How To Go From Fourth to 76th In 100 Years
One hundred years ago, Argentina was one of the most prosperous countries on Earth. Its citizens enjoyed the fourth highest per capita income in the world. By the 1970s, it resembled a third-world country, with hyperinflation and nearing collapse. Today, despite numerous IMF bailouts and loan extensions, it has fallen to 76th in per capita income. The country is unable to meet principle and interest payments on its government bonds and is now threatened with asset seizure by foreign creditors.
Its 100 year long fall into the economic abyss holds countless lessons. But, don't expect these lessons to be taught in our schools. They don't speak well of either progressive or socialist economic policies favored by our educational elite.
So what happened?
Well, once upon a time, Argentina grew in very much the same way the United States did. It was blessed with a rich abundance of prairie land, fertile soil, and natural resources. It was fueled by foreign investment and wave after wave of industrious immigrants attracted by opportunities for rich returns on labor and capital.
And like the United States at the time, Argentina's people and government embraced laissez faire economics and the importance of property rights. Its government was dominated by a small cadre of people - an oligarchy of sorts, but one that left the people free and unhindered to pursue their economic interests. LESSON #1: No matter the form of government, economic freedom and adherence to the sanctity of property rights results in economic progress.
All that changed in 1916, with the country's first election of "populist" leadership under the Radical Party - the "party of the people."
Yrigoyen, the president, immediately set about introducing a minimum wage to counter the effects of inflation. Among the 'people' empowered were University students who, in 1918, agitated successfully for university reform that included shared powers among teachers and students. In 1922, Argentina established its first public enterprise with the creation of a state-run oil company. This was followed by the founding of a state-run aircraft company in 1927. LESSON #2: Beware of the "people's" parties. By 'people' they mean supporters of redistribution of wealth to their special interests either by force or government control of the free markets.
In the 1930's government intervention in the economy accelerated considerably under a program referred to as Import Substitution Industrialization. This was intended to reduce Argentina's foreign 'dependency' for goods by promoting local production of industrialized products. This artificial mechanism required significant government intervention in the form of: 1) import bans, quotas, and taxes; 2) government subsidies for selected industries; 3) creation of government enterprises and takeover of key industrial sectors; and 4) significant government regulation and interference in economic decision-making. LESSON #3: Beware of governments that promise to build the next industry or technology. Choosing favorites distorts the market, results in uninformed decision-making, and leads to unintended consequences and poor results.
These policies forever marked the end of laissez faire economics in Argentina.
Government intervention didn't succeed in Argentina any better than it did in the Soviet Union, China, Japan, India, Europe, South America, Africa. . . well, you get the picture. In 1943, with the economy reeling, the military seized power, and in 1946, a military favorite named Juan Peron, who like many of us, is now more famous for his wife, won the presidency.
It was Peron who doomed Argentina to long-term economic decline.
Peron's first priority was to build a strong following within organized labor. He named his beautiful actress wife, Eva, to lead the Secretariate of Labor and the country's welfare programs. He increased the minimum wage and regulated working conditions, and forcefully held down food prices to improve the standard living of those working in the cities. Vacation colonies for workers were built, and free medical care and paid vacations became standard. He increased liquidity (threw cheap money at) in the mortgage industry and selected industrial development sectors for government support. LESSON #4: Alliances between government and labor inevitably leads to promises that cannot be fulfilled, and eventually an unsustainable consumer and debt-ridden economy.
Within three years, Peron nationalized the Central Bank, the railways, the merchant marine, universities, public utilities, and public transportation. Perón favored an economic system known as corporatism, as opposed to Marxism, involving considerable state control and regulation of the economy without actual state ownership - similar to Benito Mussolini's Italy. Most ominously, he created a single purchaser for the nation's mostly export-oriented grains and oilseeds: the IAPI - similar to the single-payer system the U.S. has in Medicare/Medicaid and may soon have under its new health insurance system. LESSON #5: Beware of close relationships between government and big business or particular industries.
Initially, Peron's program improved the economy. GDP grew by more than 25% from 1946-48 and wages remained high, and there was improvement in the standard of living of the working classes. But these gains were at the expense of small business and private industry, farmers and ranchers, and long-term financial stability. LESSON #6: Often government intervention initially brings what appears to be prosperity, mostly through injection of liquidity and the stimulus of economic activity. But this activity is not guided by the free market (Adam Smith's "invisible hand"), and eventually proves unsustainable, results in wasted investment and resources, and more often than not, produces the economic "bubbles" that we now know so well.
To ensure support of his programs, Peron amassed greater power under a new constitution, passed legislation criminalizing actions that show disrespect for the government, removed justices from the Supreme Court, took over schools and Universities, and jailed political opponents. In addition, independent newspapers were suppressed, while Eva Peron and her friends bought up newspapers and radio stations. LESSONS #7: When government tries to control economic activities, it eventually has to control other facets of society, as people try to escape the consequences of the government's failed policies. Liberty cannot co-exist with a centralized economy.
In 1955, Peron was sent into exile in the "Liberating" Revolution military coup. Over the next 30 years, subsequent governments never missed an opportunity to pursue wrong-headed economic policies. First, dozens of government programs were created for the dubious objective of spreading the wealth geographically. Thus, automobile, textile, petrochemical, electronics, and other industries were induced to operate anywhere but Buenos Aires. Finally, in a series of desperate attempts to prop up an economy that no longer functioned, Argentina's political leaders resorted to inflationary policies to boost the economy in the short-run while they were in power. By the late 1970s and 1980s, they had generated hyperinflation, sometimes exceeding 300% per annum. This period in Argentina's history was characterized by numerous governments, large swings in economic policy, domestic terrorist violence, business lockouts, corruption, and general strikes that brought much of the country to a standstill. Today, Argentina, once an economic powerhouse, is leaping from one economic policy to another trying to undo the destructive effects of its government over the past 75 years. ONE FINAL LESSON: Politicians generally do not study economics, They will do the wrong thing the vast majority of the time. The more active government is in the economy, the worse the economy will be.
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