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May 19, 2010

We Should Learn from Argentina, Not Try to Copy Them


 In 1900, Argentina was the 5th largest economy in the world.  They were the wealthiest economy in Latin America and like the US, Europeans immigrated to Argentina under the prospect of opportunity and personal wealth.  One hundred ten years later, Argentina is plagued by inflation, the largest sovereign default in the history of the world, and an economy that ranks in the middle of the pack, at best.

So what went wrong?

In politics conservative forces dominate the parliament until 1916, when the Unión Cívica Radical (UCR), popularly known as the Radical Party, wins a majority.”  This party was in power until 1930 when the military took over the government.  A second military coup in 1943 eventually led to the ascension of Juan Peron as President in 1946.  While the UCR opposed Peron, he took on many of the same liberal economic policies:

“In his first two years in office alone, he (Peron) nationalized the Central Bank, paid off its billion-dollar debt to the Bank of England, nationalized the railways (mostly owned by British and French companies), merchant marine, universities, public utilities, public transport (then, mostly tramways) and, probably most significantly, created a single purchaser for the nation's mostly export-oriented grains and oilseeds, the Institute for the Promotion of Trade (IAPI). The IAPI wrested control of Argentina's famed grain export sector from entrenched conglomerates like Bunge y Born; but began shortchanging growers when commodity prices fell after 1948.”

During the Peron years, the size of government also grew dramatically:

“Perón's government is well-remembered for its record social investments. Introducing a Ministry of Health to the cabinet, its first head, neurologist Dr. Ramón Carrillo, oversaw the completion of over 4,200 health care facilities. Related works included over 1,000 kindergartens and over 8,000 schools, including several hundred technological, nursing and teachers' schools, among an array of other public investments.  The new Minister of Public Works, General Juan Pistarini, oversaw the construction of 650,000 new, public sector homes, as well as of the new international airport, one of the largest in the world at the time.  The reactivation of the dormant National Mortgage Bank also spurred private-sector housing development: averaging over 8 units per 1,000 inhabitants (150,000 a year), the pace was, at the time, at par with that of the United States and one of the highest rates of residential construction in the world.

The above actually sounds eerily similar to the liberal economic policies of the United States.  Ironically enough, it is noted that during this era of big government and massive public investment, the private sector led the way;

“Using roughly half the US$1.7 billion in reserves inherited from wartime surpluses for nationalizations, economic development agencies devoted most of the other half to finance both public and private investments; indeed, the roughly 70% jump in domestic fixed investment was accounted for mostly by industrial growth in the private sector.”

These massive public spending initiatives, couple with a pegged currency (where valuations are determined by another country’s currency, forcing the fixed currency’s central bank to buy/sell reserves in order to stabilize the currency) led to devaluations and inflation.

“Exports fell sharply, to around US$1.1 billion during the 1949–54 era (a severe 1952 drought trimmed this to US$700 million), due in part to a deterioration in terms of trade of about a third. The Central Bank was forced to devalue the peso at an unprecedented rate: the peso lost about 70% of its value from early 1948 to early 1950, leading to a decline in the imports fueling industrial growth and to recession. Short of central bank reserves, Perón was forced to borrow US$125 million from the U.S. Export-Import Bank to cover a number of private banks' debts to U.S. institutions, without which their insolvency would have become a central bank liability.  Austerity and better harvests in 1950 helped finance a recovery in 1951; but inflation, having risen from 13% in 1948 to 31% in 1949, reached 50% in late 1951 before stabilizing, and a second, sharper recession soon followed.  Workers' purchasing power, by 1952, had declined 20% from its 1948 high and GDP, having leapt by a fourth during Perón's first two years, saw zero growth from 1948 to 1952 (the U.S. economy, by contrast, grew by about a fourth in the same interim).”

This was one of many bouts of inflation that the country had.  After Peron went into exile in 1955, he returned, only to become President again in 1973.  He died less than a year later and was followed by his wife Isabel.  The economic conditions continued to deteriorate;

Isabel Perón remains in power for two years, presiding over a decrepit economy with inflation running at an annual rate of 600%. The outcome, in 1976, is another military coup.

After years of massive sovereign debt, the country defaulted in 2001.  This led to violence and riots throughout the country along with total economic collapse and the fall of the government.  Despite this, the country has not learned its lesson.  In 2008, during desperate times, the government nationalized private retirement accounts and forced them to buy government debt in order to finance public spending.  Don’t think we’re headed down that road? 

After examining the evidence, there is only one reasonable conclusion to draw which caused Argentina to slip from the near-top to the near-bottom.  The only question is do they blame Bush in Argentina?