Argentina's Destructive Cycle of Economic Populism
Argentina’s election of a left-wing government last month has people speculating about the country’s future. Previously, I wrote about how neither outgoing President Mauricio Macri nor the ticket of Alberto Fernández and Cristina Fernández de Kirchner would do much to solve Argentina’s economic ills. Inflation forecasts for the end of 2019 indicate an inevitable reversion to economic turmoil, which has practically become a part of everyday life in Argentina for the past 70 years.
Argentina’s current situation is merely a microcosm of its legacy of economic malpractice that it has endured since demagogic leader Juan Domingo Perón took power in 1946 . A country that was among the richest in the globe at the start of the 20th century — being the 10th wealthiest country in 1913 — Argentina became of one of the 20th century’s most disappointing economic stories. Although his time in office was short, Perón’s policies had long-lasting effects.
Peronismo was an eclectic movement that drew heavily from Marxism, Fascism, and Latin American populist variants. In fact, Perón was a fierce admirer of Italian strongman Benito Mussolini and his Carta del Lavoro (Labour Charter of 1927) which gave the state a massive role in private affairs. Although not socialistic per se, Perón’s “third way,” corporatist policies still featured various notable interventions in the Argentine economy in the form of stiff tariffs, export subsidies, price controls, and state-sponsored unionization. Certain sectors of the economy such as central banking and railways were nationalized for strategic purposes.
Even in death, Perón’s legacy lives on. Political parties constantly appeal to Perón’s image and faithfully implement his dirigiste economic policies once in office. Because of Argentina’s activist government, the country has had to deal with bouts of fiscal upheavals. Eventually, these economic downturns sandbagged into a macroeconomic nightmare by the early 1990s, when it boasted an annual hyperinflation rate of 12,000 percent .
Despite a rocky start in the 1990s, Argentina looked like it was about to make a comeback under the leadership of Peronist politician Carlos Menem. Menem unexpectedly implemented solid market reforms such as pegging the Argentine peso to the U.S. dollar to end Argentina’s monetary hiccups (for the time being), liberalizing trade, and privatizing numerous state enterprises.
However, his reforms did not address the country’s growing budget deficits and sovereign debt which ended up biting it in the rear by the late 90s. It didn’t help that Menem also packed the Argentine Supreme Court with political cronies, which slowly eroded Argentina’s already fragile political institutions. These institutional holes along with Argentina’s refusal to adopt a true currency board brought the surprising stability of the Menem era to a disappointing close.
Once the new millennium arrived, Argentina was well into a recession. In the meantime, it opted to abandon its previous currency arrangement and default on its debt. The Argentine population was devastated with the economy contracting by 28 percent and poverty levels reaching 57.5 percent in 2002. Real wages also fell by 23.7 percent. An economic disaster on all fronts for the once prosperous South American country, Argentina’s politics mirrored its economic dumpster fire. In 2001 alone, Argentina went through 5 presidents in the span of ten days.
The turbulent political winds in Argentina appeared to calm down when Nestor Kirchner became president in 2003 and served until 2007. His wife, Cristina Fernández de Kirchner would then win the presidency in 2007 and remain in power until 2015. Both Kirchners were elected to clean up the mess that the supposed “neoliberal” order of the 1990s created. Initially, Argentina stabilized during the mid-2000s.
However, larger macro trends, not so much the Kirchner family’s populist policies, explained Argentina’s return to some degree of stability. The rise of China as a major economic power, which has invested $17 billion in infrastructure projects in Argentina, and the boom in certain commodities such as soybeans allowed the country to coast along for the time being. In many Latin American countries going through populist cycles , high commodity prices masked institutional flaws and the effects of misguided economic policies in the short-term. Countries like Brazil and Venezuela experienced similar developments during this time period.
Despite prematurely declaring a “decada ganada” (earned decade), Fernández de Kirchner ended up turning to the typical policies from Argentina’s interventionist toolbox — economic controls and subsidies . Once Argentina defaulted in 2014 and inflation started to gain national attention, anti-Peronist candidate Mauricio Macri was an attractive alternative to the worn-out Peronist agenda that dominated Argentine politics for decades. Positioning himself as a reformer, Macri gave voters the illusion that he would undo the corruption of previous administrations.
Campaigning is one thing, but governing is a whole other ballgame. Due to institutional inertia and a lack of boldness from Macri once he was in office, Argentina could not put a lid on its high spending nor could it contain inflation. Knowing that he was going to lose at the polls, Macri desperately announced a series of relief measures , which included income tax cuts, an increase in welfare transfers, and a 90-day price control on gas. Despite trying to appeal as a populist, none of the electorate was buying into Macri’s populist “Hail Mary” attempt. As expected, the Left had a field day campaigning against Macri’s lackluster government and were handsomely rewarded at the polls.
In light of recent elections, Argentina looks poised to open up a new chapter of dismal economic performance. To its credit, Argentina avoided the totalitarian disasters of the 20th century that countries like China , the Soviet Union , and Cuba had to endure. Even then, a country like Argentina should be shooting for the stars given its abundance of resources and human capital.
Argentina’s libertarian presidential candidate Jose Luis Espert may have been on to something when he declared a few months ago that Argentina will have to, “detonate what it has done in the last 50 years and do something radically different,” in terms of economic policy. At this point, the Peronist state likely needs to be demolished not reformed if the country wants to break out of its vicious cycle of statism.