This article will focus on how Argentina went from a semi-barbaric nation after the War of Emancipation to prodcuing one of the highest GDP per capita in the world, only to steadily decline and become a nation with a 30% poverty rate.
When the Spanish conquistadors arrived at what today is known as Argentina, they did not find anything of interest to them. In contrast to Peru or Mexico, the Pampas lacked gold or silver and the inhabitants were harder to subdue. During the colonial times, the northwestern regions of Argentina were more developed as they provided goods to the Alto Peru, an area rich in gold and silver. Buenos Aires and the Pampas, on the other hand, were little developed with leather production as the main economic activity.
In 1808, Napoleon Bonaparte conquered Spain and appointed his brother as King. By 1810, the locals in Buenos Aires determined that as the Viceroy did not represent the Spanish King anymore and the revolution quickly spread. The Spanish could not offer any resistance as their army presence was insignificant in the region.
After the independence war, each province in the viceroyalty became de facto autonomous and others, such as Uruguay and Paraguay, completely independent. It was a period of civil war and violence with little to no progress at all. Eventually, all the provinces, except Buenos Aires, joined a Confederation. In 1861, after the battle of Pavon, Buenos Aires and the Confederation united. Argentina finally experienced internal peace and constituted a central government. However, the territory remained underdeveloped and barely populated.
The period of 1880 to 1913 was the Golden Age for the newly formed nation. Argentina embraced a series of reforms that developed the nation, promoted immigration and integrated the country into the global economy. The liberal economic policies produced a booming economy, attracting immigrants mainly from Italy and Spain but also from Germany, Great Britain and France.
The main policies where:
- Trade partnership with Great Britain: Argentina sold grain and livestock on the other hand; Great Britain sold manufactured products.
- Free capital flow: Companies mainly from Great Britain, and to a lesser extent from France and Germany, started investing in the country, bringing railroads, ports, the telegraph, water, electricity and gas.
- Access to land: Argentina was vast and scarcely populated; the government promoted the arrival of European immigrants to work the land and generate farming and livestock products for export.
This economic model was based on agricultural exports. By 1888, Argentina was the sixth largest exporter of grains and, by 1907, the third largest, surpassed only by the United States and the Russian Empire. During this period, the size of the government remained small, and public spending never surpassed 9% of GDP. International commerce and in immigration to Argentina were completely free. Inflation was low, paving the road to stability, which in turn attracted more capital and immigrants. Illiteracy decreased from 78% to 35%; the railroad network grew from 4,000 miles to 20,000 miles; the population of the country doubled; and grain exports skyrocketed from 389,000 tons to 5,294,000 tons.
The Golden Age ended with World War I. International commerce was disrupted, greatly affecting an export-oriented economy like Argentina. During this time, some light industry developed in the nation as a result of the inability to import manufactured goods from Europe. During this time, the GDP contracted, unemployment increased and the federal government faced fiscal deficits. On a positive note, Argentina remained neutral during the war even though some of its own merchant ships were sunk by German U-boots.
After the war, Argentina resumed its policy of exporting agrarian goods and importing manufactured products. However, the world had changed. Victorious nations implemented protectionist policies which made trading more expensive and difficult. Nonetheless, the country resumed its economic growth. During the period 1920-1929, GDP per capita in Argentina grew faster than that of the United States (1.75% vs 1.22% per year).
The financial crisis of 1929 had a negative impact on Argentina, albeit not as harmful as World War I. As a direct result of the crisis, President Hipolito Yrigoyen was removed from government by a military coup, starting a 50-year period during which the military got involved in politics, seizing the power of the federal government whenever it disliked a president.
The 1930s continued the industrialisation of the country in order to substitute imports, hampered by restrictions on international trade. During this time also, the notion that the government should play a bigger and more active role in the economy became a mainstream idea.
World War II stopped the flow capital and machinery needed to continue the expansion of inudstry. In 1943, Argentina suffered its second military coup. And yet, the country remained neutral during the conflict. From the coup a prominent figure arose among the young officers.
Juan Domingo Peron was in charge of the department of labour and became well-known among union workers. Eventually, Peron became divisive among the military rulers and was incarcerated in 1945. Five days later, a general protest pressured the government to free Peron and call for elections. He was released that same day and elections were scheduled for 1946.
Peron won the elections in 1946 and government involvement in the economy became main policy. Under Peron, a host of private industries became the property of the federal government, with a special focus on public services (telephone, water, gas, etc.) and transportation (airlines and railroads). Other policies involved the redistribution of wealth from capitalists to workers. and from farmers to industrialists. Peron’s goal was to transform the agriculatural-based economy to an export- an industry-led model.
In this new era, the government, rather than the market, regulated different industries and economic actors. Price controls kept certain products artificially low and with rent controls, salaried workers obtained a 13th monthly salary. Fiscal spending grew from 16% to 29% of GDP. Money supply expanded 250% during the period from 1946 to 1949, which resulted in a level of inflation never seen before in the country. To fund this aggressive plan of government intervention in the economy, Peron created the Argentine Institute for the Promotion of Trade. The government became the only agent that could sell agricultural products in the international markets. Farmers willing to export their production had to sell their products to IAPI, which gave them a price to ‘protect’ the farmers from international price fluctuations. In turn, IAPI sold agricultural products to international markets with a huge profit margin. During the first years, the IAPI generated revenue for the national government.
However, shortly after, the IAPI needed funds to cover losses stemming from a drop in international prices and internal corruption of the institution.
By 1949, the Peronist model was in crisis: agricultural exports decreased due to several harsh droughts that ravaged the country. This resulted in a sharp decrease of exports followed by an acute reduction of imports, which were now fundamental to the new light industry that the Peronist government promoted. Salaries started to grow more slowly than inflation; price controls generated a significant reduction on investments from the private sector that could no longer be replaced by government investment.
By 1952, Peron had been re-elected, but the economic plan needed a change. The economic crisis had lasted as long as the economic boom. The government opened certain industries to private investment, implemented new policies to boost agrarian productivity, froze salaries in an attempt to stop rampant inflation and reduced fiscal spending to control the fiscal deficit.
This plan partially succeeded: inflation decreased, GDP and agricultural exports grew once again. However, by 1955 Peron had lost the support of two powerful Argentinian institutions of that time, the military and the Catholic Church and was consequently thrown out of power by a military coup.
The Peronist regime only lasted 10 years and yet, it was a defining moment for the nation. During this time, economic policy radically shifted and workers unions were empowered.
Peron also granted new rights to the general population and transformed the role of government from one that protects its citizens through internal peace and administration of justice to being the patron and provider of basic needs. This generated an oversized and overstaffed government that, in order to finance its unproductive and expensive social plans, increased taxation to unbearable levels. The new role also led to government being involved in many key industries, like public services and energy, which provided subpar services with an expensive price tag. Over-regulation has since become the norm for most economic activities. The macro-economic distortions established an industrial sector that was unable to produce quality products at a reasonable price. In order to keep the industrial sector alive, the economy had to remain closed to foreign trade and at the same time receive subsidies from the government.
The results have been disastrous: Argentina went from being a prosperous rich nation, the envy of Latin America, with aspirations of becoming a first world country, to nation that cannot feed its 40 million inhabitants, 30% of whom live below the poverty line, while trying to match the economic performance of neighbouring nations like Chile.
The future looks grim for Argentina, even though the country escaped the tyranny of socialist Cristina Fernandez de Kirchner in 2015. President Macri did not carry out any of the reforms needed such as: decreasing the power of workers’ unions, reducing fiscal spending, reforming the pension system and revamping the tax code. His gradual approach to fix the macro-economic imbalances, generated more inflation, more unemployment, higher taxes and further depreciation of the Argentinian peso. In fact, his government expanded fiscal spending on social services, further exacerbating the fiscal deficit. This deficit has been funded by issuing debt in the international markets and expanding the monetary base. The country is now in stagflation and has not grown since 2012.
This year President Macri is running for re-election even though his popularity is low and his lack of courage to do serious reforms is notorious. Cristina Fernández de Kirchner, the former president, wants to run again and if she wins, Argentina will become the next Venezuela. A third candidate is Roberto Lavagna, former minister of economy during the presidencies of Eduardo Duhalde and Nestor Kirchner, whose economic views are Keynesian.
The main reason for Argentina’s decline was the initial shift made by the Peronist regime. After the 1950s, Argentina left its competitive advantage in agriculture by entering an era of industrialisation but was unable to compete with the rest of the world. At the same time, successive governments maintained an active role in the economy, generating distortions in the market that led to hyperinflation, crony capitalism, slow growth, external debt and taxation levels that make suffocate economic activity.