a rich country. The years from 1860 to 1929.

Ch1 A deceptive growth miracle

This graph shows Argentina’s per person GDP as a percentage of what was at the time the richest economy in the world, Great Britain. Throughout it’s miracle years, the income of the average person in Argentina rose from 42% of that Britain in 1860 to almost 80% in 1929.

This dynamic made Argentina look much more similar to successful British settler colonies like Canada than to more typical Latin American countries, such as Brazil.

So, what caused this? Why was Argentina growing so fast, and how did that compare to Canada and Brazil?

According to recent economic research, the most likely explanation comes from the gradual opening up of Argentina’s economy since independence, combined with rapid globalization, and new ship building technologies, which rapidly reduced the prices of Argentinian imports, while raising the price of what they could earn with agricultural exports such as wheat and livestock.

Therefore, during this era, it became increasingly profitable for Argentinian farmers to invest in the exploitation of Argentina’s massive fertile underdeveloped Pampean grasslands, which they could do thanks to the increased availability of British capital.

Meanwhile, Brazil and other Latin American nations did not have these fertile lands, and instead depended heavily on exporting far less valuable resources like coffee.

On the other hand, while Argentina’s growth miracle looked a lot like that of Canada on paper, Canada’s growth was much more broad based as, by this time it had already developed a ‘healthy’ manufacturing sector. Interestingly enough, while Argentina had profited immensely from increased free trade under globalization, Canada had during this same time period increasingly turned to tariffs to protect its industries.

So, in short, Argentina’s economic boom was mostly a consequence of them opening up their economy at a time that the products from their main natural resource, fertile land, was in very high demand globally. In that sense, it was not very different from the rest of Latin America, it’s just that they got much more lucky with their geography for this specific time period.

Luck, that would soon run out as Argentina entered the 1930s, a decade of global crises and increased protectionism.

Ch 2 Half-hearted industrialization

This graph again shows the performance of Argentina’s economy versus that of the British economy, for the period of 1930 to 1976. This is important because while, during this period Argentina’s economy kept growing, it’s relative economic power was already declining, especially, if we compare it to ex-British colonies like Canada and Australia.

At first, Argentina’s decline was simply a consequence of globalization going into reverse, meaning that it suffered heavily from the collapse of its agricultural exports due to increased protectionism in Britain, while Canada and Australia got a special deal from Britain, as ex-colonies.

Just as today, in the 1930s, protectionism was the latest global trend. For industrialized countries, like the UK and US it was a response to the global depression, which made voters pretty upset, compelling populists to fight other countries with tariffs for a bigger slice of the economic pie. Economists generally consider this wasteful, as higher tariffs by one country tend to lead to trade wars, where everyone loses.

However, for non-industrialized nations like Australia and Argentina, protectionism is often considered good practice, as it may help them to industrialize. US founding father Benjamin Franklin Alexander Hamilton called these types of policies ‘infant industry protection’ policies, and he successfully used tariffs to protect developing American industries from established British ones. During this decade, it was not just Argentina, but also Australia and many more developed nations that tried to do the same.

So, why did infant industry protection fail in Argentina while they were much more successful in Australia?

In my research, I could find two main reasons, both have to do with Argentina’s sky high level of inequality, where oligarchs are massively influential in politics.

These oligarchs tend to get their wealth either from Argentina’s fertile lands, thus profiting from free trade, or from its emerging industry, thus profiting from protectionism.

In highly unequal societies, where money rules politics, politics tend to be much more volatile, as moneyed interests can bribe the army to take over the government. Indeed, if we look at this graph, we can see that, Argentina was rocked by several violent coups during this era, meaning that tariffs or other privileges were sometimes abruptly revoked or changed.

It’s very difficult to build a lasting industry in these circumstances. However, in the end, Argentina’s industrial oligarchs mostly dominated this period, meaning that the country saw a rise in industry and a decline in agricultural production.

However, this brings us to the second problem with Argentina’s infant industry protection, which is corruption. You see, if done well, industries are temporarily protected from OUTSIDE competition, while furiously competing inside the country. However, in Argentina, that never happened, as industry bosses convinced the government to protect them from ALL competition, meaning this industry never became very productive.

So, where infant industry protection worked in the US, Canada and then later in Australia, it failed in Argentina because it was poorly implemented!

This meant that in the 1970s, an era of global economic turmoil, Argentina found itself not competitive enough to earn enough foreign exchange to support the value of its currency, which promptly collapsed, leading to inflation, and a loss economic activity and tax revenue for the government. However, different than before, this interventionist government had developed a tendency to print money to offset that decline in taxes, increasing inflation to almost 5000% per year.

The resulting discontent amongst the public gave rise to yet another coup, where a military dictatorship installed a wealthy free market loving rancher as its new economy minister, with a mission to bring free market economics back to Argentina.

Ch3 A disastrous free market experiment

The late 1970s marked a global economic revolution. Protectionism and state intervention was out, and free market economics was in. For developing economies like Argentina and, in a more extreme case, China free market economics emphasized that to grow countries needed to control inflation by moderating government spending and then remove most restrictions on trade, like tariffs, as well as those on money flowing across borders for investment.

This could potentially give developing countries a shortcut to develop through foreign direct investment, FDI for short. Using FDI, rather than developing homegrown industries, developing countries could in theory convince foreign manufacturers to build factories in their country, from where they could export to the West, which was now committed to free trade.

In 1976, Argentina looked perfectly positioned to dominate this model, as the military Junta installed a well connected free-market loving economist and wealthy businessman, José Alfredo Martínez de Hoz, as economy minister. Mr. de Hoz then installed bright Argentinians educated at the University of Chicago in key posts. For example, he installed Adolfo Diz, who was a pupil of Milton Friedman himself as head of the central bank.

However, ironically, it was not Argentina, but rather communist China that would successfully attract FDI to transform its economy, meanwhile Argentina did succeed in attracting foreign capital, but it was mostly of the speculative kind.

So, what did China do differently than Argentina? Three things.

First, while China’s political institutions were firmly captured by elites, these were much more stable than those in Argentina, where it was difficult for foreign firms to believe that reforms would not be quickly reversed. Indeed, in the 1980s, after a brutal depression quite a few trade restrictions were re-introduced. And, while de Hoz brought inflation under control by creating a depression, it soon again spiraled out of control as the next government tried to spend itself out of the depression.

Such unpredictability is not great if you are trying to build factories worth millions of Dollars.

However, that does raise the question, why did Argentina’s economy go through this brutal recession in the first place, while China did not. This brings us to the second major difference between the free market reforms of China and Argentina, which is that Argentina did it suddenly, through shock therapy rather than doing it gradually, through free trade zones, as they did in China.

The consequence of shock therapy was not just that it created hardship, leaving Argentina’s ruling elite vulnerable, causing political instability. The consequence in Argentina was also that it produced economic instability. That is, by opening up quickly, Argentina’s inefficient industry was quickly demolished. But, that also destroyed a valuable source of tax and foreign exchange revenue, thereby causing inflation and the re-introduction of tariffs, making Argentina less attractive for foreign firms.

This contributed to free marketeer Menem then instituting a fixed exchange rate regime to the US Dollar in the early 1990s. To maintain it, he heavily restricted government spending, thereby creating stability and reducing inflation. However, because inflation was still higher than in the United States, the fixed exchange rate regime essentially meant that Argentina became relatively more expensive, and therefore a less attractive destination for foreign direct investments. In contrast, China actively kept its exchange rate low in this period.

So, given that China was more politically, and economically stable, and remained much cheaper thanks to its undervalued exchange rate, it should come as no surprise that Argentina failed to attract much FDI.

This left Argentina with a demolished industrial base, and without a new foreign one to replace it, and forever increased unemployment and inequality.

So, while China’s government made it attractive for foreign investments that benefitted it in the long term, liberalized Argentina was stuck with SPECULATIVE investment flows, which made Argentinians feel rich TEMPORARILY from time to time. But, given that such speculative investments could leave at any time, it once again left Argentina open to a global crisis, ,which is exactly what happened in 1998, when the Russian and Brazilian crises caused foreign capital to quickly flee Argentina, setting the stage for even more political drama

Ch4 Make up your mind Argentina

In the early 2000s, the world was still convinced about free market economics. However, after experiencing a 5 year long crisis well before the West would have its own crisis in 2007, Argentina was no longer sure the free market economics of Menem was the way forward.

So, Argentina went back to protectionism under the Kirchner political dynasty. Their protectionist, state interventionist program re-invigorated the economy, but ended with ever increasing inflation.

Graph 10

Then, the Argentinians voted in a free-market reformer, Macri, who opened the country up to the world again, cut spending, brought back foreign money. But, ultimately failed to convince foreign investors to stay, meaning his term yet again ended in a recession and increased inflation.

Argentina then returned to the Kirchner dynasty, which reintroduced protectionism, grew the economy, but now at every increasing inflation.

This provided an opening for Argentina’s most radical free marketeer to date, Javier Milei who has promised to save Argentina by once again taking it on the path of free market fundamentalism.

But, can he do it?

Well, to answer that question, I think we need to dive a bit deeper into the patterns that we have so far observed.

First of all, I want to stress that Argentina is not the only country in the world that regressed from developed to developing economy. As we’ve seen, Argentina was never a properly industrialized economy like like Canada, Australia or the US. It just got lucky for a couple of decades when the combination of free trade and undeveloped fertile grasslands made SOME Argentinians fabulously wealthy indeed.

After that era, Argentina tried protectionism AND free market fundamentalism, many times. And yet, where other countries succeeded in each of these approaches, Argentina failed, time and time again.

But, why did Argentina fail at both protectionism AND free market economics?

According to Nobel prize winning economists Acemoglu, Johnson, and Robinson, countries get rich, not because of their favorable geography, or because of their culture, but rather because they have inherited the right political and economic institutions.

To explain exactly how this works they have come up with the following framework, that starts with political power, which helps certain groups in society take control of the political institutions of the government.

According to Acemoglu and his colleagues, different types of colonization can explain a lot of the patterns that we see today. Specifically, in most Latin American countries, Spanish settlers encountered rich civilizations, which, after conquering them, they then sought to dominate through oppressive institutions. These oppressive political institutions created economic institutions, like big state-owned banks, laws that permitted slavery, or a corrupt police force that prioritized protecting the economic interests of the wealthy, land-owning, Spanish descended elite.

On the other hand, in British settler colonies like the US, Canada and Australia the native population was almost completely wiped out. Therefore, they did not need to be economically dominated which meant their inhabitants started on a more equal footing. Therefore, they created more inclusive political institutions. These in turn created more inclusive economic institutions such as labor protection laws, laws that permitted hundreds of small banks to emerge, and courts that protect the property rights of everyone, not just those that were already wealthy.

In this framework, inclusive economic institutions allow for faster economic growth because they allow for what famous Austrian economist Joseph Schumpeter called creative destruction, which refers to a process where an economy continuously innovates. Innovation disrupts and thereby destroys outdated businesses, but replaces them with more productive ones.

This process creates economic growth. But, also also redistributes wealth, from old, to new business elites.

So, in ex-British settler colonies inclusive political institutions allowed for more economic growth, and redistribution of wealth to innovators. On the other hand, in Latin American countries like Argentina, old, often agrarian elites controlled political institutions, which they then used to rig the economy in their favor, keeping them rich, and, as a by-product prevented the economy from growing as fast.

However, to make this story even more depressing, Acemoglu, Johnson and Robinson argue that this system is self-reinforcing. In highly unequal societies, some people have so much money that they can use it to capture political institutions. In more inclusive societies, people may be rich, but not rich enough to fully capture political parties. Therefore, in these types of societies, if an economy is not working for the masses, they can mobilize more easily to take charge of political institutions, which make the economy work for the majority again.

This means that economies like Canada and Germany face the same trends and moves between protectionism and free trade like Argentina, their institutions are not captured by elites that use these to provide excessive protections for their industries.

So, in short, the only thing that is exceptional about Argentina’s story is that it was blessed with huge resource wealth that could be easily exported at the start of the 20th century. Once those fortunate circumstances were gone, it became clear that Argentina was actually always a typical Latin American economy, stuck in a high inequality, low growth, and highly volatile economic state.

It’s not strange that Argentinians are increasingly desperate for a candidate to get them out of that predicament. Will Milei be the one to do it though? There are some hopeful signs. But, also many signs that he is just another free market reformer in the spirit of the Junta, Menem and Macri, that is temporarily creating an investment boom, but not a durable industrialization.

But, I hope, I’m wrong on that and that Argentina soon busts out of its toxic political - economic dynamic.

In fact, there are some hopeful signs that Milei is more pragmatic than he let’s on. You can read all about that in the sponsor of this video: The Economist.

Specifically, I recommend his article which explains how Milei’s government is trying to get Argentina to make better use of its natural resources. Then, follow that up with this article about how Milei will deal with the challenges I just talked about like the overvalued Peso. Finally, I highly recommend going back in tie to contrast the vibes around Milei now with this analysis Argentina’s previous free-market president, Macri, and then with this analysis about the shocking crisis that ended the Menem free market reform years.

Indeed, if there’s one constant about Argentina’s 100 year history, it is that The Economist was covering it. This is why I’m so excited to say that with my link you can now have access to the Economist’s analyses for 20% off.

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