Acentury ago, Argentina was economically on a par with France and Germany. Left-wing populism may now have irretrievably ruined it, says Max King.
There is no mystery about the route to national prosperity: a high level of domestically
financed investment supported by respect for property rights, the rule of law and low taxation. Other factors, such as the avoidance of wars, stable democratic rule and benign regulation make it easier for countries to stay on track. Good infrastructure, education and healthcare are as much a consequence of development as a cause of it.
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Britain's development was no "revolution", industrial or otherwise, but a long period of accelerated growth preceded by an equally long period in which the supportive conditions fell into place. Other countries have usually needed a kick-start such as the opening of the country to agriculture or the discovery of natural resources, with the initial capital provided from overseas. In time, local entrepreneurs emerge, domestic savings are built up and value-adding businesses first supplement, then take over from the primary industries.
Argentina followed this path successfully, becoming one of the richest countries in the world in per-capita terms by 1914, on a par with France and Germany. The election of Juan Pern in 1946 triggered a disastrous spiral of decline that continues to the present day and is probably irreversible.
Post-independence teething problems
Independence from Spain in 1810 saw Argentina embrace immigration and trade, while agriculture spread through the Buenos Aires hinterland. But the export of meat and grain was ruled out by slow ships and an inability to preserve food. The first debt default in 1827, a civil war and a disastrous war against Paraguay hardly helped.
In the second half of the 19th century, growth accelerated thanks to the commercialisation of refrigeration in the 1880s, the advent of canning and a consequent boom in exports. The British weren't the only ones to tame the Pampas but they built and owned the railways, the port terminals, the slaughterhouses, the ships and the services, such as finance, needed to get the goods to market. Argentina was never ruled by the British, but the economy was controlled by them rather than the southern Europeans who accounted for most of the immigration. When Argentina defaulted a second time in 1890 in the Barings crisis, investors saw this as an opportunity to put more money in.
Argentina continued to prosper between the wars, despite the Great Depression, the resultant drop in agricultural prices and a military coup in 1930. In response to tariffs against its beef, notably by the UK, which pursued "imperial preference", farmers switched output to grains and governments pursued a policy of industrial-import substitution, a rational attempt to diversify the economy and move it away from a dependence on agriculture. It was the military coup of 1943, led by Juan Pern, and his election as president in 1946 that proved a major turning point.
Pern, egged on by his glamorous, egocentric and politically ambitious wife, introduced what we now think of as left-wing populism to Argentina. His policies of nationalisation, exchange controls, unionisation of the labour force, higher taxation and redistribution were not remarkable by the standards of the time; more damaging was a legacy of class envy, nationalism, a sense of entitlement and a disregard for the law. The Supreme Court was politicised, removing a key constraint on his administration, the opposition leader arrested and the mob encouraged to ransack bastions of wealth. The economy stagnated and inflation took off, eventually leading to Pern's ousting by the military. Elected presidents, including a brief return to power by Pern, and military rule alternated until 1983. After that, governments alternated between Pernists and Radicals.
Four defaults and hyperinflation
In the decades before 1992, no serious attempt to change economic course was attempted. Argentina defaulted on its debts four more times and so bad was inflation that 13 zeros were knocked off the currency. Argentines learned to switch their savings into dollars and take them out of the country while net immigration reversed, inevitably with the ablest, the ambitious and the prosperous leaving. But in 1992, the newly elected Pernist president, Carlos Menem, decided that enough was enough. Inflation was brought down, market reforms, including privatisation, were introduced and the budget deficit cut back. The new peso was tied at parity to the dollar, supported by the International Monetary Fund (IMF) and capital inflows. For a while the strategy seemed to be working, but dollar strength, an emerging-market crisis and falling agricultural prices put the economy under pressure. The national aversion to austerity led to mounting unrest; the deeply entrenched view that the world owed Argentina a living hadn't gone away.
The point of no return
In 2001, Argentina passed the point of no return. It defaulted again, the currency was devalued by two thirds and even dollars held in domestic bank accounts were forcibly converted into pesos at parity, then devalued. In a desperate attempt to reduce inflation, utility prices were frozen and exchange controls brought back. The government led by Nstor Kirchner sought to bolster its finances by taxing exports as well as imports and, in 2008, by seizing the assets of private pension funds in return for the promise of inflation-indexed pay-as-you-go pensions. The value of these was then eroded by rigging the inflation data to show a fraction of the true rate.
The consequence was a collapse in infrastructure investment, the discouragement of investment in export businesses, and a massive currency black market. Nationalisation at rock-bottom prices infuriated foreign investors. For good measure, both Nstor Kirchner and his wife Cristina, who succeeded him as president, filled their own pockets. By 2014, with inflation at 40%, another default inevitable and the economy in recession, the voters had had enough. The next year, they elected Mauricio Macri as president to sort out the mess.
Macri missed his chance
He never stood a chance. The devaluation of the currency from its official rate of nine to its black market rate of 14 wasn't enough. Understandably, Macri was reluctant to take on the heavily unionised and bloated public sector, so taxes remained high. The familiar cycle of inflation and devaluation continued so that the exchange rate is now 60 pesos to the dollar. It will soon be time to knock off some more zeros. In the October 2019 election, the Pernists, with Cristina Kirchner pulling the strings, returned to power. For now, there is stability. Tough new exchange controls have lessened the downward pressure on the peso and economic activity is sustained by a rush to spend spare pesos, whose value is being rapidly eroded by an inflation rate of 50%. The stability won't last. In 2017, foreign investors, transfixed by a 7.9% yield, naively spent $2.75bn on a 100-year bond. It has already lost half its value and the other half will surely follow.
Over the last 70 years, successive governments have ensured that there are no domestic savings and hence negligible investment. The rule of law and property rights have been undermined to the point of collapse, while punitive taxation and exchange controls prop up the black market and informal economy. There, all activity is directed towards earning dollars to take out of the country and finance emigration, which keeps alive the entrepreneurial spirit. Countries that Argentina once looked down on, such as Chile, Mexico and Uruguay, have overtaken it in terms of GDP per capita. The example of Venezuela, also once one of the world's richest countries, shows that things can get much, much worse.
A warning for Britain
What relevance does all this have for the UK? Here, we are used to the idea that when governments make strategic mistakes, they see the error of their ways and perform a U-turn. At the next election, the public throw them out of office and replace them with a different government that sorts out the mess. Lasting damage is avoided and economic growth continues until the next mistake or external shock throws the country temporarily off balance again.
Argentina shows that this does not necessarily happen. Governments there pursue irreversible change that they believe is in the national interest, but proves to be a delusion brought about by a preference for ideology over experience. In response to failure, they don't U-turn but double down, put their foot on the accelerator and blame internal or external saboteurs. Core supporters are bought off, opposition suppressed and elections rigged. Even if the election is lost, sorting out the economic mess requires austerity, devaluation and the removal of price controls by the new government.
The resulting inflation and erosion of living standards ensures that the new government doesn't last long, the ideologues return to power and embark on new, crazy schemes. As savings and able citizens flee, the economy spirals downwards and life is dominated by acrimony, demagoguery, corruption, violence and repression. But that could never happen here, could it?
Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
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