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Javier Milei’s party just won Argentina’s legislative elections. Why? How can we understand his policies? Will they lead to Argentina’s return to wealth and greatness? Or will they lead it straight back into yet another cycle of mayhem? Should he do anything differently? To answer these questions, we need to understand why Argentina is poor today.
But doing so is one of the hardest tasks in economics. Argentina’s poor performance is among the most discussed topics in international economics. So I have tried to synthesize what research tells us, and I found an illuminating way to doing it was comparing the development of Argentina with those of Japan, Taiwan, South Korea, and China (covered here), because all these countries did very similar things but ended up with dramatically different outcomes. This helps us isolate the few differences that probably caused Argentina’s demise. In any case this is such a complex issue that I’m certain to have made mistakes. If you find any, please correct me in the comments or by responding to this email.
Around 1900, Argentina was 2x richer than Japan, and over 4x richer than Taiwan, South Korea, and China. But all these countries are now richer than Argentina. Why?
This is a much more interesting story than it appears, because the similarities between these countries’ economic policies are uncanny. But there are a few crucial differences that caused the Asian countries to grow while Argentina stagnated. So let’s look first at what the Asians did, and then compare with Argentina, to see where everything went wrong and why.
How Asian Tigers Developed
I explained it in detail here, but here’s the summary.
1. Agriculture
The land in Taiwan, Japan, and South Korea was concentrated in few hands. The first thing they did after WW21 was to redistribute it. This gave many people jobs and increased farm productivity, because farmers now owned the farm and its products, so they tried to improve both: They invested in machinery, better fertilizer, better grain, they didn’t overwork the land…
As farm productivity increased, these farmers were able to save money. Productivity increased enough to feed the country. The governments taxed farmers, but also frequently subsidized them through minimum prices for their crops, help procuring fertilizer, seeds… There was little food export, but what existed was heavily controlled and taxed.
Thanks to this, each country developed a broad base of farmers, increased their savings, and earned foreign income.
2. Industry
Once farming worked, these countries started redirecting the surplus to industries to develop them. They picked a few key industries and supported them in many ways:
They frequently applied import taxes to the foreign competition of protected industries. This is called infant industry protectionism.
They reduced their taxes.
They gave them cheap loans.
They got import licenses so they could import, and do so with limited taxes.
Crucially, they only did this to the companies that were growing fast and were able to compete internationally. Those that couldn’t compete stopped receiving cheap loans and were pushed to merge or fail.
3. Finance
Where did the money come from for these cheap loans? From the farmers (and other citizens), who couldn’t invest their money wherever they wanted. Real estate and stock markets were not accessible to them, and neither could they freely place their money abroad. They were forced to put the money in the bank with low interest rates. That’s the money that was then lent to industrial companies.
Also, the exchange rate was kept low, and inflation suppressed:
Exports were left untaxed, so there were a lot of exports. They brought foreign currency to their home countries (usually USD). They spent some in international markets (fertilizer, seeds, machinery…), and the rest they sold to buy local currency.
The central banks bought the USD. They printed local currency to buy it.
This would have led to inflation, so they sterilized this by emitting low-interest debt and forcing banks to buy it.
Foreign investment was limited. Since foreigners have foreign currency and sell it to buy local currency, they tend to appreciate the local currency. By limiting their investments, they limited this local appreciation.
Wage growth was kept low. Trade unions were pushed to accommodate this. This kept inflation at bay.
How Argentina Went Sideways
1. Agriculture
We saw in our two previous articles that Argentina’s geography is outstanding, and the country capitalized on it in its 1880-1910 agricultural boom:
Farmland expanded quickly
Many cattle ranches were replaced with crops, with the help of rapid mechanization and immigration2
But here’s the original sin of Argentina: Farms remained highly concentrated.
This didn’t impact land productivity too much at first, because the landowners had an incentive to maximize their production and thus their exports.
However, since land was so concentrated, there wasn’t a broad base of farmers who could benefit. A few landowners gained outsized economic, social, and political power.3
This rising inequality caused a political backlash that didn’t happen in the Asian Tigers. This political pressure pushed governments to tax farming in a less productive way than Asian Tigers had.
Recall how Asian Tigers also taxed agricultural exports, but there were few, and they used most of that income to reinvest in farms. The biggest redistribution from agriculture to industry was indirect: by forcing farmers to save at the bank their wealth, which was then lent to industries.
Instead, Argentina simply taxed agricultural exports. For example, the IAPI (Instituto Argentino de Promoción del Intercambio) had a monopsony on agricultural exports (it was the sole buyer by law).
In the 1950s, Argentina’s government bought all Argentinian beef and grain from farmers at a price well below market: up to 60-70% cheaper than world market prices. Then, it sold them in the international markets at a much higher price, which had increased thanks to higher demand after WW2. It pocketed the difference. On average, that was 44% of revenues from wheat between 1946 and 1951, and 40% for corn.
These taxes went down over time, but have been a recurring reality in Argentina’s history.
Heavily taxing exports is much worse than what the Asian Tigers did, because it disincentivizes investment. Imagine that you can produce a ton of wheat at a cost of $80, and you can resell it internationally at a price of $100. This gives you a nice profit of $20, which you can use to reinvest in expanding the business. But if the state taxes you at 30% of revenue, now you can only sell your wheat for $70. Suddenly, your entire operation is unprofitable, and you go bust. Even if your cost was $60, this is bad: You go from a margin of 40% to 14%, so many previous investments become unviable.
This reduces both production (and so exports), and investment. Indeed, Argentinian agriculture suffered from this, which we can see in the graph of wheat & corn productivity from before the export tax was introduced during Peron’s first term, when yields were still competitive:
2. Industry
How many Japanese, Taiwanese, and South Korean industrial brands do you know?
How many Argentinian ones?
Yep. The Asian Tigers succeeded where Argentina failed. Why?
Recall how the Asian Tigers protected their infant industries with cheap loans, low taxes, import taxes against the competition, etc? Argentina did something similar, import substitution. But with some crucial differences that changed the outcome entirely.
Argentina made a lot of money through agriculture, but only in booming international markets. During the world wars and the Great Depression of 1929, demand crashed, and with it commodity prices and Argentinian incomes. Without foreign currency, the country couldn’t afford imports anymore during these hard times, which meant no more manufactured goods. So it concluded it had to produce stuff by itself—substitute imports with local industry.
Notice the subtle difference here, though: This was not about increasing industrial exports. It was about replacing industrial imports. This changed the mindset completely, from one where local champion companies had to aggressively improve their productivity to compete abroad, to one where local champions were protected from abroad.
Why does this matter? Because exports are impossible to fake. If you win in world markets, it’s because you’re the best. But if you win in local markets… You’re simply good at getting Daddy State to protect you and your lack of productivity against internal and external competitors. The Argentinian state used:
Import barriers, such as tariffs or quotas against international competitors
Cheap loans to local industrial companies
Different exchange rates for agricultural exports and industrial imports, so that industries could buy at a discount
State-owned companies
Subsidies, such as below-cost electricity or train transportation
Tax exemptions
All of these tools were similar to those used by the Asian Tigers. The difference was how they were used.
Export Discipline
This is by far the most important difference. These aids were not conditional on winning in global markets like in Asia, so most of these companies simply stayed in the local Argentinian market, protected from competition. They kept prices high, and lived off the rents.
Meanwhile, the rest of the country had to pony up more cash to buy the same appliances that would be better and cheaper from abroad. Terrible.
Economies of Scale
Export discipline has another advantage, which is that an exporting company has a huge potential market. This is especially important if there is a high upfront cost. Imagine you want to make steel. You need a massive factory to do it, so you better have a market that can buy millions of tons to amortize the upfront cost. If your market is small—like the Argentinian market—you will never have enough customers for economies of scale, and your costs will always be too high.
Car factory costs in Argentina, Brazil, and Mexico were about 60% to 150% higher than in the United States.—Import Substitution in Latin America, Baer
The paper industry (excluding newsprint) had 292 plants of which only 25 had a capacity of 100 tons daily, which is considered the minimum economic size. In the chemical industry, too, there are a great many instances in which there is a wide gap between the plant sizes most frequently found in the region and the sizes constructed in the industrialized countries.—Import Substitution in Latin America, Baer
Spray and Pray
Each time you give a cheap loan, subsidize a cost, or increase some import tariff, it costs the state money. They’re like a tax on everybody else. So the state needs to be extremely thoughtful about it. It can’t prop up local players in every industry, it needs to pick the few key industries it’s going to support, and focus all its resources there.
Usually, this is done in industries that are core for the future of the country. In the case of Japan and South Korea, they both went for steel as a key input to then produce heavy industries such as car companies. Now you know Toyota, Nissan, Mazda, Subaru, Hyundai, Kia… But you might not know the powerful Nippon Steel or the South Korean Hyundai Steel4 or POSCO.
Within the industries Argentina decided to play, it should have found the winners and supported only those, pushing the others to die or merge. It’s easier to support one big company than a bunch of small ones. For example, Argentina had over a dozen car companies,5 which is good to start but you need them to merge!
In Argentina, excessive diversification, unused capacity, large inventories because of import controls, and difficulties in obtaining outside finance explain the high price level in the heavy electrical equipment industry.——Import Substitution in Latin America, Baer.
Comparative Advantage
It’s not enough to pick a few industries. The focus should be on only the ones where Argentina had a competitive advantage. You can’t be good at everything. Pick your battles. For example, given its agricultural might, could it have pushed for agricultural manufacturing companies? It had Vassalli, Senor, Pauny, Zanello, and Araus.6 Could it have produced the Argentinian John Deere with more support?
What other industries could Argentina have picked? Meat-packing and cold-storage processing? Railways? Shipbuilding? Metallurgy, nuclear, precision instruments?
Instead, it supported electronics companies like BGH, Newsan, SIAM, or Philco. But electronics is a very low-margin industry in which Argentina has no competitive advantage and you need exports to reach sufficient scale to bring down costs. As is, Argentinians had to spend much more to get their worse TVs, and in the process spend up to 1% of GDP subsidizing the industry!7 Another example is textiles and apparel. Do you really want to compete with the Indias and Bangladeshes of the world and their rock-bottom wages and no margins?
High Compensation
Speaking of wages, the Asian Tigers kept wages low for a long time to keep overall production costs low. They did so, among other things, by working with trade unions, who understood that they needed a long period of low wages to become competitive, and only then could they increase wages.8
Argentinians held the opposite view. They grew up experiencing high inequality from agricultural exports, so they wanted to tax them to redistribute wealth to the people. Industrial production (and exports, when they existed) were seen as yet another source of money to tax. The exact opposite mindset as in Asia, with resulting higher wages, higher costs, less competitiveness, and a lack of global champions.
Employers were forced to improve working conditions and to provide severance pay and accident compensation, the conditions under which workers could be dismissed were restricted, a system of labour courts to handle the grievances of workers was established, the working day was reduced in various industries, and paid holidays/vacations were generalised to the entire workforce. Perón also passed a law providing minimum wages, maximum hours and vacations for rural workers, Sunday rest, paid vacations, froze rural rents, presided over a large increase in rural wages, and helped lumber, wine, sugar and migrant workers organize themselves. Perón established two new institutions that increased wages: the “aguinaldo” (a bonus that provided each worker with a lump sum at the end of the year amounting to one-twelfth of the annual wage) and the National Institute of Compensation, which implemented a minimum wage and collected data on living standards, prices, and wages.
From 1943 to 1946, real wages grew by only 4%, but from then to 1948 (under Perón), they grew by 50%.
Subsidies on energy, food, housing, and transport had the same effect of increasing effective compensation.
Let’s take housing: The Perón government built hundreds of thousands of houses. That sounds good, but there are many problems with this:
We can see this as everybody in the country putting money aside to buy a house for a few. Who gets those houses? Friends of politicians? Are the recipients the most deserving? Those who need the houses the most?
Where does this money come from? If it’s not a sustainable source (hint: agricultural booms and busts are not), it’s a recipe for disaster.
The cost of building additional housing goes up (since the government is now outbidding the private market for builders), making it harder for everybody else to get a home. When you want everybody to get a home, the first thing you should do is focus on lowering all types of building costs.
All these things (housing, holidays, retirement…) are great objectives for a country to have, but it was too early to have so many. Employees can only earn as much as they produce. When they are not very productive (that is, early on in a country’s path to development), what these measures achieve is increased costs for industries, to the point where they become uncompetitive and either disappear or must be subsidized by the government—that is, the government taxes the productive parts of the economy (here, agriculture) to subsidize high standards of living for industrial workers, who are not productive enough to pay for themselves.
Trade Unions
How did Argentina get to such a problematic situation where wages outpaced productivity? One key factor is trade unions. About 40% of legal workers are unionized in Argentina, and these unions have outsized power.
In general, I think the best way to improve the position of workers is full employment, as competition between employers will drive up worker conditions. However, sometimes this process is not optimal, and trade unions can help balance power between workers and employers. But the key there is balance.9
There was not enough balance in trade unions in the US in the mid-20th Century, which was the main cause of the deindustrialization of the Rust Belt: Industries left for the South, much less unionized, and with cheaper costs. Something along those lines happened in Argentina.
But where did the power of Argentinian trade unions come from? Before taking power, Perón was the Secretary of Labor. There, he allied with trade unions. It’s thanks to them that he rose to power. Since his power base came from trade unions, he took care of them, and they took care of him. The most obvious way lies in the concept of Personería Gremial: Each industrial sector only has one legal union! And they’re all under the purview of one union, CGT! Can you imagine the level of power CGT has?10 Then, Perón made collective bargaining universal and state-enforceable.
Of course, such power concentration translated into political power and a revolving door between politics and unions that led to corruption.
As of today, Argentina still has stricter employment protection legislation than other Latin American countries.11
None of this happened in the Asian Tigers. South Korea and Taiwan were the most radical (they both fought Communists in their respective civil wars) , and their government controlled unions, which had limited power. Unions also existed in Japan, but under government supervision. A crucial fact is that trade unions were much less centralized. For example, in Japan, each company has its trade union. This means two things:
Unions are much weaker, but strong enough to face the employer
They’re tied to the future of the company, so they’re very interested in the company succeeding and don’t care about country-wide economic development.
Lower Agriculture Productivity
The high cost and low value of local agricultural machinery was especially hurtful to Argentina’s golden goose—agriculture. If farmers had been able to buy international machines, they could have increased their productivity massively, which would have resulted in more exports and wealth for the country. But import substitution made it impossible.
Back-Integration Resistance
Asian countries supported fundamental industries like steel. This matters because once you are competitive in something like steel, you have a competitive advantage in integrating vertically—building stuff down the line more cheaply, like cars. It takes time and effort, but the Asian Tigers did it by inviting foreign companies into their countries and making sure there was technological transfer between foreigners and locals.
Argentina frequently supported import substitution for consumer goods. Here, the incentives are the opposite, because if you’re producing consumer goods, you’re probably importing lots of machinery and materials from abroad. If you start making these machines and materials yourself, you’re likely going to make them worse and more expensively, which is going to make your consumer goods crappier. So firms pressured the government to avoid developing domestic intermediates.
If the government had pushed, maybe Argentina could have integrated vertically, but it didn’t, and the country didn’t capture entire value chains.
As you can see, this is quite a damning list of differences. No wonder Argentina has no global industrial or consumer champions!
3. Financial & Fiscal Management
That already sounds like a lot of mistakes. But we’re not done! It’s time to talk about the financial and fiscal ones.
Lost Land Productivity
Remember how we talked about the export taxes on grains and beef? This might be good or bad, depending on how they used the money. The downside of such high taxes is that farmers might underinvest: There is less surplus to buy more land, fertilize it better, acquire more machinery, build better irrigation systems… Returns on investment are So taxation like this reduces long-term production.
Asian Tigers frequently intervened in the international sale of their countries’ crops, but they also reinvested a lot of that money in the agricultural sector, so crop production in the long term improved. In fact, these countries might have better funded their agriculture with these taxes than without, as this forced investments in farms that farmers might have preferred to save or invest elsewhere.
This is not what Argentina did, though. From what I can tell, it did invest some money to support agriculture, in things like ports and grain elevators, but most of the money didn’t flow back into agriculture. That’s probably another reason why farm productivity started diverging in Argentina vs the US.
Low Return on Investment
So how did Argentina’s state spend that surplus? Among other things, it invested in the country:
It paid the national debt
It nationalized the entire banking system, including the central bank (which was previously controlled by the UK)
It nationalized the railroads
It created a merchant fleet
Public works expanded access to potable water and sanitation
It invested in coal and petroleum exploration, built the first gas pipeline, and developed power plants, hydroelectric dams, and oil refineries.
Some of these were good investments. For example, paying off the national debt allows for future debt. Building energy infrastructure reduces the cost of energy and creates energy exports, both of which are amazing for the country. It’s pretty important to control your own central bank.
Others are dangerous. If you nationalize most of the banking system, you:
Eliminate the insights from bankers on the ground
Lose the incentive to find the best places to allocate your money
Both of which lead to lower return on capital.
It’s not just the financing that might be problematic, but also its magnitude. During the first Peronist terms in the 1940s and 50s, the Industrial Credit Bank financed 52% of all industrial activity, with peaks of up to 78% in 1949! This is way too much money, too concentrated in the government, which leads to waste and corruption.
South Korea and Taiwan also nationalized the banking system, but they were able to keep a good financial allocation because the government was less corrupt and more technocratic. Argentina was too prone to populism and corruption, and its banking system was not as efficient. Many loans went to political allies rather than to strategic and efficient industrial champions.
Foreign Direct Investment
Taking over foreigners’ investments in your country is a fantastic way to make sure they don’t invest anymore.
Since Argentina grew during the UK’s apogee, most of its foreign investments came from the richest country at the time, the UK: its railroads, maritime trade, banks… This financing was crucial for Argentina’s development, but it had its downsides. For example, Argentina had a nascent wool and clothing industry in the 1800s, but when the British arrived and financed railroads, one of the goals was to reach far inland with their cotton products. The local clothing industry collapsed.
As the UK lost power during the World Wars, it wasn’t in a position to keep financing Argentina. This, coupled with the high share the UK already controlled,12 meant Argentina was not a master of its own financial destiny, which was another factor for populism: Perón accused the UK of imperialism, so when the banking system was nationalized, the goal was not “let’s judiciously invest this money” but “let’s do what we want with this money, independently from what these former imperialists wanted us to do.”
Government Spending
(As opposed to investment)
Remember the high wages we discussed before? This quote is from just after the 2nd Perón term:
In Argentina, the excess of public spending over revenue has for the most part not been used for productive expenditures, but rather for unproductive ones—that is, salaries of public administration employees or the operating deficits of state-owned companies.—Radio announcement of the new economic plan through national radio and television in Argentina after the coup, IADE, from the new Minister of Economy, Martínez de Hoz, April 2nd 1976.
Wages, civil servants, pensions, subsidies… These high costs were one of the biggest sources of public deficit, and not just under Perón. For example, in 2008, the state subsidized 77% of the private pension funds’ beneficiaries. The point of private pensions is very much that citizens are carrying their risk, not the state!
Overspending during Booms
Investing so much money from boom times also causes a problem of timing.
Norway is another country that makes a lot of money when international markets are booming, because it sells lots of oil. But it doesn’t let the money from its surpluses flood the economy. It keeps it in a sovereign fund, which invests around the world, and it only uses its real returns to fund the government (about 3% of the fund every year). This completely smooths out government spending across decades,13 so when oil prices tank for a few years, the country barely notices it.
Argentina didn’t do that. Given the massive exposure to commodity exports, and the brutal price swings they have in international markets, Argentina had a huge surplus in bonanza years. It overspent during these booms, as we saw with the huge list of projects Perón undertook.
The same thing happened in the last Perón term (1974-1975). Look at the spike in commodity prices:
Between 1972 and 1975, the number of public employees increased by 24% (in the 10 years before that, they increased by 7.4%, so 90% more slowly). This had lots of negative consequences.
One was further lowering the return on investment. For example, if you build houses over 10 years, the flow is steady, builders can predict how much they’ll make, they can invest in the long term, hire employees, increase machinery, and keep prices low. But if all that investment happens in a couple of years, they don’t have time to increase their capacity, so they simply ask for a much higher price. This means less bang for the buck.
Peso Overvaluation
Another consequence of overspending during booms is an overvaluation of the local currency, common in countries that export commodities:14
Exporters in a country sell some commodity in the international market, and make lots of dollars15
The government taxes a big chunk
The government wants to spend this in its country, so it sells the dollars and buys the local currency
This increases the value of the local currency
This makes other types of exports more expensive, so these shrink
The only way out of this is sterilization, which has its own problems.16
Another way to put it is that, during a commodity boom, the government spends much more in the local economy, increasing local prices and salaries. With higher costs, local companies (which compete for the same local resources) are less competitive abroad.
Remember what Asian Tigers did instead? Central banks bought the dollars from exporters and kept them, buying US treasuries and keeping them in their vaults. If they had sold them in international markets to buy local currency, they would have strengthened their local currency. By avoiding that, they allowed industrial exporters to sell for cheap.
Argentina could have chosen to do that, but it didn’t due to its original sin: its agricultural inequality. Wealth redistribution became a political issue, especially since Perón. The government systematically taxed exports and would immediately redistribute the proceeds through the high wages we discussed earlier, plus other ways of injecting cash into the economy (pension increases, civil servants…).
Inflation
The overvaluing of the peso during boom times is also one of the sources of Argentina’s famous inflation cycles. Remember there was an increase in commodity prices in the early 1970s? Look at Argentinian inflation just after that:
Why the inflation spike?
This is the government deficit. It grew from 1970 onwards, peaking in 1975 at nearly 14% of GDP. At that point, taxes only covered 20% of government spending! The government covered the remaining 80% by printing money and raking in debt, which led to inflation.
But why was there such a deficit in the first place? Because of the increased spend we mentioned before: more civil servants, higher wages, subsidies, more investment… So if we summarize this inflation cycle:
Commodity prices go up
Agricultural exports boom
Government income booms
Government overspends
Commodity boom ends
Government overspending is not covered by export taxes
Print money to cover government overspending
Inflation
Later cycles were not all led by booms of agricultural exports, but by some of the consequences of previous cycles. For example, in the late 1980s:
Argentina had a huge deficit and couldn’t cover it with new debt
So it printed a lot of money (over 40x increase in base money in a year!)
Why the huge deficit?
Because it had been running deficits for a long time
So it accumulated a huge debt
interest payments on that debt accumulated, worsening the deficit
Why couldn’t Argentina cover deficits with new debt?
Huge debt, as described
International markets were not accessible, as Argentina had defaulted on its debt in 1982, because it was so high back then.
A mix of both of these happened with the Kirchners in the mid-2010s.17
The more often the cycle takes place, the more people learn to expect it, and the harder it is to control:
Inflation increases just because people expect it, so they jack up prices
The value of the peso falls because people expect the currency to lose value, so they sell their pesos to buy dollars. This accelerates the process.
How did the Asian Tigers avoid this? Originally, they didn’t have the same luxury problem of agricultural exports that would bring in lots of dollars, so they didn’t have a history of commodity booms like Argentina. That said, government spending never increased as fast as exports, quite the opposite: Asian governments kept dollars in the form of US treasury bills, as discussed. The downside was less social spending in the short term. The upside was more productivity, undervalued local currency, more exports, more wealth accumulation, and more reinvestment in the long term. This reminds me of the fable of the grasshopper and the ant.
Government Defaults
Since its independence, Argentina has defaulted nine times ( three times in the 21st Century). You can see how this is a direct result of the actions above.18
Savings
Whereas Asian Tigers forced their citizens to keep their money in local banks to reinvest in industry, this didn’t happen in Argentina, which surrendered that lever too early in its development: It hasn’t pushed Argentinian banks to focus cheap loans into Argentinian industry, and since 1993 lost its big industrial development bank. Its successor is much smaller and less ambitious.
State-Owned Enterprises
There is no justification whatsoever for the State to run sugar, metallurgical, textile, and all kinds of companies under the pretext of maintaining sources of employment.—Radio announcement of the new economic plan through national radio and television in Argentina after the coup, IADE, from the new Minister of Economy, Martínez de Hoz, April 2nd 1976.
There’s a role for state-owned enterprises (SOEs). For example, natural monopolies. But states frequently try to control more enterprises than they should: They can bring money and power to the state and politicians, who might use them for their own benefit.
Aside from an opportunity for corruption, SOEs are usually inefficient because the owners are not aiming to maximize profits.
For example, before telephone privatization in 1990:
To get a new line, it was not unusual to wait more than ten years, and apartments with telephone lines carried a big premium in the market versus identical apartments without a line. After privatization the waiting line for a telephone was reduced to less than a week.—Culture and Social Resistance to Reform: A theory about the endogeneity of public beliefs with an application to the case of Argentina, Pernice & Sturzenegger
Also, when SOEs lose money, the government jumps in to fill the gap, rather than letting an unproductive company die and more productive ones take over their resources and the market.
That’s what was happening in Argentina, where in 1976 the government funded all the losses from the railroads, which were bigger than the regional budgets of all regions combined (outside of Buenos Aires).
So Why Is Argentina Poor?
Let’s summarize to see the patterns.
First, Argentina’s land is extremely fertile. This is great because it generates lots of money for the country, and is why it was rich in the 1890-1930s. But it has a few downsides:
It requires delicate currency management, to avoid peso overvaluing and inflation
Since commodity markets swing wildly, the country’s income swings too
Second, probably because of the culture inherited from Spain, but also because of how it gained its independence, Argentina’s land was very concentrated, and it never redistributed it among farm workers. This led to high inequality, and consequently, anger.
This pushed Argentinian politicians to find another way to redistribute agricultural wealth: not through land, but financially, by controlling and taxing agricultural exports. Unfortunately, this meant that the huge swings in international commodity markets became swings in government income.
The combination of these two is extremely problematic: The first one (no land redistribution) begets financial redistribution to reduce inequality (or else you get conflict), but it’s hard to redistribute in a way that follows swings in international markets, so instead redistribution was so generous it was wasteful during boom times, and it led the government to huge budget holes in bust times.
The waste during boom times can be seen in the massive worker compensation increases that happened then, the huge social support system, the overfinancing of industries, the nationalizations, the creation of state-owned enterprises…
The holes in bust times led to all sorts of problems like hyperinflation, government defaults, currency devaluation… The economic disarray, in turn, led to political instability, which led to institutional instability.
A third factor to add to the mix is the exposure of Argentina to foreign investors (especially the UK): Since it reached its independence much later than the US and was farther from the UK culturally and geographically, its industrial revolution came much later. By the time the UK was rich (and could invest), Argentina was still an agrarian society, so it couldn’t invest in itself, and most investment came from the UK. This exposed Argentina to foreigners, which bred insecurity and a desire to become self-sufficient. This can be seen in the nationalizations, the taxes to both imports and exports, the policy of import substitution, the overfunding of national industries, the protectionism…
Many of these had a dramatic impact on industry:
Oversubsidized by the government
Protected from foreign competition
Worker compensation too high
Suffered from peso overvaluation and inflation, making costs higher or investment unpredictable
Low access to foreign investment and tech
Competition from state-owned enterprises
Low economies of scale
Corruption
That’s why Argentina’s industrial base is so much weaker than it could be
All of these mistakes highlight how amazing the work of the Asian Tigers has been. But also how different their conditions were: All three Tigers emerged from mid-20th Century wars with strong anti-Communist governments and dirt poor societies that only wanted one thing: work to escape poverty. They didn’t suffer from agricultural booms and busts, and didn’t have a bias against international trade. Argentina didn’t go through any of that. Its experience was one of wealth and inequality.
I think all of this goes a long way explaining why Argentina is poorer today. But it’s not all. The country has weak institutions, corruption, and a history of coups and dictatorships that can’t be fully explained by the economics. We’re going to look into that next, as well as:
How Milei and his measures fit into all of this
What I’d do differently if I were him
And, in the case of South Korea, after the Korean War.
57% of immigrants ended up working in farms. That’s several million.
Land was originally distributed by the Spanish Crown to a few owners. Later, when Patagonia was conquered, land was distributed among its officials and partners.
It’s not a coincidence that the Hyundai car company has the same name as Hyundai steel company. They both belong to the same chaebol. Samsung, Posco, Hyundai, LG, Kakao, Hankook… They’re all chaebol.
Anasagasti, Crespi Automotive, Hispano-Argentina, Siam Di Tella, Industrias Aeronáuticas y Mecánicas del Estado, Industrias Kaiser Argentina, Tito, Industrias Eduardo Sal-Lari, De Carlo, Dinarg, CIDASA, Alcre, Autoar. A good example of the problem is Siam Di Tella, whose failure to compete was absorbed by the government. IAME simply closed rather than being absorbed by a competitor. Kaiser was sold to the French Renault. Sal-Lari went down without a sale too. All the sales or mergers I could find were with foreign automakers.
The first three are still standing.
Subsidies to Tierra del Fuego (focused on electronics) accounted for 0.8% of GDP
That was not always a
I like to see trade unions as a tool, rather than something good or bad. Like a knife, they can be used for good or bad. What they do is concentrate workers’ negotiation power. This can be good when employers have too much power and can extract undeserved amounts of wealth from companies, but bad when they give employees enough power to extract so much value from companies (or entire industries) to drive them out of business. Between these two extremes lies the right balance.
Originally, CGT was formed so that no alternative, more radical unions could emerge. This made sense in the Cold War world of the 1940s and 1950s, where communism was lurking. One union was easier for the government to control and ensure that it’s not communist. But it also gives that union immense power, which it wields to this day.
The average weeks of severance pay are higher than in Mexico, Brazil, Colombia, Perú, and even the richer Spain. Contributions to Social Security are similar to those of Spain, a country 85% richer per capita than Argentina. Redundancy notice in Argentina is the highest of all comparables i could find. Now, it’s good as a society to live a better life as we become richer, so I’m in favor of good benefits for employees. But some of Argentina’s worker protections are higher than comparable Mexico, and even than much richer Spain. More importantly, some of these protections are good for the economy, and some are not. If your social security costs are too high, you are hindering employment, so that money better be used thoughtfully. Many times, it’s not. A more egregious issue is severance. I think it would make much more sense to force employees to save a share of their income into a savings or investment account (so they can access it in the case of a dismissal) rather than forcing a lump sum cost on employers when they fire employees. The latter disincentivizes firing, which we shouldn’t do, because if somebody is not productive, this person would be better employed elsewhere where they can be more productive.
France also had banks in Argentina
Imagine the first year you make $100. According to this rule, you can spend only $3, and next year you might have $102 because you invested well and made $5 from your initial investment. Imagine that continues for 10 years, you have now accumulated $122, and can spend $4 every year. In the 11th year, oil prices increase by 5x, and you make $500. Now your sovereign fund is worth $622, and you can spend $12. Although it’s 3x what it used to be ($4), it’s also ~40x less than what the country would have spent without this rule.
This reminds me of the Resource Curse: When countries have some natural resource that makes up a big share of the economy, the rest of the economy withers because institutions get worse (they just need to capture the source of the income to function), all skilled labor gravitates towards that resource extraction, and the injection of cash makes all jobs more expensive, rendering other industries uncompetitive. To be clear, Argentina doesn’t have a resource curse, because agriculture is not like mining or oil extraction: The latter are performed in points (the mines, the extraction points) which are easy for the state to monitor and(and hence tax). Meanwhile, agriculture is a surface industry: It doesn’t generate wealth in a single point, but across a broad surface. Surfaces are much harder to control than points. They also have different local conditions, so they’re harder to monitor. Local conditions require local know-how and are harder to replace. All these reasons make agriculture harder to control and tax than mining. That said, it does share the same effect of inflation.
Technically, foreign currency. But it’s easier to just say dollars, and most of the time, it’s still accurate.
The government emits new debt. If it’s free-floating, it will be forced to have higher interest rates than US treasuries, so it will lose money on the trade. This can burn a lot of government income. So the government might be forced to demand banks buy this debt, or else keep huge reserves, none of which are ideal for banking profitability.
Something similar happened with the Kirchners: They increased the monetary base by 20-30% per year in the 2010s, to finance energy subsidies that accounted for 3.5% of GDP! Government employees increased by 65% between 2003 and 2015 (government should grow more slowly than population, as it becomes more efficient. Instead, the population grew by 13% in that period). In parallel, a commodities boom in the 2010s had disappeared by the mid-2015s. I asked ChatGPT what happened with President Macri in the late 2010s, and it said there was a government deficit because of low income (low soy exports due to a drought plus export taxes that had been cut) and high costs (high energy subsidies, above 5% of GDP, which Macri tried to shrink, but wasn’t able to do so fast enough). He was nearly able to balance the books before interest, but with interest, the deficit was nearly 5%. He refused to solve it by printing money (good on him) and instead emitted debt, but Argentinians didn’t want Argentinian debt (I don’t blame them), so Argentina emitted debt for foreigners. A lot of it was short term, and when the US increased its interest rates, a lot of investment moved from risky Argentina to less risky US. With all this peso selling, the value of the currency dropped, so imports became more expensive, and this caused inflation. Macri got the IMF to finance it. The government defaulted in 2020.
Argentina defaulted in 1955 at the end of Perón’s first term (which ended in a coup).
Another default happened in 1976, just after the boom and bust we discussed earlier.
Another one in 1989, after the cycle we described above.
Another one in 2001 during Fernando de la Rúa’s presidency, just after a liberalization decade of Carlos Menem.
Another one in 2014 under the Peronista Kirchners.
Another one under Alberto Fernández in 2020, a Peronista that came just after Macri.
This essay is quite different than your previous ones. You usually have a relatively straightforward thesis concerning geographical determinism. This essay is much more comprehensive with social-economic and governance factors, but it’s also necessarily less lightbulb-over-head insightful.
It doesn’t seem like Argentina did anything particularly “wrong” it’s just that they did and continue to do everything wrong.
But it’s all motivated (I think that subtext is in your piece) from the baseline inequality that plagues South America in general, combined with the populist and revolutionary type movements that are in constant tension with the old monied landholding elite. Anybody who’s read South American literature knows this.
Beyond the culture and history, I would also posit that South America occupies a special, maybe privileged position in space and time. The geographical distance from the rest of the world is striking.
It was spared the destruction and renewal of the word wars. It didn’t have the first mover advantage of places like the U.S. or the UK but also didn’t have the knowledge and clean slate position of the Asian tigers.
South America (especially Argentina and Chile) has its own systems based on history and geographical isolation that kinds of meanders and limps along. Democracy, socialism, populism, conflict, peace, the 19th, 20th, 21st centuries…it all seems to average out to a middle income - mid level stasis.
People there do tend to be happier than in the rest of the world. So that’s something?
TL; DR: People don't need help from the government, they need the government to get out of the way.