Ever since Canada emerged from the last recession relatively unscathed, it has been tempting to believe we are invincible.
But if Canadians want a clear lesson on why it’s a mistake to take prosperity for granted, Argentina provides a negative teaching moment. There, on a recent trip, I was reminded of how short-sighted politicians can wreck an economy. That country is an object lesson in how bad policy can harm even countries with the most potential to prosper.
Argentina, known for its beef, the tango and, in past decades, hyperinflation and sovereign debt defaults, was not always a basket case. In 1900, Argentina’s per-capita GDP at $2,756 was almost as high as Canada’s at $2,911). (I’m using the late Angus Maddison’s statistics on the world economy; he used 1990 Gheary-Khamy dollars, which the lay reader can ignore but might be of interest to specialists.)
For perspective, in 1900, per-capita GDP in the United States was $4,091 and $2,194 in Chile, Argentina’s Western neighbour.
Fast forward to the 21st century. By 2008, the latest year for which statistics were available, per-capita GDP in the four countries was:
•U.S. ($31,178);
•Canada ($25,267);
•Chile ($13,185); and
•Argentina ($10,995).
In other words, Chile is now the leader in Latin America (it jumped ahead of Argentina 20 years ago). In Canada, our per-capita wealth now is almost two-and-a-half times that of Argentina.
At present, Argentina is a mixture of past First World glories and a large underclass, a shrinking middle class under multiple threats of inflation (between 20% and 50%, depending on if you believe the government’s lower estimate or prefer the private sector’s higher estimate), massive corruption and serious crime, this along with crumbling infrastructure.
So what explains Argentina’s decline? Not the people or natural surroundings.
Argentina has more than 42 million people, most of whom are literate (97%). The country also has a plethora of natural resources, entrepreneurialism and a diversified industrial base.
Instead, for blame, look to politics: Since the 1940s, when Juan Peron (and his wife Evita) became fixtures of Argentinean political life, Argentina’s decline is directly related to its continual detour from policies friendly to markets, consumers and taxpayers into left-wing economic populism and corporatism (picking winners and losers to an extreme). Both approaches have proved disastrous for investment and for businesses not in bed with government.
Argentina’s disastrous policies include encouraging “co-operation” between labour and business of the sort that favours monopolies and quasi-monopolies over open competition.
Over seven decades, Argentineans have repeatedly been subject to politicians whose penchant for intervention has had a direct negative effect on the market’s ability to function properly.
While the country under then-president Carlos Menem did some sensible things in the 1990s – privatization of money-losing state companies and freed-up controls on exports for example – the country under President Christine Fernandez de Kirchner (who has been in power since 2007 while her husband was president before that) has returned to its past Peronist/interventionist ways, including a 2008 state takeover of private pension funds.
More recently, the ruling Peronist party has hinted it will crack down on private media à la Hugo Chavez’s model in Venezuela. It is also pushing to have more control over the country’s independent central bank, a recipe for more interventionism and even higher inflation.
Not surprisingly, and for all of Canada’s overly interventionist policies in some post-war years, especially under Pierre Trudeau, the historical data shows a divergence between the Canadian and Argentine economies since the 1940s, about when Argentina started down this path. Back then, our per- capita economy was just 29% larger than Argentina’s; that compares with Canada’s almost two-and-half per-capita economic advantage now.
The Peronist model is not substantially different from massive interventionism that has been tried elsewhere, including in Canada on occasion (think NDP governments in B.C. in the 1970s and 1990s). When allowed to continue, massive intervention can and does breed corruption. When governments grant favours instead of letting business compete, the result is politicians, bureaucrats and governments will, respectively, offer and look for bribes as ways to influence policy and conversely, make a profit.
That’s one result, but there are others. The general effect has been to hurt average people more than anyone else; it is the average person who suffers when jobs are killed or never created and when inflation runs rampant. Politicians who wield lousy policy can harm even countries with the most potential; it’s been Argentina’s story for much of the last 70 years. •
