The economic history of Argentina during the 20th century and part of the 21st shows us a black story, of how a land of opportunity early in the century got spoiled. Just before the First World War, its economy could boast of solvency and an average economic growth rate of 6% during the last 35 years.
Argentina could be seen as an advanced economy in those years, behind the English economies (United States, United Kingdom and Australia) but ahead of European economies such as the Italian, the French and the German. Argentina ranks among the best. Its per capita income adjusted for purchasing power was 92% of the average of the 16 most advanced economies in the world.
Its economy was strong and attractive. It is characterized by an economic openness that welcomed capital inflows and dominated the expansion of exports of primary products (cereals, meat, wool and leather) that drove rapid economic growth and was a pole of attraction for European immigrants.
To get an idea of its economic strength, if in those years France had a per capita income of $ 3,452, Argentina reached 3,797 dollars, that is, 10% higher.
Translated to this day, in 2018 France presented a per capita income in purchase parity of $ 46,360, so Argentina, following the previous relationship, could reach $ 46,823 but no, it was only $ 19,870, 58% below, which gives us an idea of the decline experienced in a century. If we look at the same relationship with the current 16 advanced economies, it is 42% below.
The question that comes to mind is how such economic destruction has been achieved in little more than a century.
Argentina for trying to protect agriculture sank progress
Before 1914, the Argentine economy was fully open, the ratio of its exports to its imports exceeding 50% of its GDP during the period before the First World War, but it declined during the interwar years (from approximately 45% to 20%) and practically did not exceed 25% after 1945.
Here two problems arose. The first is that there was a clear interruption of global trade as a result of the First World War and the Great Depression, a fact completely foreign to the country. But we must add an important internal factor: the birth of protectionist policies by successive Argentine governments, which later became consolidated with Peronism.
That protectionism was a mistakeIt had a strong economy but needed to move forward and the economy did not diversify. If prior to the 1920s the degree of tariffs (the ratio of import tax revenue to the value of imports) was below 10%, in the hard years of the Great Depression it raised import tariffs from an average of 16.7% in 1930 to 28.7% in 1933.
Argentina saw how in successive years a decreasing relationship was forged between its trade openness and GDP that may reflect the lack of diversification of agriculture and the depletion of the agricultural frontier due to the added difficulties for the exploitation of new lands.
This protectionism, which in the mid-1940s was institutionalized through Peronism, meant putting sticks to wheels for agricultural productivity growth and the import substitution model failed to drive productivity growth in the industry. Therefore, Argentina could not grow, it lagged behind.
Saving specific moments, from Perón a protectionist tendency was marked that some governments tried to correct without much success. The idea was simple: do not importIt must be the Argentines who produce those products that they demand from abroad.
Thus, a strategy of internal development and industrialization by import substitution was forged. The problem is that as they incorporated tariffs that made foreign products more expensive, a low productivity industry was born, the same good acquired abroad was much more expensive if produced by the Argentines themselves.
The most palpable proof is the growth of industrial productivity. In Argentina, industrial productivity (measured as gross production per industrial worker) increased at a rate of 2.6%, on average, between 1946 and 1963 and then fell at an annual rate of 0.5% between 1963 and 1974. In contrast, neighboring Brazil grew at an annual rate of 5.2% between 1945 and 1979.
Between the years 1945 to 1975 -period that in Argentina begins with the first government of President Perón and ends with the military coup that ended the third government of the Peronist Party- Argentina went from a per capita income in purchase parity equivalent to 67% of that of the United States to one of 49%.
Argentina and institutional weakness
Argentina has not particularly presented institutional stability. Her story after World War I it is plagued by military coups and extractive institutions.
If we talk about military coups, the first came in 1930, others followed in 1943, 1955, 1962, 1966, and 1976. The 1989 elections marked the first time in more than 60 years that a civilian president handed over power to an elected successor. It is difficult to attract and concentrate investments if you are closing the economy and, in turn, there are constant interruptions in the institutions of a country.
As an example of the institutional weakness we have that the Supreme Court has been reformed several times since Perón in 1946. Presidents have the habit of modifying the constitution to allow them to serve more terms and to forge themselves in office as they extractive institutions were created and property rights were increasingly violated.
That vulnerability has persisted to this day. Let us remember the case of Repsol, which held a stake in YPF, an Argentine oil company, and was nationalized in 2012.
Both in democratic periods and in dictatorship, Argentina has been characterized by the use and abuse of debt, so they are not reliable institutions to provide savings. The process has always been similar, deficits generated to the point of demanding financing in dollars due to the lack of institutional credibility, printing money to pay, the devaluation of the Argentine peso and the generation of exchange crises with an inflationary response to the economy and a chain of defaults on debt.
Argentina lacked fiscal rules. Therefore, between 1960 and 2018, it observed a chronic average fiscal deficit of 4.4% of its GDP, while the average growth rate was only 2.4%, in the same period. The difference was systematically covered by monetizing the fiscal deficit, generating the very essence of the chronic inflation of the last 70 years.
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