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Argentina’s Rollercoaster Prosperity
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Argentina's Rollercoaster Prosperity

Oct 14, 2014

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Dylan DiLecce

Argentina’s Rollercoaster Prosperity

DiLecce |1

In its mere two hundred year existence, a country in the New World rose out of the shackles of colonialism to become one of the world’s largest and most sophisticated economies. With a bustling, metropolitan centre, strong exports, and a growing middle class, the country and its economy were on the path to maturation and sustainable growth. However, through decades of political strife and economic mismanagement, the country began to decline into
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Page 1: Argentina's Rollercoaster Prosperity

Argentina’s Rollercoaster Prosperity

Page 2: Argentina's Rollercoaster Prosperity

D i L e c c e | 1

In its mere two hundred year existence, a country in the New World rose out of the shackles of

colonialism to become one of the world’s largest and most sophisticated economies. With a bustling,

metropolitan centre, strong exports, and a growing middle class, the country and its economy were on the

path to maturation and sustainable growth. However, through decades of political strife and economic

mismanagement, the country began to decline into almost third world status. Rarely seen is a nation, once

so prosperous, brought into such economic and political disrepair as quickly as the country in question.

The country, with one of the most interesting and thought-provoking economic histories, is Argentina.

Through European immigration and direct investment, and development of an export-based economy,

Argentina has over the last century and a half integrated into the global capitalist system. However,

failure of fiscal and monetary policies, chronic inflation, and political and economic mismanagement of

debt created a volatile path for Argentine development into the modern era.

With the arrival of explorer Amerigo Vespucci in Buenos Aires’ bay in 1502, the mercantilist

development and beginnings of an international economy in Argentina began1. With the establishment of

the Viceroyalty of the Río de la Plata, Buenos Aires became a hub of trade in the region, acting as the

main port city to which the precious metals from Potosí in Bolivia flowed through to Europe2. For most of

the period leading up to Argentina’s independence in the 1800s, the country remained a colony subject to

Spanish dispossession of its and its neighbours’ resources, namely Bolivia’s precious metals and

Argentina’s rapidly expanding cattle farming. However, with the weakened maritime position of Spain in

the early 1800’s due to its war with Britain, the Viceroyalty was more or less left to govern itself. A

1 (Rock, The Spanish Settlements, 1516-1680)

2 (Rock, The Spanish Settlements, 1516-1680)

Page 3: Argentina's Rollercoaster Prosperity

D i L e c c e | 2

defining moment in the movement towards Argentina’s independence came after the success of the

country in fending off the British by themselves. By 1816, Argentina had declared its independence,

successfully rebelling against the Spanish Viceroyalty rule in the May Revolution of 18103.

As Europe entered into the Industrial Revolution, the International Division of Labour began to

develop more thoroughly, with Argentina for much of the 1800s on the periphery. As a source of raw

materials for “core” countries like the United Kingdom, Argentina was heavily focused on the production

of livestock for export4. Although the country benefitted from its trade relations, it was not until around

1880 that Argentina started rapidly developing its economy. By this time, stronger state intervention to

encourage immigration, public education, and diverse national institutions helped establish the framework

for economic growth and investment attractiveness in the country5. With a renewed availability of labour

brought on by immigration, Argentina’s cattle-based exports began to shift during this period towards the

more labour-intensive production of grains and corn, thus diversifying its export-based agro economy6.

Most importantly, the diversification and expansion of agricultural production on the highly fertile

Pampas resulted in a massive growth in national infrastructure, most notably, railway construction7. By

1915, Argentina had more railroad track per capita than the United States8. This infrastructure helped

spread the development of the Argentine economy more from its concentration in Buenos Aires to other

areas of the country, albeit still holding the Buenos Aires in the core of its production. Thus it can be seen

that Argentina had its own domestic division of labour, with Buenos Aires as the main core region of

development and areas such as the Pampas as the periphery, providing resources for the core’s

manufacturing and exporting.

As the Argentine economy began to need massive capital investment for its infrastructure

projects, the economic environment set up by previous government legislation attracted a large amount of

3 (Rock, The Rise of Buenos Aires, 1680-1810)

4 (Grimson and Kessler)

5 (Grimson and Kessler)

6 (Slettedahl Macpherson)

7 (Slettedahl Macpherson)

8 (Winn)

Page 4: Argentina's Rollercoaster Prosperity

D i L e c c e | 3

foreign direct investment. With the prominence and capital accumulation of the British economy in the

late 1800s, investment by the country into Argentina was the largest out of any country9. British

investment led by firms such as Baring Brothers and Rothschilds helped to not only build ventures with

guaranteed profits like railways and utilities, but also the country’s capital markets system10

. The foreign

investments within the country proved critical to advance the export-oriented economy diversify and

develop its infrastructure. In 1890 however, the effects of poor fiscal and monetary policies greatly

affected the country’s prospects. Since debt increases a company or country’s potential risk and reward,

the growing foreign debt of Argentina proved to intensify any mismanagement of its economy. And as

loose fiscal and monetary policies led to inflation averaging seventeen percent, the economy began to

slow. The country’s debt service as a result ran upwards of forty percent of all foreign borrowing, while

imports became dominated by non-investment goods11

.

This dangerous economic situation culminated in the near collapse of British lender Baring

Brothers whose investors sought to pull out quickly from their Argentine investments. The resulting

transatlantic recession hit Argentina especially hard, forcing the country to default on almost £48 million,

which was nearly sixty percent of all the defaults in that decade12

. With the establishment of a currency

board to stabilize the peso and debt reorganization, Argentina recovered shortly after, with continued

foreign direct investment developing its infrastructure. However, the Argentine economy was to suffer

another shock to its system again due to its heavy reliance on foreign countries. However, where the 1890

crisis was a result of domestic mismanagement exacerbated by foreign disapproval, the economic

slowdown in the 1910s was a result of WWI. With so much reliance on foreign countries, the transfer of

investment of countries like the United Kingdom to arms and defence measures meant that capital

injections into Argentina slowed dramatically.

9 (Slettedahl Macpherson)

10 (Mitchener and Wadenmier)

11 (Mitchener and Wadenmier)

12 (Mitchener and Wadenmier)

Page 5: Argentina's Rollercoaster Prosperity

D i L e c c e | 4

Nevertheless, the period of global industrialization in the 1800s and early 1900s proved extremely

beneficial for Argentina, despite its volatile development. It was during these years of export-oriented

growth and infrastructure development that Argentina’s GDP increased more than seven times between

1881 and 1905 and its GDP per capita increased from thirty-four percent of U.S. GDP per capita to

eighty-five percent of U.S. GDP per capita over the same period13

. The 1920s saw strong growth for the

country as well, although this period’s average growth rate of six percent was far less than the previous

decades had been, most notably due to the lack of the same levels of foreign investment14

. By in large, the

period leading up until the 1930s, albeit volatile, was a period of extraordinary growth for Argentina.

As Argentina’s economic ties with the United Kingdom began to be replaced with the United

States, it, like most of the world, felt the deep effects of the stock market crash on Wall Street in 1929. In

1930, under immense public disapproval, the then-president was replaced in a coup d’état, while GDP

growth plummeted15

. As the public grew upset over the economic policies that were in place leading up to

the Great Depression, a change was viewed to be needed. The government responded by increasing the

money supply. Accordingly, the peso depreciated, making imports more expensive relative to exports16

.

This government policy, like many other countries’, sought to protect the industrial sector by removing

the country from importing its goods from abroad. This was the beginning of what would later be known

as import substitution industrialization, or ISI. From 1931 to 1940, GDP grew at an average rate of 2.5

percent, much lower than it had prior to 192917

. As a result of Argentina’s support of Germany in WWII,

European countries were not allowed to buy Argentine products with their Marshall Plan funding. As the

U.S. viewed Argentina with increased scepticism because of its German support, Argentina was thus hurt

13

(Avila) 14

(Gerchunoff and Aguirre) 15

(Lovering) 16

(Lovering) 17

(Lovering)

Page 6: Argentina's Rollercoaster Prosperity

D i L e c c e | 5

economically by these sanctions against European trade18

. Amidst popular support, Juan Perón was

elected in 1946, bringing import substitution industrialization to the forefront of his policies. By creating

high tariffs on potential imports and simultaneously providing domestic industries with tax and credit

incentives, the ISI policies were to secure national strategic industries from foreign competition until they

were strong enough to be self-sustaining. However, a drop in global grain prices in combination with the

lockout of access to the European market led to stagflation in the economy by the late 1940s19

. Again, a

new economic policy on development was sought to bring the country out of its malaise.

With the election of Arturo Frondizi, the policy of developmentalism was established. Similar to import

substitution industrialization, the developmentalist policies sought to support domestic industries while

aggressively pursuing foreign investment by devaluing the peso and reigning in the budget deficit through

austerity measures20

. The policies appeared to work, with balanced budgets and decreased unemployment

and poverty levels. After a brief military regime, developmentalism was continued by the succeeding

presidency of Arturo Illia, whose policies remained in line with the global rise of Fordism21

. Although

Argentina had one of the largest middle classes in Latin America during this period, the constant

alteration of military and civilian rulers with most not completing their term in office left the populace to

distrust the government22

. It was during this period that inflation seriously limited growth and with

pressures from unions to increase wages in combination with political instability, the economy struggled

to grow.

In 1973, the global oil crisis sparked even higher inflation in Argentina. From 1974 to 1976,

inflation jumped from an already staggeringly high three hundred and thirty-five percent to an astonishing

seven hundred percent. The buying power of the middleclass was drastically eroded, and with the ensuing

economic chaos alongside hastened political discontent, the military overthrew the government. This time

18

(Lovering) 19

(Lovering) 20

(Bowen) 21

(Bowen) 22

(Monteon)

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D i L e c c e | 6

however, the military stayed in power for more than seven years, in a period characterized by state

terrorism and economic destructuring now known as the Dirty War.

When Jorge Videla, the first of the generals to take office, began his term, the foreign debt levels

reached ten billion dollars with the government running a deficit that was fifteen percent of GDP. The

most instigating factor for the ensuing economic chaos was the inflation rate, which for a few months

even peaked to an annual rate of three thousand percent23

. Videla tried what previous military

governments had attempted each time they came into office: rewarding exporters, protecting

industrialists, and repressing labour24

. The economic climate during this military government was,

however, more severe than it had been before. As a result, the government acted particularly extreme in

its policies, feeling they had to discipline a society incapable of disciplining itself25

. During this time, the

finance minister negotiated with the IMF to restructure the country’s debt while promising better terms

for foreign investment. By also imposing price controls, the government was able to partially rein in

inflation to one hundred and forty percent26

. As the second oil crisis of 1978 brought about almost a

trillion dollars of petrodollars that needed to be invested, the military junta in Argentina began to borrow

heavily. The policy consisted of using imports to force the price of domestic goods downward, thus

curbing inflation close to fifty percent by 198027

. This import-friendly policy was in direct contrast to the

ISI and developmentalist policies of the previous governments but it appeared to be successful in

controlling government deficits and inflation. As the spread between domestic and foreign interest rates

grew, billions of dollars of speculative money flowed into the country28

. By 1980, the balance of trade

began to turn unfavourable as exports dwindled and imports soared due to the high peso. Subsequently,

the Ponzi scheme, a result of the speculative capital flows, began to collapse, causing the insolvency of

two Argentine banks. As the military government began to bail out the banks, the country’s largest

23

(Monteon) 24

(Monteon) 25

(Grimson and Kessler) 26

(Monteon) 27

(Monteon) 28

(Monteon)

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D i L e c c e | 7

agricultural and industrial exporter collapsed due to the same macroeconomic conditions, leaving debts of

over a billion dollars and terminating fifteen thousand jobs. By spring of 1981, the corporate bankruptcies

had spread. A further seventy-two institutions failed by this time, while reserves were essentially halved

due to the capital flight of foreign speculative money. The collapse of businesses and the tightening of

credit due to less capital in reserves led to a doubling of unemployment in the first six months29

. As seen

in Figure 1 in the Appendix, GDP actually began to fall during this period.

As General Roberto Viola took over as leader of the military junta, the country was already

ravaged by its economic and political mismanagement. From 1970 to 1980, amidst multiple military coup

d’états, rampant inflation, and finally a financial bubble, the percentage of the population living in

poverty rose from seven to twenty-eight percent30

.

In an effort to unite and thus distract the country from its economic troubles, the third leader of

the junta, Leopoldo Galtieri, launched an invasion of the Falkland Islands against the United Kingdom.

Defeated after two months, the lengthy military junta was ousted from the government, but by this point

the costs of the war and financial collapse had pushed the already dangerous debt level to levels one IMF

official called a “financial Hiroshima.”31

The new democratically-elected Raúl Alfonsín was unable to manage the massive amounts of

debt that had accumulated and could not stabilize the economy. After struggling to meet payments and

manage its budget deficit, the government was met with rising interest rates and depleted foreign currency

reserves in its attempt to prop up its currency. In 1989, with limited ability to pay its now $65 billion debt,

Argentina’s inflation surged once again to an astonishing almost five thousand percent, leading to riots

and political instability3233

. In the same year, Carlos Menem was elected into office, and as most leaders

had before him, attempted new economic and political policies to stabilize the country.

29

(Monteon) 30

(Monteon) 31

(Monteon) 32

(Klein) 33

(Llach and Cerro)

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D i L e c c e | 8

Menem enacted policies that fell in line with the neo-liberalist Washington Consensus, thus

appeasing the IMF and World Bank in neo-liberalizing the economy. Along with his Minister of the

Economy, Menem brought about trade liberalization, deregulation of industry, and privatization. The

transformation of Argentina into a prime example of neoliberalism was and continues to be a highly

controversial topic, mainly at the time for its perceived unfair dispossession of strategic state companies

through privatization. Many argued that domestic companies were being highly undervalued when

privatized, resulting in an economic loss for those industries34

. Nonetheless, inflation fell into single digits

by 1993 while GDP growth averaged almost six percent in the 1990s, shown in relative terms in Figure 2

in the Appendix35

. The liberalization of the Argentine economy appeared to be working, but when the

international crisis of 1998 began to hit Argentina, a similar story of inflation, political strife, and

economic chaos emerged.

Amidst high government spending and corruption during Menem’s term, Argentina’s debt

continued to grow36

. The support of Argentina’s liberalization policies led the IMF to continue to provide

loans to the country37

. In 1999, as the debt amassed to unmanageable levels once again, newly-elected

Fernando de la Rúa faced the effects of the international recession through the intensifying lens of high

debt levels. As investors lost confidence in the country, foreign and especially domestic capital flight

began to occur, leading to a run on the banks. After de la Rúa’s government froze all bank accounts to

prevent more capital leaving the country, the populace took to the streets in protest. As the protests

intensified with a state of emergency being called, a political crisis also developed, leading to the creation

of an interim government. With inflation skyrocketing, the government proved unsuccessful in its efforts

to stop the rapid depreciation of the peso. The culmination of not only recent political and economic

34

(Grimson and Kessler) 35

(Hofman) 36

(Grimson and Kessler) 37

(Klein)

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D i L e c c e | 9

discord but of an entire century’s volatile growth came to head in 2001 when the interim government

officially defaulted on a large part of Argentina’s debt, totalling one hundred and thirty-two billion

dollars. After restructuring some of its debts, the country struggled to recover from its high

unemployment and continued pressure from creditors as shown in Figure 3 in the Appendix. As of 2003,

Argentina’s economy once again began to grow, led by an increase in exports due to the undervalued

currency that came in effect during the debt crisis.

Although the economic history of Argentina has demonstrated the success and failure of many different

economic policies, none better than the implementation of neoliberalism did the country most

controversially prove ineffectual. As the IMF, the leading group advocating for neoliberalism, states:

The occurrence and severity of the Argentine crisis has, as mentioned, been particularly

disturbing to the Fund given its extensive engagement for many years beforehand. . . the Fund’s

experience in Argentina does call for some fresh thinking about its role, both in normal times and

in the context of a crisis38

.

The Argentine economy, with its crisis at the end of the twentieth century, might have appeared

to be better off with neoliberalism in the 1990s, but it had many negative effects as well. From putting

undue pressure on the expansion of industry and increasing income inequalities due to less government

intervention, the shock of sudden economic liberalization brought on by Menem hurt those least fit to care

for themselves, the poor and the environment. Domestic factories suffered greatly as well due to their

inability to compete with cheap foreign imports. It was during this period of “Menem’s Miracle” that saw

well over half of the Argentine population pushed below the poverty line39

. Although the neoliberal

policies spawned substantial GDP growth in the 1990s, as shown in Figure 1 in the Appendix, decline

after the debt crisis became evident. Argentina, being one of the most stringent followers of the IMF’s

neoliberal policies, is a focal point of much debate over the effectiveness of neoliberalism in general,

38

(Policy Development and Review Department, IMF) 39

(Klein)

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since it appeared to lead to the Argentine crisis at the end of the twentieth century. As the Argentina

entered the twentieth century with unparalleled growth, so it left with unparalleled disaster.

Following Argentina’s historic integration into the capitalist system feels much like riding a tall

rollercoaster over and over. The highs and lows of the ride are very pronounced, and they seem to happen

over and over again. In the past hundred years alone, Argentina has seen six coup d’états, multiple years

of hyperinflation, and an unprecedented number of protests and riots. In the same time period however,

the country has seen periods of phenomenal economic growth. In no other country can such a variety of

economic policies be examined in their most extreme effects on a populace. Indeed, amidst appropriate

policies for Argentina in the global capitalist system, political mismanagement created rampant and

devastating effects on the country. With every economic crisis came political upheaval, as the

Argentinean populace grew increasingly frustrated with their elected officials. Even in periods where

policies and leaders like Menem and neoliberalism seemed to have stabilized growth for the country, the

burden of debt, corruption, and mismanagement seems to have always pulled the Argentine economy

back. However, as the economy gets back on track in the post-financial crisis of 2011, the country has the

opportunity to focus on creating sustainable economic development. With strong economic growth in the

past year, inflation seems to also be increasing to dangerous double-digit levels40

. It may be that once

again, Argentina is about to enter another economic déjà vu.

40

(Castilla)

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D i L e c c e | 11

Appendix

Figure 1 Argentine GDP

38

Figure 2 Argentine Neoliberal Growth35

Figure 3 Economy during Neoliberalism38

0.00

5000.00

10000.00

15000.00

20000.00

25000.00

30000.00

35000.00

40000.00

45000.00

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

19

69

19

72

19

75

19

78

19

81

19

84

19

87

19

90

19

93

19

96

19

99

20

02

20

05

Argentina GDP, 1969-2007

Argentina GDP

Global GDP

Page 13: Argentina's Rollercoaster Prosperity

D i L e c c e | 12

Works Cited

Avila, Jorge. Ingreso per cápita relativo 1875-2006. 25 May 2006. 1 April 2011

<http://www.jorgeavilaopina.com/?p=61>.

Bowen, Gordon L. "Argentina: From Dictatorship to Democracy to Chaos." Essay. 2010.

Castilla, Juliana. Analysis: Argentina's inflation fuels spend-fast credit boom. 10 March 2011. 28 March

2011 <http://www.reuters.com/article/2011/03/10/us-argentina-inflation-credit-

idUSTRE7296PM20110310>.

Gerchunoff, Pablo and Horacio Aguirre. "In Search of the Missing Link: the Argentine Economy in the

1920s." 2003.

Grimson, Alejandro and Gabriel Kessler. On Argentina and the Southern Cone, Neoliberalism and

National Imaginations. routledge, Taylor & Francis Group, 2005.

Hofman, Andre A. "Economic Growth and Performance in Latin America." Serie Reformas Economicas

March 2000: 4-13.

Klein, Naomi. The Shock Doctrine. New York: Metropolitan Books, 2007.

Llach, Juan Jose and Fernando Cerro. "The Third Stage of Argentine Economic Growth." Tulchin, Joseph S

and Allison M Garland. Argentina, the Challenges of Modernization. Washington D.C.: Scholarly

Resources Inc, 1998. 239-256.

Lovering, Rick. "An Interpretation of Argentine Economic and Political History." PhD Thesis. 2007.

Mitchener, Kris James and Marc D Wadenmier. "The Baring Crisis and the Great Latin American

Meltdown of the 1890s." Financial Crises: Past, Theory and Future. Centre de Recerca en Economia

Internacional, 2007. 1-8.

Monteon, Michael. "Can Argentina's Democracy Survive Economic Disaster?" Peralta-Ramos, Monica

and Carlos H Waisman. From Military Rule to liberal Democracy in Argentina. Westview Press, 1987. 21-

34.

Policy Development and Review Department, IMF. "Lessons from the Crisis in Argentina." 2003.

Rock, David. "The Rise of Buenos Aires, 1680-1810." Rock, David. Argentina, 1516-1987: from Spanish

colonization to Alfonsín. University of California Press, 1987. 39-78.

Rock, David. "The Spanish Settlements, 1516-1680." Rock, David. Argentina, 1516-1987: from Spanish

colonization to Alfonsín. University of California Press, 1987. 1-38.

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Slettedahl Macpherson, Heidi. "Britain and Latin America." Miller, Rory. Britain and the Americas:

Culture, Politics, and History. ABC-CLIO Inc., 2005. 33-41.

Winn, Peter. "The Perils of Progress." Winn, Peter. Americas: the changing face of Latin America and the

Caribbean. University of California Press, 2006. 102-108.