Mises Wire

Why Argentina Needs Free Cities

As the libertarian anarchocapitalist Javier Milei ascends to the Argentinian presidency, the parting of the ominous clouds of socialism has brought about the rising sun of libertarianism on the South American continent. The Argentine legislative system, consisting of the Senate and the Chamber of Deputies, is designed to bolster democratic governance and accountability.

However, its inherent structure often leads to impasses, particularly with contentious reforms. The presidency of Carlos Menem from 1989 to 1999 marked a pivotal turn toward classical liberalism, implementing broad changes such as widespread privatization, deregulation, and the 1991 convertibility plan, which pegged the Argentine peso to the US dollar. Initially, these reforms attracted foreign investments but soon faced hurdles in Argentina’s bicameral legislature, hampered by rent-seeking practices.

The Senate, voicing provincial concerns, frequently opposed these reforms, fearing the loss of state-backed incomes and regional sovereignty. They claimed the concentration of economic power in Buenos Aires and foreign companies was detrimental to local businesses and public welfare. This resistance led to substantial modifications and delays in Menem’s policies.

Rent seeking in Argentina remains another obstacle to economic reform, involving various sectors like agriculture, industry, labor unions, and bureaucrats seeking to preserve their economic benefits through government intervention. These groups typically resist changes such as trade liberalization or deregulation that could threaten their privileged positions.

Post-1995, the Senate’s influence in legislative processes intensified, often counterbalancing the executive. Senators represented varied regional interests and scrutinized, amended, or vetoed presidential initiatives, especially in economic matters. This assertiveness led to vigorous debates and compromises in the economic reforms of the late 1990s and early 2000s, often resulting in diluted or incomplete policies.

The road to economic reform in Argentina faces challenges due to the bicameral legislature and the vested interests of influential groups against reform. Implementing “free cities” throughout the nation could counteract political stagnation and streamline economic reforms. These autonomous or semiautonomous urban areas, with unique economic and administrative frameworks, could act as catalysts for widespread economic change. By creating zones emphasizing market freedom, minimal regulation, and strong property rights, Argentina could nurture an ecosystem supportive of entrepreneurship, foreign investment, and swift economic growth.

Reform through Free Cities

A keystone of libertarian thinking isn’t merely abolishing state-sponsored services but their substitution with private and community-based solutions. It implies the radical replacement of existing governance structures in Argentina with private institutions. Private or “free” cities in this regard become an invaluable source of reform as they can help bring institutional change and experimentation with new rules inside the federal structure of Argentina.

Successfully implementing “free” cities requires the selection of areas with interconnected networks to the entire Argentinian economy through which it can effectively use existing resources, serving Argentinian comparative advantage. The success of these centers crucially depends on their formation and operation being completely nonpolitical with a long-term commitment, considering only economic and geographical connectivity, as well as demonstrated rule-following behavior among its inhabitants where a culture of property rights prevails. Socialism brings a set of parasitic beliefs and institutional rules that create an environment for rent seeking while discouraging innovation and stalling progress by socializing profit and loss, habituating the society in a rotten codependency. The success of the alternative, therefore, also rests crucially upon bringing in a distinctive set of beliefs, institutional rules, and people who underscore the value of enterprise and entrepreneurial activities, serving as a model to instruct the rest.

The original version of free cities took the form of special economic zones where centralized economies tried to emulate the success of a less regulated Hong Kong. They established zones for governance with low bureaucracy and red tape to encourage flourishing businesses. Its success in China and failure in India offer great insights into how their contrasting institutional structure and rules guiding governance produced contrasting results.

The first blossoming of the Chinese great economic transformation, which later lifted billions out of poverty, took place in an obscure, poor fishing and agriculture village with a small nearby market town. The area comprising modern Shenzhen went from earning a mere annual gross domestic product per capita below ¥606 ($90) to ¥175,000 ($26,000) with over thirteen billion residents. Shenzhen has not only excelled in economic growth but also in the evolution and proliferation of technology.

The city has transitioned from basic manufacturing to being a cradle of high-tech innovation. Notably, companies headquartered in Shenzhen like Huawei and Tencent are now global technology leaders. The Huaqiangbei district in Shenzhen, evolving from a local market to a global electronics hub, exemplifies the city’s pivot to high-tech industries like robotics, biotech, and renewable energy. This transformation, marked by a shift from low-end to high-end manufacturing, is mirrored in Shenzhen’s export data, where high-tech goods now dominate. However, this prosperity wasn’t the product of legislative fiat by the Chinese central government, allowing decentralization to the local provincial government bureaucrats. Instead, it was the outcome of past practice embedded in the local populace (albeit on a small scale) for entrepreneurial activities. The existing populace understood and migrants were able to learn the rules of private property through imitation.

These ambitious people sought economic prosperity, facilitated by easy immigration and linkages with the rest of the Chinese economy. Most people in China were assigned to an institutional council in one place and were destined by law to stay in that particular place due to central government urban planning restrictions. The city then served as a connected island that allowed the best resources in people and capital to voluntarily move into Shenzhen seeking prosperity and a better life.

The story of Shenzhen demonstrates local success with an effective populace learned in the art of business conduction, institutional rule following, and a competitive atmosphere that reflected poorly on the failure of Maoist China. These factors are important because other socialist countries with a parasitic elite have tried to institute governance zones and have failed to bring about any sustained economic change or benefits to their broader national economies.

The Indian experience with these governance zones is in stark contrast to the Chinese experience both in approach and in results. As opposed to the bottom-up growth process, the Indian governance around the economy has been that of an auctioneer extracting rents, distributing resources based on bribes and entirely disconnected from any market-based performance needs. The heavy regulation, restriction, and central planning in the first fifty years of the economy has had the effect of discouraging any competitive market entrepreneurship. Instead, it has encouraged market-capturing activities and a populace continuingly engaged in competition for government licenses using massive bribes and electoral favor to rent-seeking bureaucrats and politicians. The expenditures of national income on bribes became as high as nearly 8 percent in 1965.

Although the forced liberalization following a pending bankruptcy in the early 1990s led to a decline in government control over the economy in aggregate direct planning, it has only marginally lowered these activities due to the continuation of pervasive regulations over every sphere of economic life. It has proliferated a system of liberalized rent seeking where companies actively collude with politicians and bureaucrats in various sectors of the economy for capturing markets through grants of resources and restrictions on entry. Particularly in special economic zones, the decentralization has brought political thievery from the central to the state level. Local politicians in collusion with state firms buy land for favors, giving bribes entirely disconnected from economic meaning, and then sell it to interested investors in those zones. These bureaucratic state firms, guided by politicians against promotions, often directly decide the industry of investment—the technology to be used in production. Naturally, the result has been an economic disaster providing no benefits to the broader economy.

In conclusion, Argentina stands at a critical juncture, and the adoption of free cities presents a unique and potent opportunity for economic transformation. The lessons drawn from the legislative challenges faced during the Menem era and the contrasting outcomes of special economic zones in China and India offer valuable insights into the path Argentina should take.

The establishment of free cities, autonomous or semiautonomous urban areas with distinct economic and administrative policies, could be a game changer for Argentina’s economy. These free cities—by operating on principles of market freedom, reduced regulation, and enhanced property rights—can bypass the legislative gridlocks and rent-seeking behaviors entrenched in the current political system. They can create a conducive environment for entrepreneurship, foreign investment, and rapid economic development, mirroring the success stories of regions like Shenzhen. The key to this success lies in ensuring that these free cities are established with a focus on nonpolitical formation, economic and geographical connectivity, and a culture that values property rights and entrepreneurial endeavors.

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