The Economist: An economic lesson from Argentina

I’m just home from a month of travel in South America – Argentina, Uruguay (only briefly), Chile and Brazil. The trip was very interesting from a traveler’s point of view, but it was absolutely fascinating for an economist.

Today, all four countries are listed as Upper Middle Income by the World Bank, although the differences are significant. Per capita output (GDP) adjusted for the purchasing power of the local currency ranges from $12,000 in Brazil to $18,200 in Chile. By comparison, per capita GDP is $49,800 in the U.S. and $102,800 in Qatar, the world’s richest country.

In the 1500s, the Spanish established colonies in Argentina and Chile, while the Portuguese established a colony in Brazil. Argentina declared independence in 1816, Chile in 1818 and Brazil in 1822.

Here is where history gets really interesting for an economist. Agriculture in Argentina expanded rapidly, foreign investment poured in from Britain and immigrants came from throughout Europe. From 1880 to 1930, under a modern constitution and a national unity government, Argentina became one of the world’s wealthiest nations. At the beginning of the 20th century, Argentina was the seventh richest country on earth and “As rich as an Argentine” became a byword.  

Today Argentina’s economy has fallen to 67th, below not only Western and Eastern Europe, but below South Korea, many Arab nations and several countries in Africa. Brazil, one of the BRICs (at the same stage of advanced economic development as Russia, India and China), has seen its economy grow roughly seven-fold since 1980. Argentina, by contrast, is only up four-fold.

What went wrong?

During the Great Depression of the 1930s, Argentina’s growth slowed, government became unstable and a military coup in 1943 ousted the constitutional government. Under Juan Peron, who was elected president in 1946 and again in 1952, industries were nationalized, workers unionized and five-year plans based on the growth of the nationalized industries were introduced.

As the economic situation worsened, Peron was temporarily overthrown, but returned to power in 1973. Economic problems persisted, violence escalated and people were imprisoned indefinitely without being charged. A military coup occurred in 1976 and a junta ruled the country until 1983. During this period, between 9,000 and 30,000 people inexplicably disappeared and economic challenges increased.

In 1983 democracy was restored. However, economic instability continued, including hyperinflation, with prices rising more than 2,000 percent annually. In March 1990, inflation peaked at 197 percent per month. The ultimate impact of hyperinflation was that it took 100,000,000,000 pre-1983 pesos to equal one 1992 peso.

In 1992, the peso was linked to the U.S. dollar, protectionist trade and business regulations were dismantled and far-reaching market-based economic policies were implemented. Investment, growth and stable prices ensued through most of the 1990s. However, persistent allegations of corruption undermined confidence in government and the economy, culminating in a four-year depression and financial panic in 2001.

Since then, the economic situation has improved, although inflation has soared to 25 percent (2012) and we were advised by friends to change dollars to pesos at the street rate of 7/1 rather than the official rate of 4.5/1. Shades of the Soviet Union in the 1980s!

Is there a lesson in this for the United States? I certainly don’t buy the blog hype suggesting we are headed for hyperinflation and economic collapse. But it is clear from the Argentina experience (or Brazil or Weimer Germany or Zimbabwe) that eventually the over-creation of money leads to inflation. And that sound market-based economic policies and a functioning democratic government are prerequisites for economic growth.

I hope Congress and the Federal Reserve are paying attention!