This is Argentina, a South American nation which has been home to an unprecedented period
of sustained growth quintupling in size in the last decade.
This nation has seen remarkable resilience through financial crises and even though it
cycled through 5 presidents in two weeks, its continued re-investment in itself has
paid off many times over as average incomes have doubled in the same time period to create
fantastic increases in the quality of life for all the citizens of the nation.
Or at least that would have been the video we were making a few years ago.
Unfortunately today the economy of Argentina tells a very different story.
Just as quickly as the economy soared to these lofty heights it has crashed back down bringing
about a period of heavy inflation and widespread poverty.
But perhaps this shouldn’t be a huge surprise, in the last 100 years the economy of Argentina
has been categorized by periods of massive growth followed by huge declines making the
most recent decades little more than a continuation of that unfortunate trend.
This is a real shame because Argentina obviously has a lot going for it, from a healthy population
of productive workers, strong natural resource reserves and even a landmass that is very
conducive to foundational industries like manufacturing and agriculture.
But despite all of these advantages Argentina has time and time again fallen into this unfortunate
pattern, and is now teetering on the edge of becoming a full-blown failed state.
Nobel prize-winning economist Simon Kuznets is said to have remarked in the early 1970’s
that there are four types of economies in the world, developed, underdeveloped, Japan
and Argentina.
We have already explored what makes Japan so weird, but to unravel the mystery of Argentina
we are going to have to understand a few specific issues.
What has caused the various economic booms over the years?
What has caused the subsequent economic declines?
And why is this most recent downturn just a little bit different?
Once we have done all of that we can get to the fun stuff and put Argentina on the economics
explained national leaderboard, hows that for
a 2020 grand final.
Intro Add
It may sound unbelievable today but at the turn of the 20th century argentina was one
of the 10 wealthiest countries in the world. Its domestic industries which revolved primarily
around high-end agriculture had benefited greatly from an influx of investment from
Europe and America and the nation was able to adopt modern commercial farming techniques.
This worked especially well considering those same countries that invested so heavily were
also fantastic export markets who through their own economic growth had developed quiet
the taste for red meat, which before this time was seen as a bit of a luxury.
This growth was further accelerated by massive European immigration into the nation which
brought with it even more money from the people looking to set up their new lives.
Overall this was fantastic and by 1905 the average argentinian was about as wealthy as
the average citizen of France Britain or Germany, and only slightly poorer than the average
American.
There was a slight asterisk next to this success though which was that the politicians and
business leaders who oversaw this growth were extremely corrupt and the wealth the nation
was growing was distributed very unevenly and went primarily to the aforementioned european
immigrants.
This wouldn’t have necessarily been a problem in the long run because the nation was still
getting wealthier and even people at the bottom were enjoying an increased standard of living
but of course it didn’t.
World war one was a let’s say interesting time for argentina, the country remained totally
neutral but that does not mean that it was not heavily influenced by the fallout of the
war.
For starters due to the massive influx of european immigrants, many of whom were from
nations now at war with one another. it found that its population was rather, hostile.
A much more tangible effect was that all of the nations that had been pumping investment
capital into argentina and then buying up all of their exports were now broke on account
of having to fight in the largest and bloodiest war in history up until that time.
This pushed the country into a long period of stagnation that was only worsened by the
great depression in 1929.
luxuries like red meat on the dinner table and foreign investment quickly fell out of
style.
This was a real problem for the leadership of the nation. Not only were they no longer
able to make themselves incredibly wealthy off the success of Argentina, but the people
of the nation who were enjoying the second-hand wealth were becoming increasingly restless.
A solution was needed and fast, so a series of trade deals were set up with European nations
to try and reignite the growth of the previous decades.
Unfortunately, these trade deals were, very one sided, and they served primarily to solve
the issue of corrupt politicians not getting rich, rather than the problems of the nation
losing its primary industries.
The most famous example of such a deal gave britain with it’s asymmetrical flag exclusive
rights to sell coal to Argentina and also gave the British companies the right to buy
up and control the Argentinian meat industry.
Sure this gave the country a small boost in exports which were very important but it also
gave away Argentina’s primary industry to a foreign power which was terrible.
It was such a poorly planned out deal that corruption was really the only reason that
leaders from Argentina would be compelled to agree to such onerous terms.
Either way these deals further accelerated the decline of the nation which gave rise
to heightened civil unrest and a series of political coups.
Political instability resulting in the forceful removal of a government is never a good look
to the international community and foreign investment in the nation quickly dried up.
This was a real problem because at this time the nation was desperately trying to industrialize
other sectors of the economy to make up for the meat industry which was increasingly falling
into the hands of international companies.
This eventully led to the election of Juan Peron who introduced sweeping economic reforms
with a particular interest on building out nationalized heavy industry. Which sounds
an awful lot like someone else you might know from this time period.
For what it’s worth this tactic of nationalise everything that was owned by foreigners and
pumping money into building out industry did sort of work for a while, but once other nations
had recovered from the second world war they were very cranky that all of their foreign
assets had been stolen.
To add insult to injury Argentina was more than happy to extend an open invitation to
German Nazi’s that the world had just fought so hard to defeat.
For this reason nobody wanted to invest in Argentina or buy any of the stuff they were
making in their fancy new factories and for a nation as heavily dependant on exports and
foreign investment as Argentina this was a major blow.
The nation quickly became very poor once again and the radical new leaders popularity fell
along with it, leading to yet another political coup from a successive lineup of strong figurehead
leaders with the secret solution to fix the nation.
At this point you should start to get an idea of the narrative of Argentina in the 20th
century. Sweeping reforms to correct minor issues meant more harm was done than good
and these damages were subsequently “fixed” by more sweeping reforms that did more harm
than good.
The nation ping-ponged its way through the remainder of the twentieth-century pinging
from total command economics to ponging of basically le-ze faire capitalism.
Now any regular viewers of this channel will know what I am going to say next. This kind
of back and forth decimated the Stability of the nation and the confidence that people
had in it.
People dont’t want to invest or start families, careers and businesses in a country that could
be flipped on it’s head in the next election. They don’t want to save for retirement under
a regime that could plunder their piggy bank and international organisations don’t want
to throw money into a nation that will give them nothing in return.
So yeah yeah stability and confidence, no huge surprise their, but what if we looked
a little bit deeper. Remember Argentina was a very wealthy and stable nation, so what
was it that caused their decline, while other similar nations like canada and Australia
sailed on with their prosperity intact to this day.
Well to answer that we have to look at the
Argentine Paradox
The actual reason behind Argentina’s continued economic instability is a point of much debate
between a host of economists. just like the 3-decade long stagnation of japan nobody really
knows for sure. But there are a few prevailing theories for both.
Economists have primarily looked at the Argentinan journey in contrast to Australia and Canada
specifically who were all very similar entities at the turn of the last century. They all
had modest populations, they all had a large population of European settlers and they all
had a healthy collection of natural resources and farmland.
So the question was what made the difference.
The first proposal put forward by Guiadio Di Tella an Argentinian economist and businessman
was that the main difference between Argentina and other settler societies such as Australia
and Canada was its failure to seek adequate alternatives to compensate for the end of
geographical expansion with the definitive closing of the frontier.
100 years ago these countries were all far less utilized than they are today where almost
every square inch of land is accounted for in some way primarily agriculture. Back in
the day, these nations all had policies if you could go out and find a piece of unused
land and make it work as a farm it was all yours.
The problem was that Argentinian farmland is much more arrible than farmlands in Australia
or Canada and also by virtue of the country been smaller, much less available.
This overtime meant that Argentina had fewer farmers with more land and influence, rather
that more farmers with less influence. Throw in a healthy dose of anti-competition and
corruption and tada, suddenly the core industry of this nation is built on a fundamentally
unstable platform.
Another popular theory is that the nation’s political climate and systems were not as
well equipped to handle the new political landscape of an increasingly globalized world.
Canada and Australia both effectively have political and legal systems passed down from
the british westminster style of government. Now this system is by no means perfect but
it does promote stability and balance of power above all else.
It also promotes systems are put in place to deal with international entities since
you know, the British were very into that.
By contrast, Argentina had it’s political systems passed down to them primarily from
Spain which takes a more run and gun approach to international policies and has much less
of an institutional emphasis on political stability.
This is a slightly controversial theory, but for what it’s worth ex British colonies
have an average GDP per capita almost 50% higher than ex-Spanish colonies.
But, perhaps the most compelling argument came from a 1992 paper published by a research
team at the University of Madrid which highlighted that property rights were the big thorn in
the side of Argentina.
Remember how the nations assets kept on getting claimed by the state, and then privatised
and then claimed by the state and privatesed over and over again? Well it turns out that
makes people really not want to invest in your country, which is really bad.
Borrowing for growth is an essential part of managing a healthy industrial economy,
but that health heavily relies on what terms you get from that borrowing.
On an individual level, if you were a skilled worker like a doctor, or a dentist or even
a tradesman and someone offered you a business loan at 2% interest over a 40 year period
to open your own operation, you would be silly not to take that deal.
So long as you provide a good service you should easily be able to make these repayments
and be wealthier in the long term as a business owner rather than an employee.
On the other hand, if someone offered that same loan but it had to be paid back with
20% interest over a 5 year period, well suddenly it is a lot less tempting.
Not only is the interest higher but the entire thing needs to be paid back quicker which
means those month to month repayments could easily be much more than the business will
ever make.
The same kind of tossup exists on a national level. Historically very stable nations like
the USA and yes even Australia and Canada here can borrow money at very low interest
rates over a very long time.
But if investors look at Argentina they are going to see all of this nationalizing business
and be pretty scared to invest. If they do put their money into the nation they are going
to want high returns, and also going to want to have it out quickly before some new government
gets any ideas.
So in the long term australia and canada got to be the happy little business owners, and
Argentina had to forever be the national equivalent of an employee who couldn’t catch a break
due to their poor credit score.
Of course, there were many historical footnotes that accelerated these problems, not least
of which was starting a war with their longest and most loyal trading partner but some combination
of these three factors are the foundation of the nation’s economic woes.
Or atleast they were, because today, argentina might be facing a very different problem a
Currency crisis
The most recent crisis was kicked off as many have been before it when it became obvious
that argentina would elect a new president that had a political stance that was more
left-wing than his incumbent opposition.
A day after the primary election took place te argentinian stock market plummeted more
than 48% as investors feared they could be in for yet another round of nationalization.
The difference this time is that it’s currency has been thrown into jeopardy with no real
plan to save it.
In the early 1990’s the argentine pesa was pegged to the USD at a rate of approximately
3 to 1. This was enacted in an attempt to ward off inflation and it worked, decently
well.
Currency pegs involve the home nation in this case argentina keeping massive piles of foreign
currency that they are fixing to in this case USD’s. By being there to always honor the
3 to 1 exchange rate the market more or less falls into line because no buyer will accept
less than 3 peso’s per one dollar and no seller will accept less than one dollar for
their 3 peso’s.
We have explored how currency pegs work in much more detail in our video on Entropia
universe of all things so if you are still confused go and watch that.
But in short so long as people believe that a government can honor the currency exchange
they say, that’s what the currency conversion will be and sometimes this works so well the
government doesn’t even need to get involved. People just exchange at the agreed price of
their own volition.
Unfortunately this system fell apart during the last economic crisis in 2001, where people
rushed to exchange their peso’s to USD’s until the exchange board completely ran out
of reserves at which point the Argentine Peso effectively became a free-floating currency
despite the government still trying their best to prop it up.
Those efforts include offering the highest interest rates in the world. Ever feel short
changed by bank’s in your country only giving you half a percent interest on your savings
if you are lucky? Well in argentina you can get as much as 25%, the only catch is that
you need your deposits held in Argentinian peso’s.
The reason that this has become such a problem now is that this attempt to control the Argentine
peso has done very little but introduce lots of American money into circulation.
Given the historic instability of the nation and a rapidly declining value of the peso
people are moving to do more and more of their business in American dollars rather than Argentinian
monopoly money. Today Argentina effectively has a dual currency economy.
Argentine peso’s are still used for regular day to day activities like buying groceries
or paying for a taxi, but major transactions like buying a house or a car or even getting
paid are done in American dollars.
If this becomes widespread enough people will eventually not recognise peso’s for anything
and Argentina will become the largest economy in the world to not have control over it’s
own money.
Using a foreign currency is fine for small nations that don’t have the capacity to
truely run their own internal economic policies, places like monaco, and even Montenegro get
away with this just fine.
But if Argentina can not raise taxes, or provide fiscal stimulus or borrow in it’s own currency
it will effectively become a dead state walking, just one bump away from complete implosion
and if history is anything to go off, there are plenty of bumps ahead.
Ranking
Now it’s time to put Argentina on the economics explained national leaderboard, however, we
will now be doing that on our second channel that I bet most of you didn’t know we had.
Go and subscribe to that one as well because we will be using that channel a lot more this
year than we have been, for fun little economic curiosities that we weren’t able to make
full video’s out of as well as national rankings from here on out, plus well whatever
else I feel like putting on there.
Now spoiler alert, Argentina is not going to get a great score, but will it be bottom
of the list, well you’ll have to find out.
Fortunately, you can do a much better job of setting yourself up for prosperity by automating
your savings.
With acorns...
Outro add