Sunday 15 December 2019

Lessons on growing prosperity from Argentina

Diego Maradona
Diego Maradona
Dan O'Brien

Dan O'Brien

My interest in economics was sparked as a kid growing up amid Ireland's miserable economy in the 1980s. Why was unemployment so high? Why were so many people emigrating? And why did adults live in fear of budget day?

These woes seemed all the more curious when the countries we knew best from TV (Britain and the US) seemed to have no such problems.

My curiosity widened as a teenager, when I became more aware of the world and the uneven levels of development across it.

If seeing countries at first-hand might not give immediate answers as to why some countries are poor and others rich, it certainly focuses the mind on the question.

And as I started last week in Shanghai and ended it in Buenos Aires from where I'm writing, it did exactly that - the former is a powerhouse of economic vibrancy that glistens and gleams in its newness; the latter a grand but often sad megacity dotted with decay and faded past glories. And all this is in evidence within an hour of landing, from the respective states of their airports and the road quality into the two cities.

Libraries of books try to explain the differences in economic performance across countries and time. Some scholars focus on geography and natural resources, others on social structure and others again on the quality of government institutions (in the main section of this newspaper, my column considers a new book on Ireland's path to modernisation). The economic records of China and Argentina happen to say a good deal about the debate.

This year Argentina marks its 200th year of independence from Spain. As with Ireland's first post-independence government, which favoured economic openness, the historian Tulio Halperin Donghi has written that Argentina was "born liberal". That allowed it to grow from a sparsely populated backwater to become Latin America's success story of the 19th century.

By the early 20th century, estimates of Argentina's per capita incomes put it in the global top 10, and not far behind the US. Its temperate climate and vast fertile pampas allowed it to become an agricultural powerhouse, exporting food to Europe's growing and increasingly urban population.

If beef and grain went one way, people went the other. Huge immigrant flows took place from Europe - including a not insignificant number from Ireland.

China, by contrast, was at a historic low point at the beginning of the 20th century. The 350-year-old Qing dynasty was crumbling under an assault of the western imperial powers. For a country that claims, with good reason, that its institutions of state pre-date all others in the world, the events of 100 years ago were a shocking humiliation. It still rankles to this day.

The decades that followed brought disaster after disaster for China, while Argentina had a less spectacular fall from grace.

China suffered invasion and civil war. Then it was cursed with Mao Tse Tung. His insane collectivist experiments, including the Cultural Revolution which began exactly 50 years ago, led the country down the sort of cul de sac North Korea is now lost in.

By the 1970s, China was one of the poorest countries on the planet and an insignificance in the world economy.

Argentina's descent was more relative, and a lot less bloodily dramatic. From relative high income status a century ago, it slipped into the middle income bracket, from where it appears to have become trapped.

Its economic growth in the decades up to the 1970s was anaemic. Then things got worse. The Latin American debt crisis and chronic mismanagement lead to the end of growth for most of the rest of the 20th century. That happened despite somewhat better politics since the 1980s when the global "third wave of democratisation" took root in Latin America.

The country began the 21st century with what was the largest sovereign default in world financial history. Protracted awfulness ensued, despite what some Irish advocates of taking the default option at the height of our most recent crisis said at the time. A new government, elected last year, has only just cut a deal with the holdout bondholders from the 2001 default. That has allowed the country borrow money internationally again. But the risk of yet another crisis looms.

The recovery of the economy from the middle of the last decade was largely on the back of booming commodity prices. That is now over. One result has been a 50pc increase in public debt relative to GDP since 2011. All of this has knocked always fragile confidence. The currency has lost half its value vis a vis the dollar since late 2013. Inflation is out of control, running at 35pc in March. The new government has its work cut out for it if it is to avoid yet another collapse.

If Argentina had a turning point, it was probably the military coup in 1930. That ushered in half a century of the army strong-arming its way into politics. Despite having one of the least socially and racially stratified societies in Latin America, politics polarised. Reactionary right-wingers and populist Peronists undermined the basis for wealth creation. The hovering threat of foreign-backed Marxists during the cold war only made matters worse.

Perhaps the biggest mistake was the attempt to use protection to grow indigenous industries. Although this strategy worked in East Asia, it failed dismally in Argentina, as it did in the rest of that region.

Vested interests - management and organised labour - preferred to exploit the home market and keep out foreign competition rather than do the hard slog of becoming globally competitive (Ireland's experience of protectionism, incidentally, was much closer to Latin America's than East Asia's).

When China opened up in the 1970s, it also developed its industries but it followed the model of the Asian tigers, ensuring that protected industries compete against each other. And the consequences of failure for those in management positions were also much greater than in Latin America.

A hugely important part of the China success story has been its ability to accumulate and deploy capital.

The Chinese are among the world's biggest savers. Because they trust their banking system, the money provides a vast reservoir of capital for investment - and this can be seen in the built environments in the country's cities.

Although there is a real risk to the banking system after excessive lending since 2008, over the decades since the opening of the 1970s the huge capital investments have been mostly successful.

The country's turnaround since then amounts to one of the greatest, and certainly the biggest, modernisations in world history. It is not hyperbole to say what has been achieved in China is a miracle.

In Argentina, by contrast, savings rates have long been abysmally low, as is the case in much of Latin America. Successive bouts of hyperinflation, currency collapses and bank failures have resulted in life savings being repeatedly wiped out, most recently in Argentina in 2001.

As a result, people don't trust the system - and those who can, stash their money off shore. All this has contributed to the chronic lack of investment, something that, again, is all too visible, from the country's crumbling cities and to its defunct 19th century Andean railway lines.

"Argentina is a riddle," according to sociologist Carlos Waisman. It should have been "the Canada of the south", or at least as successful as its neighbour Chile, by a distance the richest country in the region, but it has been in relative decline for a century.

Many factors affect economic outcomes, but these two cases over more than a century show that the role of government is among the most central issues in economic development. Bad politics and policies will kill wealth creation, often quite quickly.

Good policies and stable politics have a slower burn effect - they won't conjure prosperity overnight, but it is nigh-on impossible to get rich without them.

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