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Javier Milei’s party just won Argentina’s legislative elections. Why? How can we understand his policies? Will they lead to Argentina’s return to wealth and greatness? Or will they lead it straight back into yet another cycle of mayhem? Should he do anything differently? To answer these questions, we need to understand why Argentina is poor today.
But doing so is one of the hardest tasks in economics. Argentina’s poor performance is among the most discussed topics in international economics. So I have tried to synthesize what research tells us, and I found an illuminating way to doing it was comparing the development of Argentina with those of Japan, Taiwan, South Korea, and China (covered here), because all these countries did very similar things but ended up with dramatically different outcomes. This helps us isolate the few differences that probably caused Argentina’s demise. In any case this is such a complex issue that I’m certain to have made mistakes. If you find any, please correct me in the comments or by responding to this email.
Around 1900, Argentina was 2x richer than Japan, and over 4x richer than Taiwan, South Korea, and China. But all these countries are now richer than Argentina. Why?
In this article, I’m going to define Asian Tigers as Japan, South Korea, and Taiwan. This is not the standard definition, which includes Hong Kong and Singapore and excludes Japan, but the first two are port-based, finance-based city-states (so very different to manage than a big country, which has much more diversity of land, people, culture, and economic activity to handle), while Japan’s development has lots of similarities with SK and TW.
This is a much more interesting story than it appears, because the similarities between these countries’ economic policies are uncanny. But there are a few crucial differences that caused the Asian countries to grow while Argentina stagnated. So let’s look first at what the Asians did, and then compare with Argentina, to see where everything went wrong and why.
I explained it in detail here, but here’s the summary.
The land in Taiwan, Japan, and South Korea was concentrated in few hands. The first thing they did after WW2 was to redistribute it. This gave many people jobs and increased farm productivity, because farmers now owned the farm and its products, so they tried to improve both: They invested in machinery, better fertilizer, better grain, they didn’t overwork the land…
As farm productivity increased, these farmers were able to save money. Productivity increased enough to feed the country. The governments taxed farmers, but also frequently subsidized them through minimum prices for their crops, help procuring fertilizer, seeds… There was little food export, but what existed was heavily controlled and taxed.
Thanks to this, each country developed a broad base of farmers, increased their savings, and earned foreign income.
Once farming worked, these countries started redirecting the surplus to industries to develop them. They picked a few key industries and supported them in many ways:
They frequently applied import taxes to the foreign competition of protected industries. This is called infant industry protectionism.
They reduced their taxes.
They gave them cheap loans.
They got import licenses so they could import, and do so with limited taxes.
Crucially, they only did this to the companies that were growing fast and were able to compete internationally. Those that couldn’t compete stopped receiving cheap loans and were pushed to merge or fail.
Where did the money come from for these cheap loans? From the farmers (and other citizens), who couldn’t invest their money wherever they wanted. Real estate and stock markets were not accessible to them, and neither could they freely place their money abroad. They were forced to put the money in the bank with low interest rates. That’s the money that was then lent to industrial companies.
Also, the exchange rate was kept low, and inflation suppressed:
Exports were left untaxed, so there were a lot of exports. They brought foreign currency to their home countries (usually USD). They spent some in international markets (fertilizer, seeds, machinery…), and the rest they sold to buy local currency.
The central banks bought the USD. They printed local currency to buy it.
This would have led to inflation, so they sterilized this by emitting low-interest debt and forcing banks to buy it.
Foreign investment was limited. Since foreigners have foreign currency and sell it to buy local currency, they tend to appreciate the local currency. By limiting their investments, they limited this local appreciation.
Wage growth was kept low. Trade unions were pushed to accommodate this. This kept inflation at bay.
We saw in our two previous articles that Argentina’s geography is outstanding, and the country capitalized on it in its 1880-1910 agricultural boom:
Farmland expanded quickly
Many cattle ranches were replaced with crops, with the help of rapid mechanization and immigration
But here’s the original sin of Argentina: Farms remained highly concentrated.
This didn’t impact land productivity too much at first, because the landowners had an incentive to maximize their production and thus their exports.
However, since land was so concentrated, there wasn’t a broad base of farmers who could benefit. A few landowners gained outsized economic, social, and political power.
This rising inequality caused a political backlash that didn’t happen in the Asian Tigers. This political pressure pushed governments to tax farming in a less productive way than Asian Tigers had.
Recall how Asian Tigers also taxed agricultural exports, but there were few, and they used most of that income to reinvest in farms. The biggest redistribution from agriculture to industry was indirect: by forcing farmers to save at the bank their wealth, which was then lent to industries.
Instead, Argentina simply taxed agricultural exports. For example, the IAPI (Instituto Argentino de Promoción del Intercambio) had a monopsony on agricultural exports (it was the sole buyer by law).
In the 1950s, Argentina’s government bought all Argentinian beef and grain from farmers at a price well below market: up to 60-70% cheaper than world market prices. Then, it sold them in the international markets at a much higher price, which had increased thanks to higher demand after WW2. It pocketed the difference. On average, that was 44% of revenues from wheat between 1946 and 1951, and 40% for corn.
These taxes went down over time, but have been a recurring reality in Argentina’s history.
Currently the taxes on soy are ~25%, and ~10% for corn. Their role in foreign currency is illustrated by the fact that Milei’s government temporarily canceled taxes on agroexports in September to increase the amount of reserve currency in the country.
Heavily taxing exports is much worse than what the Asian Tigers did, because it disincentivizes investment. Imagine that you can produce a ton of wheat at a cost of $80, and you can resell it internationally at a price of $100. This gives you a nice profit of $20, which you can use to reinvest in expanding the business. But if the state taxes you at 30% of revenue, now you can only sell your wheat for $70. Suddenly, your entire operation is unprofitable, and you go bust. Even if your cost was $60, this is bad: You go from a margin of 40% to 14%, so many previous investments become unviable.
This reduces both production (and so exports), and investment. Indeed, Argentinian agriculture suffered from this, which we can see in the graph of wheat & corn productivity from before the export tax was introduced during Peron’s first term, when yields were still competitive:
How many Japanese, Taiwanese, and South Korean industrial brands do you know?
How many Argentinian ones?
Yep. The Asian Tigers succeeded where Argentina failed. Why?
When I asked ChatGPT to give me the top 10 most famous brands from each country abroad, it literally stopped after four for Argentina, saying others weren’t famous.
Recall how the Asian Tigers protected their infant industries with cheap loans, low taxes, import taxes against the competition, etc? Argentina did something similar, import substitution. But with some crucial differences that changed the outcome entirely.
Argentina made a lot of money through agriculture, but only in booming international markets. During the world wars and the Great Depression of 1929, demand crashed, and with it commodity prices and Argentinian incomes. Without foreign currency, the country couldn’t afford imports anymore during these hard times, which meant no more manufactured goods. So it concluded it had to produce stuff by itself—substitute imports with local industry.
Notice the subtle difference here, though: This was not about increasing industrial exports. It was about replacing industrial imports. This changed the mindset completely, from one where local champion companies had to aggressively improve their productivity to compete abroad, to one where local champions were protected from abroad.
Why does this matter? Because exports are impossible to fake. If you win in world markets, it’s because you’re the best. But if you win in local markets… You’re simply good at getting Daddy State to protect you and your lack of productivity against internal and external competitors. The Argentinian state used:
Import barriers, such as tariffs or quotas against international competitors
Cheap loans to local industrial companies
Different exchange rates for agricultural exports and industrial imports, so that industries could buy at a discount
State-owned companies
Subsidies, such as below-cost electricity or train transportation
Tax exemptions
All of these tools were similar to those used by the Asian Tigers. The difference was how they were used.
This is by far the most important difference. These aids were not conditional on winning in global markets like in Asia, so most of these companies simply stayed in the local Argentinian market, protected from competition. They kept prices high, and lived off the rents.
Meanwhile, the rest of the country had to pony up more cash to buy the same appliances that would be better and cheaper from abroad. Terrible.
Export discipline has another advantage, which is that an exporting company has a huge potential market. This is especially important if there is a high upfront cost. Imagine you want to make steel. You need a massive factory to do it, so you better have a market that can buy millions of tons to amortize the upfront cost. If your market is small—like the Argentinian market—you will never have enough customers for economies of scale, and your costs will always be too high.
Car factory costs in Argentina, Brazil, and Mexico were about 60% to 150% higher than in the United States.—Import Substitution in Latin America, Baer
The paper industry (excluding newsprint) had 292 plants of which only 25 had a capacity of 100 tons daily, which is considered the minimum economic size. In the chemical industry, too, there are a great many instances in which there is a wide gap between the plant sizes most frequently found in the region and the sizes constructed in the industrialized countries.—Import Substitution in Latin America, Baer
Each time you give a cheap loan, subsidize a cost, or increase some import tariff, it costs the state money. They’re like a tax on everybody else. So the state needs to be extremely thoughtful about it. It can’t prop up local players in every industry, it needs to pick the few key industries it’s going to support, and focus all its resources there.
Usually, this is done in industries that are core for the future of the country. In the case of Japan and South Korea, they both went for steel as a key input to then produce heavy industries such as car companies. Now you know Toyota, Nissan, Mazda, Subaru, Hyundai, Kia… But you might not know the powerful Nippon Steel or the South Korean Hyundai Steel or POSCO.
Within the industries Argentina decided to play, it should have found the winners and supported only those, pushing the others to die or merge. It’s easier to support one big company than a bunch of small ones. For example, Argentina had over a dozen car companies, which is good to start but you need them to merge!
In Argentina, excessive diversification, unused capacity, large inventories because of import controls, and difficulties in obtaining outside finance explain the high price level in the heavy electrical equipment industry.——Import Substitution in Latin America, Baer.
It’s not enough to pick a few industries. The focus should be on only the ones where Argentina had a competitive advantage. You can’t be good at everything. Pick your battles. For example, given its agricultural might, could it have pushed for agricultural manufacturing companies? It had Vassalli, Senor, Pauny, Zanello, and Araus. Could it have produced the Argentinian John Deere with more support?
What other industries could Argentina have picked? Meat-packing and cold-storage processing? Railways? Shipbuilding? Metallurgy, nuclear, precision instruments?
Instead, it supported electronics companies like BGH, Newsan, SIAM, or Philco. But electronics is a very low-margin industry in which Argentina has no competitive advantage and you need exports to reach sufficient scale to bring down costs. As is, Argentinians had to spend much more to get their worse TVs, and in the process spend up to 1% of GDP subsidizing the industry! Another example is textiles and apparel. Do you really want to compete with the Indias and Bangladeshes of the world and their rock-bottom wages and no margins?
Speaking of wages, the Asian Tigers kept wages low for a long time to keep overall production costs low. They did so, among other things, by working with trade unions, who understood that they needed a long period of low wages to become competitive, and only then could they increase wages.
Argentinians held the opposite view. They grew up experiencing high inequality from agricultural exports, so they wanted to tax them to redistribute wealth to the people. Industrial production (and exports, when they existed) were seen as yet another source of money to tax. The exact opposite mindset as in Asia, with resulting higher wages, higher costs, less competitiveness, and a lack of global champions.
Employers were forced to improve working conditions and to provide severance pay and accident compensation, the conditions under which workers could be dismissed were restricted, a system of labour courts to handle the grievances of workers was established, the working day was reduced in various industries, and paid holidays/vacations were generalised to the entire workforce. Perón also passed a law providing minimum wages, maximum hours and vacations for rural workers, Sunday rest, paid vacations, froze rural rents, presided over a large increase in rural wages, and helped lumber, wine, sugar and migrant workers organize themselves. Perón established two new institutions that increased wages: the “aguinaldo” (a bonus that provided each worker with a lump sum at the end of the year amounting to one-twelfth of the annual wage) and the National Institute of Compensation, which implemented a minimum wage and collected data on living standards, prices, and wages.
From 1943 to 1946, real wages grew by only 4%, but from then to 1948 (under Perón), they grew by 50%.
Subsidies on energy, food, housing, and transport had the same effect of increasing effective compensation.
Let’s take housing: The Perón government built hundreds of thousands of houses. That sounds good, but there are many problems with this:
We can see this as everybody in the country putting money aside to buy a house for a few. Who gets those houses? Friends of politicians? Are the recipients the most deserving? Those who need the houses the most?
Where does this money come from? If it’s not a sustainable source (hint: agricultural booms and busts are not), it’s a recipe for disaster.
The cost of building additional housing goes up (since the government is now outbidding the private market for builders), making it harder for everybody else to get a home. When you want everybody to get a home, the first thing you should do is focus on lowering all types of building costs.
All these things (housing, holidays, retirement…) are great objectives for a country to have, but it was too early to have so many. Employees can only earn as much as they produce. When they are not very productive (that is, early on in a country’s path to development), what these measures achieve is increased costs for industries, to the point where they become uncompetitive and either disappear or must be subsidized by the government—that is, the government taxes the productive parts of the economy (here, agriculture) to subsidize high standards of living for industrial workers, who are not productive enough to pay for themselves.
How did Argentina get to such a problematic situation where wages outpaced productivity? One key factor is trade unions. About 40% of legal workers are unionized in Argentina, and these unions have outsized power.
In general, I think the best way to improve the position of workers is full employment, as competition between employers will drive up worker conditions. However, sometimes this process is not optimal, and trade unions can help balance power between workers and employers. But the key there is balance.
There was not enough balance in trade unions in the US in the mid-20th Century, which was the main cause of the deindustrialization of the Rust Belt: Industries left for the South, much less unionized, and with cheaper costs. Something along those lines happened in Argentina.
But where did the power of Argentinian trade unions come from? Before taking power, Perón was the Secretary of Labor. There, he allied with trade unions. It’s thanks to them that he rose to power. Since his power base came from trade unions, he took care of them, and they took care of him. The most obvious way lies in the concept of Personería Gremial: Each industrial sector only has one legal union! And they’re all under the purview of one union, CGT! Can you imagine the level of power CGT has? Then, Perón made collective bargaining universal and state-enforceable.
Of course, such power concentration translated into political power and a revolving door between politics and unions that led to corruption.
As of today, Argentina still has stricter employment protection legislation than other Latin American countries.
None of this happened in the Asian Tigers. South Korea and Taiwan were the most radical (they both fought Communists in their respective civil wars) , and their government controlled unions, which had limited power. Unions also existed in Japan, but under government supervision. A crucial fact is that trade unions were much less centralized. For example, in Japan, each company has its trade union. This means two things:
Unions are much weaker, but strong enough to face the employer
They’re tied to the future of the company, so they’re very interested in the company succeeding and don’t care about country-wide economic development.
The high cost and low value of local agricultural machinery was especially hurtful to Argentina’s golden goose—agriculture. If farmers had been able to buy international machines, they could have increased their productivity massively, which would have resulted in more exports and wealth for the country. But import substitution made it impossible.
Asian countries supported fundamental industries like steel. This matters because once you are competitive in something like steel, you have a competitive advantage in integrating vertically—building stuff down the line more cheaply, like cars. It takes time and effort, but the Asian Tigers did it by inviting foreign companies into their countries and making sure there was technological transfer between foreigners and locals.
Argentina frequently supported import substitution for consumer goods. Here, the incentives are the opposite, because if you’re producing consumer goods, you’re probably importing lots of machinery and materials from abroad. If you start making these machines and materials yourself, you’re likely going to make them worse and more expensively, which is going to make your consumer goods crappier. So firms pressured the government to avoid developing domestic intermediates.
If the government had pushed, maybe Argentina could have integrated vertically, but it didn’t, and the country didn’t capture entire value chains.
As you can see, this is quite a damning list of differences. No wonder Argentina has no global industrial or consumer champions!
That already sounds like a lot of mistakes. But we’re not done! It’s time to talk about the financial and fiscal ones.
Remember how we talked about the export taxes on grains and beef? This might be good or bad, depending on how they used the money. The downside of such high taxes is that farmers might underinvest: There is less surplus to buy more land, fertilize it better, acquire more machinery, build better irrigation systems… Returns on investment are So taxation like this reduces long-term production.
Asian Tigers frequently intervened in the international sale of their countries’ crops, but they also reinvested a lot of that money in the agricultural sector, so crop production in the long term improved. In fact, these countries might have better funded their agriculture with these taxes than without, as this forced investments in farms that farmers might have preferred to save or invest elsewhere.
This is not what Argentina did, though. From what I can tell, it did invest some money to support agriculture, in things like ports and grain elevators, but most of the money didn’t flow back into agriculture. That’s probably another reason why farm productivity started diverging in Argentina vs the US.
So how did Argentina’s state spend that surplus? Among other things, it invested in the country:
It paid the national debt
It nationalized the entire banking system, including the central bank (which was previously controlled by the UK)
It nationalized the railroads
It created a merchant fleet
Public works expanded access to potable water and sanitation
It invested in coal and petroleum exploration, built the first gas pipeline, and developed power plants, hydroelectric dams, and oil refineries.
Some of these were good investments. For example, paying off the national debt allows for future debt. Building energy infrastructure reduces the cost of energy and creates energy exports, both of which are amazing for the country. It’s pretty important to control your own central bank.
Others are dangerous. If you nationalize most of the banking system, you:
Both of which lead to lower return on capital.
It’s not just the financing that might be problematic, but also its magnitude. During the first Peronist terms in the 1940s and 50s, the Industrial Credit Bank financed 52% of all industrial activity, with peaks of up to 78% in 1949! This is way too much money, too concentrated in the government, which leads to waste and corruption.
South Korea and Taiwan also nationalized the banking system, but they were able to keep a good financial allocation because the government was less corrupt and more technocratic. Argentina was too prone to populism and corruption, and its banking system was not as efficient. Many loans went to political allies rather than to strategic and efficient industrial champions.
Taking over foreigners’ investments in your country is a fantastic way to make sure they don’t invest anymore.
Since Argentina grew during the UK’s apogee, most of its foreign investments came from the richest country at the time, the UK: its railroads, maritime trade, banks… This financing was crucial for Argentina’s development, but it had its downsides. For example, Argentina had a nascent wool and clothing industry in the 1800s, but when the British arrived and financed railroads, one of the goals was to reach far inland with their cotton products. The local clothing industry collapsed.
As the UK lost power during the World Wars, it wasn’t in a position to keep financing Argentina. This, coupled with the high share the UK already controlled, meant Argentina was not a master of its own financial destiny, which was another factor for populism: Perón accused the UK of imperialism, so when the banking system was nationalized, the goal was not “let’s judiciously invest this money” but “let’s do what we want with this money, independently from what these former imperialists wanted us to do.”
(As opposed to investment)
Remember the high wages we discussed before? This quote is from just after the 2nd Perón term:
In Argentina, the excess of public spending over revenue has for the most part not been used for productive expenditures, but rather for unproductive ones—that is, salaries of public administration employees or the operating deficits of state-owned companies.—Radio announcement of the new economic plan through national radio and television in Argentina after the coup, IADE, from the new Minister of Economy, Martínez de Hoz, April 2nd 1976.
Wages, civil servants, pensions, subsidies… These high costs were one of the biggest sources of public deficit, and not just under Perón. For example, in 2008, the state subsidized 77% of the private pension funds’ beneficiaries. The point of private pensions is very much that citizens are carrying their risk, not the state!
Investing so much money from boom times also causes a problem of timing.
Norway is another country that makes a lot of money when international markets are booming, because it sells lots of oil. But it doesn’t let the money from its surpluses flood the economy. It keeps it in a sovereign fund, which invests around the world, and it only uses its real returns to fund the government (about 3% of the fund every year). This completely smooths out government spending across decades, so when oil prices tank for a few years, the country barely notices it.
Argentina didn’t do that. Given the massive exposure to commodity exports, and the brutal price swings they have in international markets, Argentina had a huge surplus in bonanza years. It overspent during these booms, as we saw with the huge list of projects Perón undertook.
The same thing happened in the last Perón term (1974-1975). Look at the spike in commodity prices:
Between 1972 and 1975, the number of public employees increased by 24% (in the 10 years before that, they increased by 7.4%, so 90% more slowly). This had lots of negative consequences.
One was further lowering the return on investment. For example, if you build houses over 10 years, the flow is steady, builders can predict how much they’ll make, they can invest in the long term, hire employees, increase machinery, and keep prices low. But if all that investment happens in a couple of years, they don’t have time to increase their capacity, so they simply ask for a much higher price. This means less bang for the buck.
Another consequence of overspending during booms is an overvaluation of the local currency, common in countries that export commodities:
Exporters in a country sell some commodity in the international market, and make lots of dollars
The government taxes a big chunk
The government wants to spend this in its country, so it sells the dollars and buys the local currency
This increases the value of the local currency
This makes other types of exports more expensive, so these shrink
The only way out of this is sterilization, which has its own problems.
Another way to put it is that, during a commodity boom, the government spends much more in the local economy, increasing local prices and salaries. With higher costs, local companies (which compete for the same local resources) are less competitive abroad.
Remember what Asian Tigers did instead? Central banks bought the dollars from exporters and kept them, buying US treasuries and keeping them in their vaults. If they had sold them in international markets to buy local currency, they would have strengthened their local currency. By avoiding that, they allowed industrial exporters to sell for cheap.
Argentina could have chosen to do that, but it didn’t due to its original sin: its agricultural inequality. Wealth redistribution became a political issue, especially since Perón. The government systematically taxed exports and would immediately redistribute the proceeds through the high wages we discussed earlier, plus other ways of injecting cash into the economy (pension increases, civil servants…).
The overvaluing of the peso during boom times is also one of the sources of Argentina’s famous inflation cycles. Remember there was an increase in commodity prices in the early 1970s? Look at Argentinian inflation just after that:
Why the inflation spike?
This is the government deficit. It grew from 1970 onwards, peaking in 1975 at nearly 14% of GDP. At that point, taxes only covered 20% of government spending! The government covered the remaining 80% by printing money and raking in debt, which led to inflation.
But why was there such a deficit in the first place? Because of the increased spend we mentioned before: more civil servants, higher wages, subsidies, more investment… So if we summarize this inflation cycle:
Commodity prices go up
Agricultural exports boom
Government income booms
Government overspends
Commodity boom ends
Government overspending is not covered by export taxes
Print money to cover government overspending
Inflation
Later cycles were not all led by booms of agricultural exports, but by some of the consequences of previous cycles. For example, in the late 1980s:
Argentina had a huge deficit and couldn’t cover it with new debt
So it printed a lot of money (over 40x increase in base money in a year!)
Why the huge deficit?
Because it had been running deficits for a long time
So it accumulated a huge debt
interest payments on that debt accumulated, worsening the deficit
Why couldn’t Argentina cover deficits with new debt?
Huge debt, as described
International markets were not accessible, as Argentina had defaulted on its debt in 1982, because it was so high back then.
A mix of both of these happened with the Kirchners in the mid-2010s.
The more often the cycle takes place, the more people learn to expect it, and the harder it is to control:
Inflation increases just because people expect it, so they jack up prices
The value of the peso falls because people expect the currency to lose value, so they sell their pesos to buy dollars. This accelerates the process.
How did the Asian Tigers avoid this? Originally, they didn’t have the same luxury problem of agricultural exports that would bring in lots of dollars, so they didn’t have a history of commodity booms like Argentina. That said, government spending never increased as fast as exports, quite the opposite: Asian governments kept dollars in the form of US treasury bills, as discussed. The downside was less social spending in the short term. The upside was more productivity, undervalued local currency, more exports, more wealth accumulation, and more reinvestment in the long term. This reminds me of the fable of the grasshopper and the ant.
Since its independence, Argentina has defaulted nine times ( three times in the 21st Century). You can see how this is a direct result of the actions above.
Whereas Asian Tigers forced their citizens to keep their money in local banks to reinvest in industry, this didn’t happen in Argentina, which surrendered that lever too early in its development: It hasn’t pushed Argentinian banks to focus cheap loans into Argentinian industry, and since 1993 lost its big industrial development bank. Its successor is much smaller and less ambitious.
There is no justification whatsoever for the State to run sugar, metallurgical, textile, and all kinds of companies under the pretext of maintaining sources of employment.—Radio announcement of the new economic plan through national radio and television in Argentina after the coup, IADE, from the new Minister of Economy, Martínez de Hoz, April 2nd 1976.
There’s a role for state-owned enterprises (SOEs). For example, natural monopolies. But states frequently try to control more enterprises than they should: They can bring money and power to the state and politicians, who might use them for their own benefit.
Aside from an opportunity for corruption, SOEs are usually inefficient because the owners are not aiming to maximize profits.
For example, before telephone privatization in 1990:
To get a new line, it was not unusual to wait more than ten years, and apartments with telephone lines carried a big premium in the market versus identical apartments without a line. After privatization the waiting line for a telephone was reduced to less than a week.—Culture and Social Resistance to Reform: A theory about the endogeneity of public beliefs with an application to the case of Argentina, Pernice & Sturzenegger
Also, when SOEs lose money, the government jumps in to fill the gap, rather than letting an unproductive company die and more productive ones take over their resources and the market.
That’s what was happening in Argentina, where in 1976 the government funded all the losses from the railroads, which were bigger than the regional budgets of all regions combined (outside of Buenos Aires).
Let’s summarize to see the patterns.
First, Argentina’s land is extremely fertile. This is great because it generates lots of money for the country, and is why it was rich in the 1890-1930s. But it has a few downsides:
It requires delicate currency management, to avoid peso overvaluing and inflation
Since commodity markets swing wildly, the country’s income swings too
Second, probably because of the culture inherited from Spain, but also because of how it gained its independence, Argentina’s land was very concentrated, and it never redistributed it among farm workers. This led to high inequality, and consequently, anger.
This pushed Argentinian politicians to find another way to redistribute agricultural wealth: not through land, but financially, by controlling and taxing agricultural exports. Unfortunately, this meant that the huge swings in international commodity markets became swings in government income.
The combination of these two is extremely problematic: The first one (no land redistribution) begets financial redistribution to reduce inequality (or else you get conflict), but it’s hard to redistribute in a way that follows swings in international markets, so instead redistribution was so generous it was wasteful during boom times, and it led the government to huge budget holes in bust times.
The waste during boom times can be seen in the massive worker compensation increases that happened then, the huge social support system, the overfinancing of industries, the nationalizations, the creation of state-owned enterprises…
The holes in bust times led to all sorts of problems like hyperinflation, government defaults, currency devaluation… The economic disarray, in turn, led to political instability, which led to institutional instability.
A third factor to add to the mix is the exposure of Argentina to foreign investors (especially the UK): Since it reached its independence much later than the US and was farther from the UK culturally and geographically, its industrial revolution came much later. By the time the UK was rich (and could invest), Argentina was still an agrarian society, so it couldn’t invest in itself, and most investment came from the UK. This exposed Argentina to foreigners, which bred insecurity and a desire to become self-sufficient. This can be seen in the nationalizations, the taxes to both imports and exports, the policy of import substitution, the overfunding of national industries, the protectionism…
Many of these had a dramatic impact on industry:
Oversubsidized by the government
Protected from foreign competition
Worker compensation too high
Suffered from peso overvaluation and inflation, making costs higher or investment unpredictable
Low access to foreign investment and tech
Competition from state-owned enterprises
Low economies of scale
Corruption
That’s why Argentina’s industrial base is so much weaker than it could be
All of these mistakes highlight how amazing the work of the Asian Tigers has been. But also how different their conditions were: All three Tigers emerged from mid-20th Century wars with strong anti-Communist governments and dirt poor societies that only wanted one thing: work to escape poverty. They didn’t suffer from agricultural booms and busts, and didn’t have a bias against international trade. Argentina didn’t go through any of that. Its experience was one of wealth and inequality.
I think all of this goes a long way explaining why Argentina is poorer today. But it’s not all. The country has weak institutions, corruption, and a history of coups and dictatorships that can’t be fully explained by the economics. We’re going to look into that next, as well as:
How Milei and his measures fit into all of this
What I’d do differently if I were him