Argentina is stuck in a time warp. Political and economic reforms over the past decade were supposed to lead the country out of chronic economic crisis. In April 1991 Economy Minister Domingo Cavallo linked the Argentine Peso to America’s dollar at a rate of one to one, kicking off an era of radical reform. Yet ten years later, the same Signor Cavallo is trying to fend off recession and government default.
Argentina’s cycle of crisis is perplexing. The past ten years saw industries and social security privatized and international trade liberalized. A chronic budget deficit was brought under control, infrastructure upgraded, and the banking sector strengthened.
All this, and currency stabilization, made for an economic boom in Argentina that lasted until 1995, as foreign investors poured money in. In that year, the economy was set back by Mexico’s financial crisis. Growth rebounded strongly until 1998. Since then, the economy has confronted prolonged recession, and the government is having trouble refinancing the public debt. Fears of a default abound.
Starting with Cavallo, Argentina’s boosters argue that these problems are transitory, and blame the country’s difficulties on turmoil in world financial markets and the US dollar’s excessive strength in relation to the Euro, which reduces Argentina’s export competitiveness. Brazil’s devaluation in 1999 also undermined export competitiveness. Low world commodities prices and protectionism against Argentina’s agricultural exports are additional factors.
These supporters also argue, with some justice, that Argentina’s crisis results in part from a self- fulfilling prophesy among creditors. Since Argentina has been in crisis so often, investors always fear the worst and withdraw funds at the first hint of trouble, provoking an even deeper crisis.
But something more than bad luck and self-fulfilling prophecies are at work. Argentina’s Peso, because it is pegged to the US dollar, provides little flexibility. There is no safety valve in currency depreciation when the economy is buffeted by external shocks.
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Compare Argentina with another grain exporter, Australia, which has been hit by some of the same shocks. Australia’s dollar depreciated from 78 US cents per Australian dollar in May 1997 to just 53 US cents per Australian dollar in May 2001. This helped maintain Australia’s exports and kept the economy growing at around 2% per year, while Argentina’s economy has been shrinking at around 2% per year.
But Argentina’s woes go deeper. Argentina is vulnerable to external shocks such as declining agricultural commodity prices because Argentina failed to develop a diversified export sector, one in which a broad range of industrial and service sectors are internationally competitive.
Argentina’s trade is overwhelmingly concentrated in a small number of commodities, including cereals, meats, processed foods, and other agricultural products. Exports of machinery and transport equipment, embodying higher technology, claimed only 10% or so of exports and only 1% of GDP. In other words, Argentina has failed to become a technology-based economy.
Market reformers focused their attention on reducing the size of government, but overlooked the government’s role in raising the country’s technological capacity. An economy’s technological capacity depends on a wide range of social institutions. A well-functioning market system helps attract high-tech investors from abroad and fosters high-technology startups at home. But a high-tech economy also requires strong universities, with high enrolment, and large-scale government support for scientific research.
America, for example, invests around $90 billion of public funds each year in scientific research. Some developing countries - Israel, Korea, and Taiwan - also invest heavily in higher education and scientific research. Sadly, Argentina did not.
Under-investment in technology is evident throughout the economy. There are around 600 scientists for every million Argentines, compared with 2,200 scientists for every million Koreans. Argentina invests less than 1% of its national income in research and development, compared with around 2.5% of national income in Korea. Argentine inventors received just 63 patents in the US in the year 2000, compared with 3,400 patents received by Korean inventors.
The difference is reflected in economic growth. Argentina achieved per capita economic growth of just 0.5% during 1980-1998, while Korea grew at a rate of 6.2% per year, fueled by its high-technology exports.
Argentina’s fate teaches a lot about development strategies. Argentina has much going for it: widespread literacy, a healthy population, a highly productive agricultural economy, and a strong natural resource base. Indeed, Argentina has had its share of economic success, with an income level, adjusted for purchasing power, around one-third of that of the US, and is far ahead of most countries in the world.
But Argentina did not make a successful transformation from a resource-based to a technology-based economy. The reform prescriptions it followed helped end inflation but ignored the need for government to promote a knowledge-based economy.
In the past countries could achieve high living standards by exploiting natural resources. In today’s global economy, however, international competitive advantage is mostly based upon knowledge and the capacity to harness knowledge in new technologies. Countries need strategies to foster education and innovation just as they need strategies to preserve macroeconomic stability and a healthy business environment. The next stage of reforms in Argentina, and in countries in similar positions, should focus on fostering society’s educational, scientific, and technological capacities.
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While both the American and Chinese Gilded Ages raised material standards of living for hundreds of millions of people, their endemic corruption produced radically unequal and unsustainable growth. Ultimately, both periods offer cautionary tales about unbridled crony capitalism, not models for blind emulation.
explains how corruption both drove the country's GDP growth and sowed the seeds for its current economic problems.
Since taking power in 2014, Prime Minister Narendra Modi and his ruling Bharatiya Janata Party have stoked Hindu nationalism, hollowed out India’s democracy, and overseen an economy that is probably performing far worse than official figures suggest. And yet Modi and the BJP are genuinely popular, making them likely – though not certain – to emerge victorious when the ongoing parliamentary election concludes in June.
Argentina is stuck in a time warp. Political and economic reforms over the past decade were supposed to lead the country out of chronic economic crisis. In April 1991 Economy Minister Domingo Cavallo linked the Argentine Peso to America’s dollar at a rate of one to one, kicking off an era of radical reform. Yet ten years later, the same Signor Cavallo is trying to fend off recession and government default.
Argentina’s cycle of crisis is perplexing. The past ten years saw industries and social security privatized and international trade liberalized. A chronic budget deficit was brought under control, infrastructure upgraded, and the banking sector strengthened.
All this, and currency stabilization, made for an economic boom in Argentina that lasted until 1995, as foreign investors poured money in. In that year, the economy was set back by Mexico’s financial crisis. Growth rebounded strongly until 1998. Since then, the economy has confronted prolonged recession, and the government is having trouble refinancing the public debt. Fears of a default abound.
Starting with Cavallo, Argentina’s boosters argue that these problems are transitory, and blame the country’s difficulties on turmoil in world financial markets and the US dollar’s excessive strength in relation to the Euro, which reduces Argentina’s export competitiveness. Brazil’s devaluation in 1999 also undermined export competitiveness. Low world commodities prices and protectionism against Argentina’s agricultural exports are additional factors.
These supporters also argue, with some justice, that Argentina’s crisis results in part from a self- fulfilling prophesy among creditors. Since Argentina has been in crisis so often, investors always fear the worst and withdraw funds at the first hint of trouble, provoking an even deeper crisis.
But something more than bad luck and self-fulfilling prophecies are at work. Argentina’s Peso, because it is pegged to the US dollar, provides little flexibility. There is no safety valve in currency depreciation when the economy is buffeted by external shocks.
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Access every new PS commentary, our entire On Point suite of subscriber-exclusive content – including Longer Reads, Insider Interviews, Big Picture/Big Question, and Say More – and the full PS archive.
Subscribe Now
Compare Argentina with another grain exporter, Australia, which has been hit by some of the same shocks. Australia’s dollar depreciated from 78 US cents per Australian dollar in May 1997 to just 53 US cents per Australian dollar in May 2001. This helped maintain Australia’s exports and kept the economy growing at around 2% per year, while Argentina’s economy has been shrinking at around 2% per year.
But Argentina’s woes go deeper. Argentina is vulnerable to external shocks such as declining agricultural commodity prices because Argentina failed to develop a diversified export sector, one in which a broad range of industrial and service sectors are internationally competitive.
Argentina’s trade is overwhelmingly concentrated in a small number of commodities, including cereals, meats, processed foods, and other agricultural products. Exports of machinery and transport equipment, embodying higher technology, claimed only 10% or so of exports and only 1% of GDP. In other words, Argentina has failed to become a technology-based economy.
Market reformers focused their attention on reducing the size of government, but overlooked the government’s role in raising the country’s technological capacity. An economy’s technological capacity depends on a wide range of social institutions. A well-functioning market system helps attract high-tech investors from abroad and fosters high-technology startups at home. But a high-tech economy also requires strong universities, with high enrolment, and large-scale government support for scientific research.
America, for example, invests around $90 billion of public funds each year in scientific research. Some developing countries - Israel, Korea, and Taiwan - also invest heavily in higher education and scientific research. Sadly, Argentina did not.
Under-investment in technology is evident throughout the economy. There are around 600 scientists for every million Argentines, compared with 2,200 scientists for every million Koreans. Argentina invests less than 1% of its national income in research and development, compared with around 2.5% of national income in Korea. Argentine inventors received just 63 patents in the US in the year 2000, compared with 3,400 patents received by Korean inventors.
The difference is reflected in economic growth. Argentina achieved per capita economic growth of just 0.5% during 1980-1998, while Korea grew at a rate of 6.2% per year, fueled by its high-technology exports.
Argentina’s fate teaches a lot about development strategies. Argentina has much going for it: widespread literacy, a healthy population, a highly productive agricultural economy, and a strong natural resource base. Indeed, Argentina has had its share of economic success, with an income level, adjusted for purchasing power, around one-third of that of the US, and is far ahead of most countries in the world.
But Argentina did not make a successful transformation from a resource-based to a technology-based economy. The reform prescriptions it followed helped end inflation but ignored the need for government to promote a knowledge-based economy.
In the past countries could achieve high living standards by exploiting natural resources. In today’s global economy, however, international competitive advantage is mostly based upon knowledge and the capacity to harness knowledge in new technologies. Countries need strategies to foster education and innovation just as they need strategies to preserve macroeconomic stability and a healthy business environment. The next stage of reforms in Argentina, and in countries in similar positions, should focus on fostering society’s educational, scientific, and technological capacities.