This is Argentina, a country famous for its amazing landscapes, cuisine, football players,
and equally terrible economic management.
Argentina is arguably the most unstable economy anywhere in the world at any time throughout
history. That is a big title to hold with a lot of solid competition, but in just the past five
decades the economy has alternated between incredible economic booms and devastating
crashes. Not once, not twice, but now five times as once again the country finds itself staring
down the barrel of intense economic collapse with record high inflation. This is all coming after a
short period where the country was technically the fastest growing major economy in the world,
doubling in size in just two years. Looking further back, this recent instability is
unfortunately nothing new. Argentina was once one of the most productive countries in the world,
beating out places like Canada, Australia, and even rivaling the USA. It's very unusual for
advanced economies to go backwards once they have reached a certain level of wealth, but today
Argentina has a GDP per capita in line with countries like China and Malaysia, and even lower
than regional rivals like Chile and Venezuela, which to put it mildly have not been economic
success stories themselves. Now while this situation is unfortunate, it's not hopeless,
and economists can learn a lot more from things going wrong than things going right.
And since things in Argentina have gone wrong so many times in so many ways,
it really should be a country that everybody takes particular interest in,
if for no other reason than to avoid the mistakes of their past.
So, why can't Argentina sustain its economic development for any more than a decade?
Why is it that despite these challenges, Argentina has managed to become one of the
fastest growing economies in the world? And finally, can the country do anything
to make sure this doesn't happen again? Once we have done all of that, we can put Argentina,
the most unstable country in the world, on the economics explained national leaderboard.
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To be one of, if not the most unstable economy in the world, it must be recognized that Argentina
does have good times mixed in with the bad. So that means despite a lot of its challenges,
it's obviously still doing far better than a lot of other countries around the world.
Its people are not wealthy, but they're not starving. Living conditions and economic
opportunities are minimal, but overall human development is still very high by global
standards. And in a weird way, that might be one of the biggest challenges holding it back.
In the early 1900s, Argentina became a very wealthy country off the back of its
agricultural industry, which attracted a lot of foreign investment and a lot of
foreign migration from wealthy Europeans moving to the country to set up their own wineries and
farms. With them, they brought the expectation of the modern amenities that they enjoyed in
their home countries, like utilities, roads, and even electricity. The development of these
services was a huge boost to the economy by itself, as it employed a lot of people to build
them out. But it also made the Argentine economy way more competitive outwardly,
because with all of these new technologies, it could develop its domestic industries and
start exporting its goods all over the world. Meats and wines from Argentina back at this
time were prized commodities, and those export industries also gave rise to sporting industries
that overall made for a very worldly and advanced economy, for the time.
Foreign money coming in with new wealthy migrants and luxury exports going out was a great system,
but it did create something of a speculative mania as the growth of the country attracted
even more attention around the world. Eventually, investing in Argentinian land,
farms, or businesses became the early 20th century equivalent of buying cryptocurrencies.
Nobody really understood what was going on, but a lot of people were getting rich and
everybody wanted in. Despite perhaps not having the best or most stable underlying motivations,
investment into the country was still doing a lot of good, as it could be put towards modernizing
the economy that was just a few years earlier reliant mostly on subsistence agriculture.
Unfortunately, this stream of foreign income fell apart during the great depression.
People had less money to invest, they weren't buying luxury consumables as much,
and they also were more cautious about risky speculation.
The great depression hit Argentina just as hard, if not harder than it did in the USA,
but fortunately for the up-and-coming country, it still had a lot of the industries that people
had invested in. The resulting instability, on top of long-held tensions over inequality
between wealthy migrants and poorer locals, gave rise to a military junta that seized power in the
country in 1930, just one year into the great depression. In just a few months, the country
went from one of the most stable, economically conservative, and well-regulated democracies in
the world to one of the most unstable, and in the almost 100 years since, that's not a switch that
they've been able to reverse. After that shake-up, what little foreign income streams the country
still had were quickly shut off, because people were understandably hesitant to invest in,
or otherwise do business with, a country that was undergoing a military revolution.
Out of necessity more so than long-term planning, the new government that had just
seized power needed to introduce a new policy to keep their economy functioning.
Fortunately for them, the country was in a surprisingly good position to make this happen,
because of all the investments that had already been made into the country from before this
political turbulence. Just because a new factory or advanced farm equipment was worth less than
it was before 1929, didn't mean that it was any less productive. So the country switched
up its strategy. Instead of exporting its goods abroad, it would focus internally,
and work on satisfying its own market demand with its own local manufacturing and agriculture.
This worked fairly well, and while the country was certainly less prosperous on paper than it
was in the years before, most people still enjoyed a relatively high standard of living
for the time. However, inequality remained quite high, and that was just the start of their problems.
The shift away from global cooperation and towards self-sufficiency sped up greatly
during the second world war, again almost out of necessity, because a lot of their traditional
trading partners in Europe did not have the resources left to spare after committing
themselves to total war. This economic movement that had so far been working pretty well,
eventually culminated after the war in a political movement that nationalized a
lot of the country's major industries to push a theory called developmentalism.
All countries, with very few exceptions, want to develop their economy and become
advanced service-based centers where their people can enjoy high incomes.
Leadership in countries want to do this, if for no other reason than it will make them
very politically popular and make it much easier for them to maintain power.
The question then becomes, how do they achieve that economic development?
Argentina after the end of the second world war had developed a decent manufacturing industry that
had for the first time ever overtaken its agricultural sector as the largest contributor
to output in the economy. One strategy would have been to reopen up to world trade and provide
manufactured goods to all of the countries around the world that had lost their own
industrial capacity in the war. They could exchange their goods for foreign income,
which could in turn be used to purchase even more advanced industrial equipment
to hopefully further grow its local industries.
The fear with this strategy is that domestic industries will need to compete directly with
every other industry around the world, and if they are only producing basic goods like
Argentina was at the time, the only real way to compete is by trying to be the cheapest,
which means lower wages for workers, kinda defeating the purpose of building this industry
in the first place.
The other option was developmentalism, which meant that anything that could be produced
in the country, should be produced in the country, and imports should only be considered
as an absolute last resort. Given the country was in many ways one of the earliest pioneers
of global trade as we know it today, and given that relying on that trade and foreign investment
had caused many problems for them in the past, the developmentalist approach was incredibly
politically popular in the country.
This was also heavily supported by a new group of immigrants that moved to the country
following the second world war, that uh, did not see the appeal of being too involved in
global affairs, and that's all we're going to say about that.
In retrospect, it's clear now that modern global trade has been an incredible driver
of economic wealth and prosperity, because no individual country is able to keep up with
the pace of technological advancements in every single industry that exists to provide
the goods and services that modern economic participants have come to expect.
Even something as conventional as farming has seen massive technological advancements
in recent decades, which means hundreds of times more produce can be harvested with the
same land and labor input as before. So yeah, not being part of these advancements was the
missed opportunity for Argentina as they focused inwards, but it wasn't an unprecedented decision.
Before the second world war, the USA had a similar policy of developmentalism,
and it wasn't until after that it started trading globally at any kind of scale,
it just picked its timing better.
Even today, Argentina has very low trade intensity by the standards of even developing economies
around the world, and that combined with the pressure to maintain living standards are
what causes its never-ending economic turbulence.
The Nobel prize-winning economist Simon Kuznets is said to have remarked that there were four
types of economies, the developed, the underdeveloped, Japan, and Argentina.
What he meant by that is that unlike a lot of other economies around the world that have
their own economic problems, Argentina has worked its way into a position where it's
almost destined to forever bounce back and forth between periods of rapid growth
and equally rapid collapse.
From the start of pushing to isolate from the outside world,
Argentina did experience economic problems.
There are just certain things that are cheaper to import, and in advanced modern economies,
even modern economies back in the 1950s, it's incredibly difficult to produce everything
locally. Local industries that were protected by the government with high import taxes that
made anything from overseas uncompetitive were, perhaps unsurprisingly, uncompetitive.
Since production couldn't keep up with demand, and the government had committed to paying
workers in newly nationalised state-owned industries very well, the relative value of
the peso shrank, and Argentina got its first taste of inflation.
Eventually, this inflation stifled domestic industry, but the problem was that since
Argentinians had become used to a certain level of economic prosperity, it was very
hard to roll back measures like high incomes for state workers or protectionist trade policies
because that would cause a sharp drop in living standards, even if it was what was
really necessary long term.
Instead, over the decades, the country has fallen into a cycle of new charismatic leaders
promising to turn the country around by modernising industry to keep up with global competitors.
These modernisation efforts do, in the short term, boost economic output as people are
put to work reshaping the economy, but they have consistently been funded by taking on
lots of debt. That, with the combination of poor economic policies of developmentalism,
means that the country then consistently has problems repaying those loans.
To pay loans, the country then prints lots of money causing inflation,
and that combined with debt problems causes other economic crises, which gives rise to
a new political movement that promises their sweeping reforms will solve all the country's
problems.
A lot of those fixes have also been incredibly reactionary and have given little consideration
to how everything in an economy affects everything else in at least three different ways.
Today, the country is once again fighting with record high inflation,
having passed a rate of over 100% a year for the first time since the 1990s.
That means every year twice as much of the local currency is required to buy the same
amount of stuff.
Since this is just not manageable for regular people to use for transactions or savings,
people have started using US dollars instead. So, in reaction to that,
the government put a limit on how many Argentine pesos could be transferred
for foreign currencies in a given year.
Obviously, this caused problems in other areas of the economy, like the few industries that
were still involved in international trade, as that requires trading foreign currencies.
So, the government once again reacted by setting up special rules for certain industries.
This is all happening at the same time as the total economic output of the country has almost
doubled in just two years, essentially making it the fastest-growing economy in the world.
Although, of course, not many economists are predicting that this boom is going to last for
a long time, because it has again mostly been fueled by the government pushing lots of borrowed
money into local industries.
It's not a perfect analogy, of course, but the country is a lot like a person that grew up
wealthy and has relied on debt and get-rich-quick schemes for the rest of their life to try and
maintain the standard of living that they are used to. But in doing so over the long term,
they have only hurt their credit score and chances of building a real career that could
sustainably give them the prosperity they are after.
In reality, the country would be better off committing to some level of austerity,
where debt is brought back under control, protections are reduced, and real industries
are allowed to grow without radical and unpredictable interventions from the
government constantly trying to put out fires.
The problem is, of course, in a country that has grown accustomed to high standards of
living based on industries that have never really needed to compete, it's not going to
be a popular political platform to run on when there is no guarantee of when such a
plan would start to pay off.
The only other variable here is the institutions that keep loaning the country money.
Argentina since the early 1900s has always been a high-risk, high-reward country to invest in,
because when things are going well it has some of the most intense periods of economic growth
of any country at any point in history, even beating out countries like China.
Of course, a long history of defaults and other economic problems mean that now only
institutions like the IMF, which acts as a sort of global lender of last resort, gives them loans.
But controversially, they have received by far the most lending from this organisation of any
country, and they have also received it without the same kind of terms and conditions that
usually come with loans from the IMF.
Some commentators have seen this as unfair treatment because other countries have had
to introduce very strict economic controls in return for their bailout loans.
Others have seen it as just enabling Argentina to continue to live beyond its means by giving
it yet another macroeconomic equivalent of a credit card to max out,
maintaining a system that wasn't working to begin with.
Okay, now it's time to put Argentina on the economics explained national leaderboard,
which we have done before, but in the almost three years since the country has changed quite a lot,
as is probably to be expected in arguably the world's most unstable economy.
Starting as always with size, Argentina currently has a GDP of 632 billion US dollars,
which despite the doom and gloom we've explored in this video is a significant
improvement from where it was when we last made this ranking, it gets a very solid 8 out of 10.
GDP per capita is, however, quite low because the country has not encouraged its domestic
industries to innovate or reinvest into new technologies because they've always lived
under strong government protections from outside trade.
That means today the average worker in Argentina has fewer tools to do their
job as efficiently as workers in other industrial economies, even those like China.
Of course, its recent economic boom is improving, but even today it only has a GDP per capita
of just under $13,000, almost perfectly in line with the global average, so it gets a 5 out of 10.
Stability and confidence should be at zero, and that's what we gave the country last time,
but since then we've updated the secret formula to mean that basically anything under a 2 means
the country is in the throes of a civil war, infrastructure has been destroyed,
and economic participants are uncertain of their own safety, let alone their own wealth.
Argentina is obviously home to wild ups and downs, but those ups are at least in part only
possible because the country has been able to foster a certain level of political stability,
and things like armed revolutions, well do happen, but are not regular occurrences.
Because of that Argentina gets a score of 2 out of 10, not great by any means,
but something that we do believe is more representative of its real position in the world.
Growth has obviously been exceptional in the past two years,
which is exactly why we measure this score from average growth over the past decade.
Even on that short timeframe Argentina has had some wild ups and downs,
but overall has only grown by an average of 1% per year.
Not great by global standards, and certainly not great for a developing economy.
It is for now not going backwards though, so it gets a 3 out of 10.
Industry is poor, the country's main exports are still basic agricultural goods,
and its push for self-sufficiency over the decades means that the country is
still well behind the rest of the world in most technical fields.
Argentina gets a 3 out of 10.
Altogether that gives the country an average score of 4.2 out of 10,
which is an improvement from where it was last time, but not a big one,
and unfortunately it is likely that when we explore this country in the future,
that current issues like hyperinflation will have pushed it back into an economic crisis
once again and all we can do is hope that we are wrong.
Now another issue that is a big deal in Argentina is the crippling effects of brain drain.
We have already made an entire video exploring that concept and why it keeps poor countries poor,
so we didn't want to repeat too much here,
but you should be able to click to that video on your screen now.
Thanks for watching mate, bye.