Argentina, from rich country to poor country

In the first third of the 20th century, it was one of the ten wealthiest countries in the world, today it is 63 (IMF, 2017). Why? The answer is socialism.

Argentina is one of the countries that has registered a greater economic deterioration during the last century. its transit of wealth to poverty could be summarized in the succession of three major stages: boom and development thanks to globalization, monetary stability and economic liberalization (from the mid-nineteenth century to the first third of the 20th century); the period between the wars, from 1930 to 1945, where the autarky and the protectionism were gradually imposed; and the rise of Peronism (1946-1955), whose legacy has survived since then, in one form or another, despite the succession of different dictatorial and democratic regimes.

One of the wealthiest countries in the world

Like other countries, Argentina was integrated into the global economy during the 19th century thanks to the commercial opening, the free movement of capital and monetary stability that imposed the then current gold standard. Argentina prospered substantially until 1930, attracting a large volume of foreign investment and human capital (immigrants).

After its independence process and a turbulent period of civil conflicts, the definitive emancipation of Argentina came with the Constitution of 1853, which established as basic principles the division of powers, equality before the law and absolute support for private property and free trade. The different governments that emerged from the Magna Carta strengthened the infrastructure, encouraged immigration and foreign investment and they guaranteed the strict compliance with its financial commitments.

To such an extent, this is how, in 1876, the then President Nicolás Avellaneda, faced with the risk of suspending payments, sent a firm message to his international creditors (holders of public debt):

The Republic can be deeply divided into internal parties; but it has but an honor and a credit, as it only has a name and a flag, before the strange peoples. There are two million Argentines who would save even on their hunger and thirst to respond, in a supreme situation, to the commitments of our public faith in foreign markets.

This period, characterized by commercial openness and economic freedom, is summarized in the following indicators:

  1. The population it increased from 3.3 million people in 1890 to 7.5 in 1913 (average annual growth of 3.5%). Almost half of this increase was due to immigration, mainly from Europe.
  2. The percentage of foreign capital it rose from 32% in 1900 to 48% in 1913, as a result of which Argentina then presented the most favorable economic and institutional conditions in Latin America for foreign investment.
  3. The accumulation of capital increased by an average of 4.8% per year from 1890 to 1913, allowing the per capita income to advance at a rate of 2.5% per year. The disaster of First World War affected, no doubt, the Argentine development, as a result of the collapse of international credit and the decline of the world economy, so that the accumulation of capital fell to 2.2% per annum and per capita income advanced by 0.8% between 1913 and 1929, but it did not prevent Argentina from continuing to develop until 1930.
  4. Until the First World War, its per capita income was similar to that of the US; It was one of the largest exporters of cereals and meat, to the point of representing almost 7% of all international trade; Argentina accumulated 50% of the GDP of all Latin America in 1913; the Average salary in Buenos Aires was up to 80% higher than in Paris, and when an immigrant landed in Argentina he earned almost the same as the one in New York.
  5. During the 20s it remained as one of the 10 richest countries on the planet, with an affordable and even superior wealth to that of most European countries, similar to France or Germany, and greater than Italy or Japan; the average wage was still higher than that of the Europeans. In fact, during the 1930s, the US, Canada, Australia and Argentina remained among the richest countries in the world, with a per capita GDP of around $5,000.

GDP per capita in 1913  from the USA, Argentina, France, Germany, Italy, Japan and Korea

The interventionism of the 30, the beginning of the end

The most developed countries at that time, including Argentina, presented -as now- a series of common grounds, among which the legal security, a stable institutional framework and, above all, the economic opening, a very small state, poor regulations and monetary stability. However, that open economy, favorable to capitalism, gradually gave way to state interventionism, economic nationalism (autarchy) and, finally, the Peronism (socialism) that, in one way or another, presides over Argentina since the 50s.

The 30 years they are known as the “Infamous decade”, as there were a series of coups that gave power to the military, who established growing economic interventionism, the autarky (replace imports by national production) and commercial protectionism.

In addition, mercantilism resurfaced again, where the State arbitrarily appropriated certain private resources to redistribute them among certain interest groups, thus favoring the elites closest to political power to the detriment of the free market. Then the exploitation of hydrocarbons it was under the control of the Government -the resources of the subsoil belonged to the States-, and political power began to intervene more and more actively in key sectors of the country, such as the production of meat and cereals.

That is, Argentina went from having an open economy and a small state to an economy closed to international trade and heavily intervened. To this, the abandonment of the gold standard and the adoption of Keynesian policies, based on fiscal and monetary stimulus (more public spending and low interest rates), to try to boost growth in the midst of the Great Depression. Although this is not something extraordinary at that time – many countries opted for similar policies – it is the fact that this type of practice extended and worsened after WWII  through the establishment of Peronism.

Peronism, the consecration of socialism

The military Juan Domingo Perón got the presidency in 1946, establishing the so-called justicialismo (“social justice”) until 195, together with his wife Eva Perón, who is still an icon in Argentina. His government not only maintained the practices of previous military regimes but, in fact, substantially increased state interventionism in the economy, extended mercantilist practices and established its particular socialist model, inspired by Italian fascist Mussolini.

Among other factors, the following stand out, as exposed José Ignacio García Hamilton, Professor of Law History at the University of Buenos Aires:

  • Nationalized several industries, such as electricity, gas, telephone, railways, urban transport, media, etc.
  • Subsidized union and business groups close to power.
  • He fired the public spending and incurred high fiscal deficits.
  • The surplus of the balance of payments accumulated during the Second World War (Argentina remained neutral and sold products to both sides) was not enough to finance Peron’s “populist practices”.
  • It was then that he resorted to massive debt monetization through the central bank, generating high inflation.
  • Rose the taxes to the export sector, to capital and, especially, to the rural sector, and it continued to impede imports through tariff policies.
  • Introducedrigid controls on production and the free hiring of services and workers; fixed prices in the rental market and suspended real estate foreclosures.
  • He created the Argentine Institute for Production and Exchange (IAPI), which eliminated private export companies and set domestic prices for crops below international prices. Then, the IAPI sold those products abroad and retained the difference to increase public spending.

As a result, the Argentine economy had already declined substantially by the middle of the last century.

The dictatorship returns, but not the free market

Perón was overthrown by a new military coup in 1955, but this did not prevent the basic features of Argentine interventionism from being maintained until the 1990s, even after the restoration of democracy in 1983. The alternation of authoritarian and democratic governments in the power did not change the mercantilist and socialist model that was gradually imposed since 1930.

As a result, the Argentine development was much slower and weaker than that of the rest of the advanced countries during the second half of the 20th century. In essence, a high public expenditure was maintained; substantial state control over the economy (nationalization of industries); the model of import substitution and, therefore, commercial isolationism; the unbridled issuance of money (high inflation);and a cultural indoctrination (in schools and universities) centered on nationalism, which fostered mercantilism and hatred towards foreigners (including foreign capital). And all this, in the midst of great political instability.

Insufficient reforms, corralito and kirchnerism

After the restoration of democracy (1983), the crisis worsened to such an extent in the decade of the 80s – with hyperinflation in between – that the Peronist Carlos Menem (1989-1999) attempted to reverse economic policy through the privatization of state-owned companies (such as YPF), a certain commercial opening abroad and the fixing of the Argentine peso to the US dollar to curb inflation.

Although the country managed to grow strongly during the nineties, the reforms were timid at the time of reversing the socialism of previous decades. For example:

  • The business privatization public was made by privileging groups close to power and, in any case, limiting to the extreme free competition by strict regulation and setting rates in the provision of services. That is, the monopoly remained intact in many sectors.
  • The commercial opening was limited to only some Latin American countries (included in Mercosur) so that national isolationism was replaced by regional isolationism. That is to say, Argentina remained closed to globalization.
  • The public spending It continued to increase: spending on the provision of public services was replaced by the increase in “social spending” (subsidies, subsidies, public benefits and aid), as a way of buying votes.
  • In fact, The State’s weight on the economy continued to grow: the public deficit went from 0.15% in 1994 to 2.4% in 2000, and public debt from 34% in 1991 to 52% of GDP in 1999. As a result, the external debt of Argentina – both commercial and public – increased substantially, making financing more expensive for the public and private sectors.

Since fixing the dollar tied his hands and feet to his central bank to print money and generate inflation (thus reducing the burden of external debt), Argentina decided unilaterally to declare default (unpaid) in 2001, which generated a bank run and the feared playpen of 2002.

Argentina Pais Rico a Pobre

Absence of freedom equals to poverty

The country today is in a terrible position in key indicators for economic development. Thus, Argentina is located in the ranked 113th in the world in terms of ease of doing business (Doing Business 2019 ), produced annually by the World Bank, out of a total of 183 economies, at the level of countries such as Ethiopia, Egypt or Kenya. It stands out, above all, for placing the thing in indicators such as the opening of companies (146), construction permits (169), registration of properties (139) or payment of taxes (144).

In addition, in a ranking that measures the respect for private property in 130 countries (IPRI 2018)Argentina is placed at position 79.

Also, the Institutional Quality Index (ICI 2018) places Argentina in the 119th position out of a total of 194.

62% of the countries obtain a rating higher than Argentina in terms of institutional quality. In the first positions of Latin America are Chile, Costa Rica and Uruguay; Argentina, on the other hand, approaches Nicaragua, Paraguay, Bolivia and Ecuador; the last positions are for Cuba, Haiti and Venezuela. Within this index, it records the lowest ratings in terms of economic freedom, functioning of the markets, monetary stability and legal security.

A century ago, Argentina was framed in the top ten of richer countries of the world. Today it is located in the ranked 63 in the world, according to the latest data from the International Monetary Fund (IMF 2017) and the poverty reached 33.6% of the population (UCA, 2018).

By Manuel Llamas, Spanish economist.

Originally published by Manuel Llamas at, 2012
Data updated by Libertad y Progreso, 2019.