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Archive for July 10th, 2020

It doesn’t get as much attention as basket-case nations such as Venezuela, North Korea, Zimbabwe, or Cuba, but Argentina is one of the world’s worst-governed nations.

Though the most damning indictment, in my humble opinion, is that Argentina in the late 1940s used to be one of the world’s 10-richest nations.

But beginning in 1946 under Juan Peron’s statist presidency (much beloved by Pope Francis for inexplicable reasons), policy shifted to the left and Argentina become one of the world’s least market-oriented nations.

Not surprisingly, the country’s relative living standards then began a steady decline, thus providing us with a painful lesson that rich nations that adopt bad policy don’t remain rich.

Recent history hasn’t made things better. Populist-left governments were in charge from 2003-2015, followed by an ineffective right-reformist government (akin to Nixon-Bush-Trump-style Republicanism) from 2015-2019, and now the left is back in charge.

But one thing that hasn’t changed is that Argentina has bloated, corrupt, and ineffective government.

Here are some details from a column that wrote last September for Project Syndicate.

Argentina has fallen back into crisis for the simple reason that not enough has changed since the last debacle. …Argentinian authorities succumbed to the same temptation that tripped up their predecessors. In an effort to compensate for slower-than-expected improvements in domestic capacity, they permitted excessive foreign-currency debt, aggravating what economists call the “original sin”: a significant currency mismatch between assets and liabilities, as well as between revenues and debt servicing. …Undeterred by Argentina’s history of chronic volatility and episodic illiquidity – including eight prior defaults – creditors gobbled up as much debt as the country and its companies would issue… The search for higher yields has been encouraged by unusually loose monetary policies… Then there is the IMF, which readily stepped in once again to assist Argentina… So far, Argentina has received $44 billion under the IMF’s largest-ever funding arrangement.

This latest bailout is a classic case of throwing good money after bad, which seems to be the IMF’s primary purpose – especially with regards to Argentina.

Later that same month, Anne Krueger weighed in with another column for the same publication.

Argentina is…chronically overspending and over-regulating until it is forced to go to the International Monetary Fund for a new round of treatment. In 2001, the country suffered a major crisis, and…entered into an IMF loan program. But its debt restructuring was messy, and policies to address its underlying structural problems – lowering trade barriers, allowing public-utility prices to rise – were pursued halfheartedly or not at all. …government spending and fiscal deficits began to increase once again. Consolidated public expenditures rose from a low of 22.9% of GDP in 2002 to 30.1% of GDP in 2008, and to 42.2% in 2015. …For an economy as distorted as Argentina’s, there is no medicine that can prevent a period of painful adjustment. …By early 2018, Argentina was in another crisis. …in June 2018 the IMF approved a $50 billion loan program, the largest in the Fund’s history. …The problem, once again, is that the medicine was not strong enough. At the patient’s insistence, the measures were too mild to be effective, and more difficult structural reforms were delayed. …the country needs structural reforms, especially a further reduction in the size of the government sector, starting with pensions. More gradualism will only prolong the pain and allow political opposition to mount.

Ms. Krueger is correct. Only good policy will cure Argentina’s woes.

Sadly, bailouts actually undermine that goal give the country’s awful politicians an excuse to postpone necessary reforms.

Though there is a silver lining to the dark cloud of Argentine statism. James Pethokoukis of the American Enterprise Institute pointed out earlier this year that we now has a real-world example of democratic socialism.

…the Nordic nations are “firmly rooted in capitalism and free markets,” wrote Michael Cembalest of JP Morgan Asset Management in a note last summer… The closest Cembalest could find to a true democratic socialist state, at least by his definition, is Argentina, “which has defaulted 7 times since its independence in 1816, which has seen the largest relative standard of living decline in the world since 1900, and which is on the brink of political and economic chaos again in 2019.” …Argentina met most of the following criteria: a) higher personal and corporate tax rates, and higher government spending; b) more worker protections restricting the ability of companies to hire and fire, and less flexibility for companies to set wages based on worker productivity and/or to hire foreign labor; c) more reliance on regulation, more constraints on real estate development; d) more anti-trust enforcement and more state intervention in product markets; and a shift away from a shareholder-centric business model; e) protections for workers and domestic industries through tariff and non-tariff barriers, and more constraints on capital inflows and outflows.

Not exactly a ringing endorsement of so-called democratic socialism.

If you prefer hard data, this chart shows that Argentina has the world’s worst economic performance over the past 100 years.

And I imagine the country would look even worse if 1945 was the base year.

Let’s close with this recently tweeted video from Human Progress, which shows relative levels of per-capita economic output over a 100-year period for 16 different nations.

Pay specific attention to how high Argentina was ranked in the late 1940s if you want to appreciate the awful consequences of Peronist statism.

P.S. Also make sure to note that Chile was in last place in the 1970s and then significantly improved in the rankings by liberalizing the economy and reducing the burden of government in the 1980s. Yet another reminder that the world is a laboratory and every experiment tells us the same thing: Statism produces bad results and markets deliver good results.

 

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