Monday, 4 March 2013

Argentina: The country that failed to rise

Having just come back from a 2-week holiday in Argentina, I wanted to do a recipe which demonstrated Argentina’s unique economic situation.
            Its early days but it’s already been a tough 2013 for Argentina. The year had barely started when Argentina heard it had made the top ten ‘miserable nations’, according to the Global Misery Index (a ranking based on a country’s inflation and unemployment rate).  The Argentinean president, Cristina Fernández de Kirchner, has struggled to negotiate price freezes with major supermarkets in an attempt to combat the country’s intense inflation. These are just the latest in a range of failed measures and the inflation rate now stands at 25% according to economists. Yet the government stubbornly insist that the rate is no higher than 10.8%. This refusal to engage with reality has, after many threats, earned Argentina a declaration of censure from the IMF, as well as causing its black market dollar rate to hit an all time high. Not a great start to the year.
            Hopefully this will provide some context to the recipe I picked up in Argentina this January*. Travelling around, the more people I spoke to, the sadder I felt for those living in this beautiful country.  There was very little optimism and widespread dissatisfaction with the de Kirchner government. I wanted to understand how a country which showed so much promise at the turn of the 20th Century, with all the ingredients for success, could fall so flat. To better understand Argentina’s failure to rise, I’m going to compare it to a very successful country with a very similar set of ingredients; the United States. Argentina is traditionally compared to Australia and Canada but I wanted to... (please forgive the cooking pun) mix it up. Let’s take a look at their shared ingredients:
o   An abundance of fertile land
o   High rate of European immigration 
o   A constitutional presidential system
o   Civil War  

          The first shared ingredient is an abundance of fertile land which gives the country a comparative advantage in agriculture. While vast tracts of land were a common enough feature in the America’s, the quality of Argentina’s land was a differentiator. Argentina’s vast pampas covers more than 295,000 square miles and with a mild climate and evenly distributed rainfall, it is ideal for agriculture. So much so that by the 1920’s 99% of Argentina’s exports were agricultural and totalled more than $1billion.The United States had a similar comparative advantage. Indeed they had such a profusion of land that the government issued 160-acre tracts for agriculture virtually free to about 400,000 families under the Homestead Act of 1862. The abundance of land and the temperate climate meant that by the 1920’s the US was exporting agricultural good worth $1.94 billion (although this accounted of only 42% of total exports).

         The abundance of arable land, together with the addition of the second ingredient, labour, was enough to provide a platform for growth. In their initial stages both the United States and Argentina were scarcely populated, relative to their size, and thus relied on immigration to fill and work their productive farmland. Argentina was particularly successful at this; Argentina’s population rose from 4 million in 1895 to 7.9 million in 1914, and to 15.8 million in 1947. This rapid supply of labour created a significant boost to growth when combined with capital and fertile land. The Unites States experienced a similar phenomenon (although immigration had been taking place for a considerably longer period in its case).  It acquired 25 million new citizens over the period 1850 to 1930, again mostly from Europe. The US, like Argentina, relied on immigration to provide the changing demography necessary to take full advantage of its natural resources.

            These two ingredients created a catalyst for growth in both countries’ economies’, although the effects were more striking in Argentina.  Argentina’s growth between the 1860 to 1930 period was so impressive that it was expected to eventually become the Untied States of South America. GDP per capita rose from 35% of the United States in 1880 to 80% in1905. By 1913 Argentina’s income per head was on par with France or Germany's and far ahead of Spain’s or Italy’s. So where and why do these similar recipes diverge? Why did the promise of Argentina fail? The trouble lies with the final ingredients. Although Argentina managed growth for seven decades, we shall see that the seeds of disaster were already sown and would manifest themselves in the Great Depression of the 1930’s.

            Let’s start with the presidential system, one in which a president is both head of state and head of government. This particular ingredient can be notoriously difficult to work with. While the US’s presidential system has created one of the world’s most stable democracies, the same cannot be said of other countries who have adopted it.  Indeed the presidential system has been referred to as; ‘America’s most dangerous export’. This is because it gives broad powers to the executive branch the power to veto bills, appoint cabinets, and crucially to assume emergency powers. While, this has the advantages in terms of speed and decisiveness it can lend itself to authoritarian government. The US’s well developed system of checks and balances at both federal and state level have helped it avoid these problems. However, Argentina did not have strong legislative and judicial branches or even local government to act as a check on its executive branch. Indeed, Peron, following the first coup in 1930, impeached the Supreme Court, entirely eliminating the judicial branch as a check. The 1949 constitution then destroyed the separation of powers. This sealed the fate of Argentina’s presidential system. Without a history of stability the system could not develop the checks and balances it needed to prevent the political instability Argentina has suffered since the 1930s. 
            This historical instability is the result of a final ingredient; civil war. While both countries endured civil wars during the 19th Century, Argentina’s was considerably more damaging. While the US’s civil war lasted only four years, its resolution ended uncertainty and provided a platform for stability. In Argentina however, the Civil war lasted more than sixty years and seeded political and economic instability which would resurface in the 20th Century. Gross devaluations in currency, over dependence on only British capital and corruption at the heart of the financial system (in the Banco de la Nacion Argentina) were just some economic manifestations of this lack of stability.
            These two final ingredients, a presidential system and instability resulting from years of civil war, come together to create an underlying political instability and institutional weakness. This then became manifest during the Great Depression of the 1930’s when a military junta pushed aside Argentina’s fragile democracy, ending seven decades of constitutional government. Since then Argentina has suffered numerous coups and dictatorships and has fallen into long term decline. Peron, who took power following the coup, cut Argentina off from international trade and adopted a strict policy of import substitution. While many countries became increasingly protectionist during the downturn, for example the US introduction of the Smoot-Hawley tariffs, few cut themselves off to the extent Argentina did. The resultant push towards an industrial economy, created a misallocation of resources and without investment Argentina lost its comparative advantage in agriculture; sales of beef and grain stagnated. Successive governments, trying to placate Argentina’s population intervened to keep prices low while keeping public spending high. This created the conditions for the spiralling inflation which has plagued Argentina for decades. It also led to a huge amount of foreign debt which, by the 1980’s, was the equivalent of 75%of Argentina’s GNP. New, often unelected governments would frequently change and add to Argentina’s legislation and this complex mix served to further dampen economic activity. As a result, by 1969, GDP had fallen to half that of the United States.
            There were attempts to pull Argentina back. It even briefly returned to democracy in 1983. However, Argentina continued to suffer and per capita income continued to decline; by 20% between 1975 and 1990. Corruption and civil unrest during the 1990’s led to a financial crisis in 2001 resulting in massive capital flight and deposit runs. While Argentina has returned to growth due to booming demand for commodities, it is still not growing as fast as its Latin American neighbours and citizens are not benefitting. High import and export tariffs, renationalisation of companies (such as YPF) and government intervention have all worked to discourage investment and fuel inflation. 
            It is strange to think that recipes with such similar ingredients could create such starkly different results. Argentina had a promising start but underlying instability doomed it to fall even before it had risen.  Argentina’s democracy was not strong enough to withstand the pressures of an increasingly competitive global economy. It then entered a downward spiral of institutional weakness, a trap from which it was difficult to escape. The United States, with its background of stability, avoided this. Is there a recipe for Argentina’s rescue? If anyone has any ideas for an Argentina raising agent, I would love to know!
*An economist’s travel tip: If you are planning to travel to Argentine, convert you travel money to dollars first. They are widely accepted and it could save you a lot in terms of the conversion rate!

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