Lessons from Argentina – How a Rich Country Can Become Poor

I’ve always had an interest in Argentina, stemming from the Welsh communities found in Patagonia.

The first industrial revolution of the 18th century brought profound changes to many parts of Wales, often at the expense of the Welsh language and rural communities. In response, more than 150 people left their homes in 1865 and founded a Welsh colony, Y Wladfa, in Patagonia. Today there are more than 70,000 Welsh-Patagonians with many still speaking Welsh as a first language.

Lately I have developed a new interest in Argentina because of their recently elected libertarian president, Javier Milei. He is a unique character: Milei has an unruly mop of hair that reflects his nonconformist approach and is a self-described anarcho-capitalist who believes the government should only play a minor role in people’s lives. He has been in power since December 2023 and won the election on the promise of leading Argentina out of decades of economic decline.

The country is broke, poverty is continuing to rise, and the inflation rate was more than 200% in 2023. Milei’s economic plan includes massive spending cuts, privatisation of all public companies, liberalisation of trade, and the deregulation of labour. He told the people of Argentina that his proposed plan would be extremely painful over the short-term but was the only way to reverse their economic decline.

From a Latin America powerhouse to more than 80 years of economic misery

At the turn of the 20th century Argentina stood among the top five wealthiest countries. It experienced strong economic growth after its unification in 1852, supported by the modernisation of public institutions and a constitution modelled on that of the United States.

More than six million immigrants arrived between 1870 and 1914. International financiers invested in the country’s agricultural producers, enabling them to increase exports to satisfy strong international demand for grain, meat, wool and leather. Together, the immigrants and financiers helped power the rapid economic growth that transformed the country. The expression ‘riche comme un Argentin’ (as rich as an Argentine) became a common saying and the country’s capital city became home to the first overseas branch of Harrods in 1914.

International demand for agricultural products declined during the 1930s with a devastating impact on Argentina’s economy, which had become over-reliant on exporting grain and meat. In response to the worsening economic situation, the people elected Juan Perón as president in 1946. Along with his wife, Eva Perón, he introduced many social welfare reforms aimed at helping the country’s working class. However, the government’s unsustainable spending only contributed to its economic woes. The situation got worse throughout the 1970s and 1980s as several military regimes took control of the country and brought stagnating growth, rising debt levels, and falling real incomes.

By the 1990s, the government abandoned its state-led economic model in favour of a series of market-led reforms. These reforms opened the economy through trade liberalisation, deregulation, and the privatisation of previously public-owned enterprises. The Argentine government also decided to peg the national currency to the U.S. dollar to try to stabilise the economy. However, by 2001 they could not maintain this peg and, as a result, could not pay the debt owed by the country. This was the ninth time Argentina had defaulted on its debt.

Throughout all this time, inflation was a significant problem. Argentina faced hyperinflation in the 1980s, when the price of goods and services increased by more than 50% per month. Although inflation has come down, it still exceeded 200% in 2023.

This, coupled with people’s memory of even higher rates, severely hampers Argentina’s economy. Households and businesses are reluctant to borrow money because interest rates rise to counteract high inflation, and a jump in inflation would cause their interest payments to rise sharply. High inflation has decimated Argentina’s domestic mortgage market, making it nearly impossible for people to borrow to buy a home. Businesses are reluctant to borrow because they recall how previous increases in inflation, and thus in interest rates, pushed otherwise healthy companies into bankruptcy.

We need to learn from Argentina’s experience

Argentina holds important lessons for everyone. The first, and perhaps most important, is that price stability is fragile, and the inflation rate can rise rapidly. Despite its enormous potential at the beginning of the 20th century, successive awful politics and bad (and inconsistent) economic policies made Argentina a poor country.

In 2023, four out of ten Argentines were in poverty. Electoral fraud, corruption, the decline of trust in public institutions, and the erosion of the rule of law have also contributed to Argentina’s economic demise. Deep polarisation has emerged within the country, and this extreme division between left- and right- political factions has often resulted in political deadlock and rapid reversals of government policy.

Continuous wrong decisions by a government and a failure to protect public institutions and their underpinning, coupled with the polarisation of society, will make a wealthy country poor.

Now more than ever, we need to learn the lessons from Argentina. According to the OECD, the UK will be the worst performing economy in the G7 next year. This prediction is based on their assessment that government policies have hampered medium- and long-term economic growth.

Unfortunately, there have been a few recent policies that have adversely impacted the economy. For example, Chancellor Kwasi Kwarteng’s September 2022 budget woke up the bond vigilantes, resulting in a surge in mortgage rates and threatened people’s pensions. Brexit continues to have an impact: on the last day of April, Britain launched physical checks and a common user charge on fresh food products imported from the European Union, which will push up prices for businesses and consumers. Voters will head to the polls within the next nine months to vote in the UK General Election. When the election does come, people need to pay attention to what the politicians say they will do for the economy. A special friend recently reminded me that people get the government they deserve …… but holding politicians to account ensures it’s the one they demand.