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.
We want to learn from history here at the C Thomas Printer Cooperative and therefore on this series, we will look to the past to try and find lessons and parallels for us to apply to our lives today.
C Thomas: I like to think of a quote that I heard from Charlie Munger “The same man never enters the same stream twice.” This might have predated Charlie, but I believe it to be very constructive as we look at Argentina. The generations have changed, the technology has changed, but the fundamentals of money and debt and people incentives does not.
I again want to reference the paper Introduction to Argentine Exceptionalism and give credit to the authors Edward Glaeser, Rafael Tella, and Lucas Llach. It was their paper that sent me off down this rabbit hole and stimulated my research into trying to link the past with the present.
In part I, we discussed how Argentina became so wealthy by the dawn of the 1st World War and we posed the question: were they as wealthy as we are led to believe? They benefited from some fortunate timing of prices of the goods that they exported, but also across a lot of metrics they had a pretty wealthy country. However, we also talked about some headwinds they had at the time to future progress like education, opportunity for all, and incentives.
Today’s focus will be on the second main theme of the authors which was bad institutions and how they compare to our institutions today and see if there is anything we can learn. In terms of what we are investigating we mean primarily political institutions because of the combined effect of monetary and fiscal policy that they can influence. Argentina in the 19th century was a republic like the US but it had certain differences. In contrast to America which also attracted large immigration inflows, Argentina didn’t offer an Argentinian dream that was nearly as achievable. As we discussed the wealthy landowners had more clout and carried more political influence. Workers and immigrants didn’t participate in the country’s success. Immigrants struggled to assimilate, as they faced headwinds to become citizens. This top heavy environment of have and have nots would be exploited by politicians for the next 75 years.
While the wealthy concentrated their wealth in a corrupt national bank BNA trying to preserve their wealth and protect it in a series of social and political influence aka rent seeking. This inequality opened the political window to enflame the passions of the masses. Argentina politics began to take a turn toward extremism during 1916 when the conservative party was ousted by the radical left party. They went off the gold standard and the fiscal discipline it commands in 1929. The radicals would hold power until 1930 when a military coup brought down the radical party. I love what the authors wrote in their paper “Argentina had accepted regime change by the bayonet instead of the ballot.” The period of peaceful transitions of power in Argentina had concluded.
I want to reinforce this key point about political institutions in Argentina. Looking back in history, a very underrated thing happened between the second and third presidents of the United States in that there was a peaceful transfer of power from John Adams to Thomas Jefferson, once friends but upon opposition were bitter rivals. This was a change of vision, ideals, and policies and in history this almost always included bloodshed, but this was one of, if not the first, peaceful transitions of power in history. This is now a hallmark of stability in many countries but in the age of monarchies and dictators was extremely rare. These peaceful transitions have continued in the United States until 2020 and the capital riots when Joe Biden took over, and were certainly a black mark on the reputation of the United States globally. Argentina would have much larger stains on their political history.
We have discussed in the previous episode the capital investment made by Europe into Argentina in the late 19th, early 20th centuries, and how it had largely dried up while Europe fought and paid for World War I. Any chances of foreign capital investment dries up when a military coup takes place in a country for the simple reason that Warren Buffet’s mentor Benjamin Graham always calls the first rule of investing: preservation of capital. If you think that a government can take over a country, what is to stop them from taking over your investment or seizing your money? Since Argentina had laid the precedent for a military takeover of power, it was no surprise that in 1943 another military takeover took place that began the Peron era of Argentinian politics. One of his first orders of business as president was nationalizing the railroads: French and British cementing the end of foreign investment in the country.
Juan Peron contributed to the coup d’etat as a party member and became the Minister of Labor. Promising land, higher wages, and social security to workers catapulted him to the presidency in 1946. Remember when we said there was lack of upward mobility incentive in the preceding generations? Peron recognized the shift that had begun in the previous decades away from the elites and pulled the oldest trick in the political playbook- give people free stuff and they will vote for you. As the practices continued, the middle class grew during the early years of Peron’s reign as he redistributed wealth. Argentina further alienated itself from global trade as a policy of import substitution industrialization began. This policy promoted self-sufficiency and eschewing imports and expanding domestic industry instead. However, the very reason their export market was drying up is that the world was having to rebuild and couldn’t import Argentinian goods. Asia, Europe, and America were struggling with very high inflation coming out of World War II. Argentina had no such issues, and their foreign reserves appreciation enabled them to eliminate their foreign debt. How fortuitous for Peron, and he expanded these policies unopposed. This was disastrous long term because it cemented these unproductive import substitution policies and indicated they were effective when they weren’t effective at all. Do you know anyone that owns an Argentinian made car, radio, or washing machine?
It got worse under Peron as he expanded the nationalization efforts by spending on internal capital projects like rail line expansion and power generation. The purchasing power of the people declined for Argentines in the 1950s and boy does that sound familiar today. Austerity, Who is supporting the chip industry today?
Austerity: Government.
C Thomas: Who is providing all the tax credits for large companies to move?
Austerity: Government.
C Thomas: Who is building EV infrastructure?
Austerity: Government.
C Thomas: The more the government involvement, the less purchasing power for its citizens.
After Peron, Argentina next tried to become an oil producer with Arturo Frondizi in 1958, but it wasn’t really an oil rich region, and so as it was forced to import energy that added to the inflationary pressures the country would face. Another coup in 1966 brought a shift back to state-controlled policies. Wage controls were instituted and by 1969 huge riots were threatening to overwhelm the cities. A wage price spiral ensued, and the inflation genie was out of the bottle for good. From 1975-1990 real per capita income fell 20% as inflation averaged 300%. Import substitution industrialization was declared failed, but the underlying issues remained. Government spending grew while wages grew and there was still inefficiencies due to technological, educational, and lack of incentive policies. In the 1980s, inflation reached an annual rate of 1000%. My god man, go grow some cocaine and sell it to Miami like Colombia or something!
This is only partially in jest. You see, Argentina had the violence of the drug wars without the money. All told there were 6 military coups in 36 years over the 50 years since Argentina chose bayonet over ballot. The country went from one of investment and relative stability to a violent economic pariah. Inflation grew slowly at first and then more quickly through the militant and centrally controlled years until 1983 when democracy was restored. Since then power has transitioned smoothly, but there has been nothing smooth about their economic performance.
Argentina has since experienced hyperinflation with the ensuing riots of hurting people. From 1998- 2002 , Argentina experienced a crisis so bad that there were runs on their banks and the economy contracted 20% in just a four year span. The peso lost 75% of its value in 4 years and poverty peaked at over 50%. Argentina GDP per capita has plunged over the last 100 years from 85% of the US to less than 30%. They have oscillated between issuing new currency, devaluing the old currency, experiencing high inflation, and the government spending beyond their means leading to fiscal deficits. They have failed to realize the fundamental source of inflation- government expansion of the money supply. Nothing more and nothing less.
Austerity: Fiscal deficits, hmmm, where have I heard that term being a problem before, C Thomas?
C Thomas: In the US, in Europe, how about England? Have we already forgotten about Liz Truss’ economic plan? Ohh, poor Liz Truss…
Austerity: You threw in a lot of information C Thomas. Can you summarize all these pieces and give us a summary maybe?
C Thomas: Government’s unproductivity intrusion into private enterprise, lack of government fiscal discipline, a lack of political stability and transition of powers, a shift from private sector reliance to government reliance for economic development, and lowered individual productivity due to lack of incentives all led Argentina into a unique stagflation at best and hyperinflation doom loop at worst. Because of ego, we often think that we are different or that we are special, but the fundamentals of debt and money remain the same. If we look around the world today we see that Argentina might have simply been the leader as these same issues are developing in countries around the world. Next week we will investigate some of the bad international shocks that may have handcuffed Argentina on finding its way back to prosperity before we dive into some of the real deleterious policies of their recent history. Back to you Austerity. Austerity?
Austerity: I’m sorry C Thomas, I was investigating and comparing Maradona to Messi as we ramp up to the World Cup 2022 later this month. My answer is Messi.
Paper mentioned: Introduction to Argentine exceptionalism (hbs.edu)