Argentina, the land stretching down the east side of South America and conjuring images of cosmopolitan cities, grass fed beef, Malbecs, the flat Pampas, and the mountainous Andes. It is a country full of abundant resources yet for the last century Argentina has been an interesting case economically because it could be argued that they have lost their way.
In part III, we explore how they were affected by external shocks in the 20th century and how this helped and perhaps hindered their economy.
C Thomas: The 20th century was dominated by world wars, depression, and the development of post war global trade . The world of isolationism decreased while global interconnectedness grew. With the fall of the Soviet Union in the last decade, the world was largely open for trade just about anywhere except for North Korea, Venezuela, and Iran, just follow and find McDonald’s. Global standard of living went up dramatically as hundreds of millions of people were pulled upward and out of poverty. Argentina was poised to be one of these nations that would take the next step and be a leader in growing the livelihoods of their citizens but it didn’t work out that way.
I again want to reference the paper Introduction to Argentine Exceptionalism and give credit to the authors Edward Glaeser, Rafael Tella, and Lucas Llach. They discuss how external shocks were the third key component to Argentina’s poor economic performance over the 20th century and we will investigate that, but I want to take it further and discuss their response function and how they reacted to these shocks particularly.
The first half of the 20th century was marked by two world wars sandwiching a global depression. At the onset of WWI, Argentina was reaching its zenith on the global stage. Its commodity prices were generating large cash infusions to the country, and foreign investment was pouring in primarily from Europe to develop a reliable food source trading partner. What the first war did was divert funds from funneling into Argentina and into supporting the war efforts. As we discussed, the political landscape in Argentina changed in 1916 as the radicals took over with progressive ideas and they had a lot less focus on building an economic powerhouse in South America. When they were ousted by military coup in 1930, the external capital investment had already begun to dry up and the depression only exacerbated the export woes. In essence, Argentina was living on its past successes, and it wasn’t feeling the extreme hardships that other countries felt. Germany for example, dealt with the Weimar hyperinflation as it struggled under the unfair repayment terms of the Treaty of Versailles. Europe was rebuilding, and Argentina wasn’t hungry but comfortable as the depression didn’t affect them nearly as harshly as other countries. As the former boxer Marvelous Marvin Hagler said, “It’s tough to get up and go for a run when you are sleeping on silk sheets.” Argentina didn’t have the destruction of the wars to bring about a change in their mindsets so they never had to reset their intentions about which direction their country should go.
This unambitious mindset, shall we say, paralleled major changes in the international landscape. The demand for other goods became more important than food because technology had allowed food to grow in abundance. The real price of wheat fell 75% from 1920 to 2005. In essence, the world got really good at growing food with the use of fertilizers, largely leading to being able to grow a lot more food on fewer acres. Argentina had an abundance of acres, but they weren’t comparable in quality to the American Midwest or even later to the Ukrainian breadbasket. One of Argentina’s main exports was suddenly in less and less demand – globally -. Because Argentina had positioned itself so well with its agriculture in the late 1800s, it actually was uniquely positioned to make the step into moving up the ladder from agriculture to further value-added industrial goods. Argentina did not take advantage of this fact and could not join Europe nor the United States in this economic advancement.
Instead, the wealthy, which controlled most of the country’s internal capital, was investing in rent seeking at the BNA, the Argentine National Bank. They were pursuing a rent seeking model of using social and political influence to generate returns. This is a far cry from reinvesting capital from grain and beef sales into factories, mechanical production, or technological improvements. It also created internal markets for products that simply were not up to the standards of the day internationally, so there would be little demand for them in an export market. If you have a government that mandates that you must buy something internally, then producers don’t have to create the best product. They produce something good enough to appease the government bureaucrats that you are fulfilling their mandate. That was a very inefficient way to proceed as a country in a world that was increasingly being more globally interconnected. The low education standards and low upward mobility of the lower classes made it hard for entrepreneurs to create new products and services and move up the economic ladder.
While the lower class was not incentivized and the upper class was rent seeking, leaving the government to provide the capital for large infrastructure projects. . This is why when Peron took over, he used government funds to build major infrastructure projects: There weren’t Rockefellers, Carnegies, and Vanderbilts in Argentina investing in such projects. The Henry Fords of Argentina would have required a banking system that would encourage capital investment, and this was simply not a priority at the time. The other factor serving as a delimiter was the lack of education as Argentina was behind other advanced nations by 40% in years of schooling of its citizens as late as 1960. This disparity could have led to a dearth of entrepreneurs due to not having exposure to the ideas and concepts necessary to make technological progress.
Lastly, Argentina chose a very bad time to go isolationist under Peron with the import substitution industrialization because global trade was exploding. Had they had some industries able to export during the late 40s and early 50s, they would have had an entire world rebuilding from wars that stretched from Normandy to Japan. This was a missed opportunity for certain as Argentina had invested decades earlier, but they missed another chance as the 50s and 60s came to a close. Rather than maintaining isolationism, they could have developed their industry from a far higher starting point than Japan or Korea did after their wars. Had they began much later than America and Europe they would still have had a leg up on the Asian countries. Once again they missed the opportunity as the Asian countries turned themselves from some of the poorest on earth to the most technologically advanced in just two generations. They exported TVs, VCRs, and smaller cheaper cars amongst other products that the world bought in great quantities. While Europe created some of the best brands and technologies on earth during their rebuild like BASF’s chemicals and plastics in Germany or Airbus in France. This was driven again by the fierce determination that abject poverty can bring. Parents’ focus on education created some of the world’s most advanced electronics, car and technology companies on earth. This recreation mirrored America’s expansion of its industries after their worst moment, the American civil war. In the short two generation span from countrywide destruction, America was rebuilt in such a way that they could provide the winning boost industrially and economically for the Triple Entente powers of Britain, France, and Russia to defeat the Triple Alliance.
In short, Argentina never had to suffer enough to develop resolve. In the worldwide game of thrones, every country is always advancing or declining. Their isolation, geographic and policy-wise, hindered their ability to keep up with the Jones’. Other nations put a larger focus on education and internal capital investment than Argentina, and they carved out a unique niche in global trade. It was simply the mindset of the people that was different. The Asians and Europeans built great industries in the second half of the 20th century and advanced beyond the static Argentina. The authors explore how external shocks affected and limited Argentina’s growth, but I believe it was the lack of external shocks that limited their growth. If Argentina would have been destroyed, how would their priorities have changed? Would their kids have become more educated; would they have been forced to become entrepreneurs and develop different skills than just working for the government or at union jobs that provided just enough. Would this shift have pushed them away from a centrally focused country to a country of citizen achievement? We will never know, but what we do know is the result: a half century and counting of inflation, currency nightmares, and declining standard of living.
Austerity: Thank you C Thomas for that comprehensive background. Do you see similarities to our current world?
Austerity: I see the parallels in America today because we have been sitting on our laurels for a couple generations. I like to think that Americans today sit on the shoulders of giants, the giants that built this country. That doesn’t make us taller and able to see better on our own, it simply makes us vulnerable when we get put down into our rightful place as we currently reside in undeserved heights. Is it any wonder that we are starting to have unpeaceful transfers of power, inflation at 40 year highs, expanding government spending, an increasing amount of the people working for the government, yes I’m referring to the 87k new IRS agents. Have we not learned anything from our history, can we not learn anything from Argentina? Emilio Estevez playing Billy the Kid once said in the movie Young Guns “You have to test yourself every day, gentlemen. Once you stop testing yourself you get slow.” Even countries that got tested and got defeated, managed to rebuild their countries to far superior economies than Argentina has become.
What happened to Argentina’s prosperity wasn’t the effect of external shocks from the rest of the world, but the lack of shocks altogether. It is the opinion of this humble scribe that Argentina got slow, and America hasn’t had a shock or at least one that it didn’t get bailed out of in a very long time and America is getting slower by the day. Next week we will look at how Argentina became slow with some of the particularly onerous policy choices that they made.
Sincerely yours,
C Thomas Printer
Paper mentioned: Introduction to Argentine exceptionalism (hbs.edu)
Clip of Billy the Kid: Young Guns (Test Yourself scene) – YouTube