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Argentina: Cruising For A Bruising

Cristina Fernandez won an overwhelming majority in Argentina’s elections over the weekend ushering in what she hopes will be her second four-year term. She has presided over a booming economy, but one that is built on shaky foundations. As the Economist reports:

Orthodox economists have long warned that Argentina’s economy was overheating. She [Fernandez] has ignored calls to step on the brakes, instead increasing energy and transport subsidies and social spending. And her central bankers have printed pesos freely. So far she has been vindicated: during her term the economy has grown by 6.1% a year. Inflation is high, although no one knows how high. Official statistics are doctored, and private estimates are a little over 20%. But the government has kept price increases steady rather than allowing inflation to take off, and has protected household purchasing-power by expanding pensions and welfare benefits.

This does not bode well for the future:

Argentina is losing $2 billion of capital a month. Although the official statistics put the investment rate at 23% of GDP, this total includes house-building, cars, air conditioners and mobile phones, as well as public works. According to Fausto Spotorno of Orlando Ferreres, a consultancy, “productive” private-sector investment has fallen from $35 billion in 2008 to $29 billion. Price controls have crushed Argentina’s domestic energy production, taking its energy-trade balance from $6 billion of net exports in 2006 to an expected $2 billion of net imports this year. Even Amado Boudou, the economy minister, says “no one should be proud” of this trend.

Argentina is one of the saddest failures in the world.  It is a country that has everything but somehow keeps ending up with very little.  Like a smaller version of the United States it has vast fertile plains, rich energy resources, and a great river system opening out into the open seas.  But Argentines have never built the strong institutions and embraced the sound policies that could turn all that potential into real and lasting wealth.

For the last sixty years, one flim flam artist after another has captured the hearts of the Argentines with economic gimmicks.  The couple at the center of modern Argentine political history, pro-Nazi dictator/populist Juan Peron and his glittering wife Eva, set the tone for decades of bad populist policy that frustrated Argentine progress even as it flattered Argentine hopes.  (Imagine an alternative America in which the place of Franklin and Eleanor Roosevelt was filled by Jimmy Hoffa married to Marilyn Monroe as the moral and political center of the twentieth century — and that the US military leadership was bloodthirsty and corrupt and overthrew Hoffa to usher in a rein of terror and murder.)

After the collapse of the last Argentine gimmick (under the disingenuous and crooked Carlos Menem), Cristina Fernandez and her recently deceased husband and predecessor in office restored Argentina’s growth, temporarily, by stiffing international creditors, stimulating the domestic economy through unsustainable spending, and riding the commodity boom.  Grateful voters have kept them in office, and as long as the good times roll, the poll numbers will continue to look good.

Argentina’s current growth bout looks like the latest episode in the long series of delusional economic ‘miracles’ that have seen Argentina slip from one of the world’s richest countries in 1900 (“rich as an Argentine” used to be a popular saying in France) to upper third world status today.  Each new miracle comes unglued, usually when commodity prices tank and the fall in export earnings exposes the weak underpinnings of the Argentine system.  Frantic inflation is one of the traditional signs that an Argentine pseudo-boom is beginning to come unglued; this seems to be one of the reasons that the current government reacts with such irrational, counter productive rage and vindictive fury against professional economists who say openly what every Argentine knows: the official inflation numbers are lies, intended to conceal the worsening real state of Argentina’s economy.

Argentina is like Greece: it is a country whose popular attitudes and instincts do not mesh well with the requirements of capitalist growth.  It is rich in the gassy and inchoate discourse of ‘alternative models’ and critiques of the injustice of the existing world system, poor in the production of sustainable economic development.  Chileans say that the differences between Chile and Argentina reflect demographics.  After the Spaniards, Germans were the most important European immigrant group in forming Chilean culture and identity.  In Argentina, after the Spaniards, the next largest group of immigrants were Italian, with many from the south.

Stereotypes have their limits, but Argentina is perhaps best viewed as a South Atlantic offshoot of Club Med; fortunately for the Argentines they are not locked into a currency union with Germany.  When the current boom fades like  so many others, the Argentines will be able to devalue their way out and can avoid the years of austerity and pain now facing the European members of Club Med.

That still leaves the question of whether and when Argentina will stop spinning its wheels.  It is hard to say; culture is a powerful force and culture changes slowly.  There are a number of countries with cultures that function poorly in a capitalist setting: think Russia.  Think Egypt. One cannot call these cultures “wrong” or “inferior”, nor does it make much sense for outsiders to dream up quick fixes.  But until these societies find way to develop the institutions and promote the attitudes that make sustainable growth in a capitalist world system more likely, they will be trapped in unsatisfactory political and economic conditions.

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  • Gordon Pasha


    Conservative analysis on Argentina has to sharpen considerably. These types of hatchet job pieces really look bad. If you do a google news search for “Argentina economy overheating” you will find articles already appearing in 2005.

    The reality is the continuous growth spell that started in 2002 and is still ongoing is the longest and largest in Argentine’s living memory (and possibly in history, it is difficult to get good numbers pre-1940’s).

    Now, there is no theorem that states that an economy cannot overheat for 9 years and then crash spectacularly, but there are few signs in the horizon that indicate trouble, at least imminently.

    Inflation of 20% (more likely 25-30%) may scare people in the US, but countries like Argentina have a lot of experience operating in that environment (no one, for instance, would write a Peso amount into a law, like one foolishly sees Dollar amounts in US laws and even constitutions!). They have built in many automatically adjusting mechaniss in how they operate. Inflation has been running at that level since 2007 at least.

    There are obviously other factors at play here, and I wish serious conservative economists would disentangle them. For instance, it could be that it is all gimmicks, as Walter claims. The default provided temporary respite in canceling interest payments. Then the government confiscated the IRA-style pensions Menem had introduced, so that gave them a bundle of cash to be repaid way in the future. Commodities may have helped (although academic studies indicate otherwise). But instead of getting serious analysis, we get this drivel where “house-building, cars, air conditioners and mobile phones” is not considered “productive investment” in order to make things look bad. What would happen if you do the same when analyzing the economies of the US and Europe?

    The Cato Institute used to write almost weekly about Argentina pre-default. They went silent after. There are a lot of wrong things in Argentina, but they seem to be getting something right. I wish we could understand it better.

    Best wishes


  • Mick Reactionary


    “Argentina is like Greece: it is a country whose popular attitudes and instincts do not mesh well with the requirements of capitalist growth.”

    But if USA will import 100 Million of Argentine-lite people from south of the border, with attitudes, if anything, even worse than that of Argentinians … well, what could go wrong?

    But wait, we are already half way there (50 Million Mexicans and their off-spring are in the USA).

    Nothing possible could go wrong, we have Proff Mead and the rest of ruling class assurances for that.
    Their word is solid as gold, we could take it to the bank, I hear Lehman Brothers offers good interest of fools gold deposits.

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