Argentina’s Economic Decline - English

Viva la competencia

By Andreas Kern27.03.2015Economics

Argentina was once the economic pride of the southern hemisphere. There is barely anything left after a half-century of misrule. Europe can (and must) learn from this cautionary tale.


The distance between Santiago de Chile and Bueneos Aires is only one hour flying time: an hour that separates the future from the past. One travels from an emerging boom town, bejeweled with new theaters and hip shops, to a city where decline is ever-present, and just a century ago the picture was completely different.

For a long time, Argentina was a place of longing. A land of promise where milk, honey and red wine flowed plentifully. The state founded along the Rio de la Plata was the most affluent in the region, Buenos Aires the most sophisticated capital in the southern hemisphere. The Argentines looked upon their Chilean neighbors with disdain, taking them for backwoods peasants. The picture has switched: The former backwoods peasants now fly to Buenos Aires for discount shopping.

Since Argentina and Chile are disposed to similar geography, population make-up, and climate, the reversal in their relations is due mainly to political and historical causes. An important part is the quality of the government leadership.

Somebody has to pay for the free beer

Chile’s ascent is easy to explain: rising copper prices, hard work and ambition on the part of the people, as well as the reasonable economic policy, has brought the country forward. After its transition to democracy in 1989, the Andean state has been notably stable. There is a consensus between the progressive liberals and the middle-left government that economic growth is the basis of societal progress. Surpluses from of the copper mining industry are put into funds to be used only when the growth begins to slacken. The retirement system is attached to private savings and individual provisions.

Across the mountains, Argentina has hit rock bottom; the obscure economic policy of the erratic President Kirchner has once again accelerated the downward spiral. The decline began after the Second World War, with the election that put Juan Domingo Perón into the presidential office. When the military officer came to power in 1946, he reorganized the society. The newly designed economy was a mixture of nationalism, protectionism, and protected social benefaction. At the same time, the _caudillo_ created a network of dependents, corrupt unions, which are still today a pillar of Peronism.

Perón lost power in 1955, but all attempts to return to the country’s winning ways fell short. The Peronists had pillaged the country, corroding it with nationalism, nepotism, and an inefficient state economy. From the quarreling opposition rarely came any danger. Critics of Peronism had a hard time being well received against the cornucopia of Peronistic campaign promises. “Free beer for everyone” could have an Argentinian copyright.

Above all, there was “Evita”, Perón’s legendary second wife, who played brilliantly on the people’s emotions. Even today the actress is venerated as a saint.

Succesors of Perón were also more swayed by glamor and cheap sensationalism than by efficient work. This applies to the head of state in the 1990s, to Néstor, and now to Cristina, Kirchner.

The Kirchners have failed to whip the country into shape after the 2001 crash. Even worse, when the presidential pair from the southern province of Rio Gallegos took power, they restrengthened government control, protectionism, and the bureaucracy. Prestigious projects and high welfare expenses were financed through the profits from agricultural exports, and of course the steady rotations of the money printers. The Kirchners reacted to the inevitable inflation with price controlling; if they denied the rising prices, they could manipulate the respective statistics.

They imposed a strict regime over the peso currency, including controlling foreign exchange rates and allocation. Import bans and other obstacles also came into fashion. As a result, the black market boomed with foreign exchanges. And like the sword of Damocles, the wrangling between the Kirchner-government and the “vultures” (fondos buitre) still hangs over the _pampas_ state: Hedge funds, which bought up national bonds on favorable rates after the state claimed bankruptcy in 2001, now sue for a complete payback of 1.33 billion dollars plus interest.

The Peruvian Nobel laureate, Mario Vargas Llosa, put it succinctly: “The Argentinians have chosen in the last half-century their worst political options. To vote for Peronism, i.e. to mistakenly vote on preserving that mistake, in spite of the catastrophe in the modern history of Argentina, the Argentinians apparently want to be poor. The people are equally responsible for what has happened.”

Argentinization also threatens Europe

The negative example of Argentina should be a warning for the people of Europe, who also have the opportunity to vote for their own downfall. One who denies reform, expands bureaucracy, makes expensive campaign promises, all while lacking a moderate expenditure policy, is well on the way to argentinization. Even wealthy countries with a broad middle class and the best infrastructure, like the Argentina of the 40s and 50s, can start down this slippery slope. In Europe, unfortunately, many of the causes for the fall of Argentina are already present. Many of them stem from a reluctance to face global competition. Instead, there are those who lament the loss of the familiar Biedermeier and forget that the European welfare state is based primarily on the performance and hard work of previous generations.

Populists from the right and the left, like Hungary’s Viktor Orbán, France’s Marine Le Pen, Spain’s Pablo Iglesias, and Greece’s Alexis Tsipras and Yanis Varoufakis, with their tirades against globalization and the free market, their protectionist ideas, their theatrical performances, and their rhetoric somehow remind us of Argentina’s original sin: Perón. In Germany, populists from Gysi to Gauland may be less glitzy and glamorous, but their ideas remain dangerous all the same.

The established parties must make an effort to hold Europe on course. Never should we forget that everything one promises must be paid for somehow. Also, more government is often not the solution, but the problem. Consider the crumbling of a country like Argentina.

_Translated from German by Ben Hill_



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