This is Argentina's capital, Buenos Aires. A hundred 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 upcoming nations like Canada and Germany.
However, after 1930, Argentina stagnated and then declined after 1976, while the other countries just kept growing a lot with Britain. This century of relative decline. Or 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? Military supporters will tell you that protectionism and state interference under people like Peron and the curse theirs is to blame.
While opponents will tell you that actually hardcore free market fundamentalism has been tried in Argentina many times. For example, the military junta in 76, Menem in the 90s, Macri in 2015 and this always ended in a massive economic collapse. But what if both of them are right?
What if there's a much deeper story that can explain Argentina's terrible economy under both left and right wing approaches? If you're interested in that story, then this video is for you. So sit back and relax as we take a deep dive into the sad story of Argentina.
A hundred years of economic decline, starting with the growth miracle years in which Argentina supposedly became a rich country. The years from 1860 to 1929. Tiptoe on 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 its miracle years, the income of the average Argentinian arose from 42% of that of Britain in 1860 to almost 80% in 1929.
This dynamic made Argentina look much more similar to successful British settler colonies like Canada. Then more typical Latin American countries like 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 shipbuilding technologies, which rapidly reduced the prices of Argentinian imports while raising the prices of what they could earn with agricultural exports such as wheat and livestock. Therefore, during this era, it became increasingly profitable for Argentinean farmers to invest in the exploitation of Argentine owners.
Massive, fertile, underdeveloped family and 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, wasn't very high demand. 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 from the. Deficit to halfhearted industrialization.
This graph again shows the performance of Argentina's economy versus that of the British economy for the period of 1932 1976. This is important because while during this period Argentina's economy kept growing. Its 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 its 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, to say the least.
Compelling populists to fight other countries with tariffs for a bigger slice of the economic pie. Economist Del Rey considered this wasteful, as heart errors by one country tends 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.
U. S. Founding Father 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 this protectionism as well. So why did infant industry protection fail in Argentina? While it was much more successful in countries like Australia, in my research I could find two main reasons, and 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 land, 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.
This is a problem because it's very difficult to build lasting industries 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 sadly, a decline in agricultural production. However, this brings us to this 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 if an industry protection worked in the US, Canada and then later in Australia, it failed in Argentina because it was not properly 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 then loss of economic activity and tax revenue for the government. However, different than before, this interventionist government had developed a tendency to create money to offset that decline in Texas, increasing inflation to almost 5,000% per year. The resulting discontent among 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.
To switch the organization of the economy from a top down to a bottom up performance. We must go through a very bitter pill. Trained at the University of Chicago in a normal market system that works fairly easily.
Three the 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 the more extreme case, China. Free market economics emphasized that to grow, countries needed to control inflation by moderating government spending and then to 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 at least, convince foreign manufacturers to build factories in their countries 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, Jose Alfreda Martin, as the host. As economy minister, Mr.
Austin installed a bright Argentina. Educated at the University of Chicago in key posts. For example, he installed Adolfo Diaz, 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 reintroduced, and while the horse 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 that depression.
Such unpredictability is not great if you're trying to build factories worth millions of dollars in a country. However, that does raise the question why did Argentina's economy go through this brutal recession in the first place? Well, 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. That's what it's called, 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 industries were quickly demolished, but that also destroyed a valuable source of tax and foreign exchange revenue, thereby causing inflation and the reintroduction of tariffs. Making Argentina less attractive again for foreign firms.
This contributed to free marketeer Menem then instituting a fixed exchange rate to the US dollar in the early 1990s, and to maintain it, he heavily restricts government spending, thereby creating stability and reducing inflation. However, because inflation was still higher than in the United States, the fake success rate essentially meant that Argentina became relatively more expensive over time and therefore a less attractive destination for foreign direct investment. 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 undervaluing its 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 it forever increased unemployment and inequality in the country. So while China's government made it attractive for foreign investments that benefited the country in the long term, liberalized Argentina was stuck with speculative investment flows, which made Argentina's feel temporarily rich from time to time.
But given that such speculative investments can 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. Chapter four make up your mind. Argentina.
In the early 2000, the world was still convinced about free market economics. However, after experiencing a five year long crisis well before the West would have its own crisis in 2007, Argentina was no longer sure. The free market economics of minimal was the way forward.
So Argentina went back to protectionism. Under the curse. Their political dynasty, their protectionist state interventionist program, reinvigorated the economy, but it ended with ever increasing inflation.
Then the Argentinians voted for 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 for the long term, meaning this term yet again ended with a recession and increased inflation. But it didn't then return to the case. The dynasty, which reintroduced protectionism, grew the economy but had the cost of ever increasing inflation.
This then provided an opening for Argentina's most radical free market to today's. Xavier Milei, who has promised to save Argentina by once again taking it back on the path of free market fundamentalism. But can you 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 Canada, Australia or the US.
It was always agrarian. It just got lucky for a couple of decades when the combination of free trade and undef fell apart, fertile grasslands made some Argentinians fabulously wealthy. Indeed.
After that era, Argentina tried protectionism and free market fundamentalism many, 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 economist Arthur Moghalu, Johnson and Robinson, countries get rich not because of their favorable geography that China has, not 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 like the government.
According to us Moghalu and his colleagues. Different types of colonization can explain a lot of 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, loans that permitted slavery, or a corrupt police force that prioritized protecting the wealth of the 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. And then these in turn created more inclusive political institutions such as labor protection laws, laws that permitted the hundreds of small banks to emerge and courts that protected 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 and innovation disrupts and thereby destroys outdated businesses, but replaces them with more productive one.
This process creates economic growth, but it also redistributes wealth from old to new business elites. So in ex-British colonies, inclusive political institutions allowed for more economic growth and redistribution of wealth to innovators. On the other hand, in Latin America, 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 byproduct, 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. And 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 move between protectionism and free trade from time to time, like Argentina, but because their institutions are not captured by elite that use these for protectionism, they actually are able to make these transitions work.
So in short, the only thing that is exceptional about Argentina story is that it was blessed with huge resource wealth that could easily be exported at the start of the 20th century. Once these 14 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 and political state. Therefore, it makes sense that, like in many other Latin American countries, 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 market reformer. In the spirit of the hunter, Menem and Macri that is temporarily creating an investment boom but not durable industrialization.
But I'm 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 lets on.
You can read all about that in this sponsor of this video, The Economist. Specifically, I recommend this article which explains how Miller'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 that I just talked about, like the overvalued bank.
So finally, I highly recommend going back in time to contrast the vibes around Milei now with this analysis of Argentina's previous free market, president Macri and then go back in time to this analysis about the shocking crisis that ended the Menem free market reform years in the 1990s. Indeed, if there's one concept about Argentina's 100 year economic history, it's that The Economist was covering it. And this is why I'm so excited to say that with my link, you can now have access to the economists analysis for 20% off.
Whether you prefer to enjoy the print edition over a cup of coffee or their Digital weekly edition, you'll always stay on top of global trends no matter where you are. So don't miss out! Click the link in the description or top comment, or head over to economist.
