Arz Taneja, St. Stephen’s College, University of Delhi
Argentina is in trouble—economic trouble. Inflation has breached a new ceiling, crossing the 120 percent mark. The Argentine peso is at risk of yet another devaluation, leading to the currency being traded on the black (or should we say blue) market for the dollar at prices roughly double that of the current exchange rate. In an effort to stabilize the peso, the Argentine government imposed a slew of rules and regulations on how dollars can be accessed, which has led to the birth of a dozen different exchange rates, several of which are quite strange. For instance, under the “Coldplay Dollar” exchange rate (374 pesos per dollar), concert promoters who book performers charging in dollars are subject to a 30 percent tax, which fans ultimately have to cover on top of ticket costs.
However, that’s not where the story ends. Promises of cash handouts and pay raises for public sector employees are exacerbating inflationary pressures. Moreover, Sergio Massa, a presidential candidate and the current Minister of Economy, led the Argentine Senate in successfully getting approval for a bill to eliminate income taxes for (almost) all formal workers. While most workers had already been temporarily exempted from paying taxes, this is now permanent—unless the new government decides to do away with the law. The already-rising poverty rate is also unlikely to see any much-needed respite in the near future.
So, the big question is, why is all of this happening in Argentina? Why does the nation seem to spring from one crisis to the next? How did it become the consistently-inconsistent mess that it is?
Argentina wasn’t always like this. In the early 1900s, the country was more prosperous than France and Germany, and its GDP per capita was challenging that of Canada. Between 1870 and 1930, Argentina experienced exceptional growth, making it wealthy by world standards. However, growth slowed down post-1930 and ultimately stagnated after 1970. Coupled with poor political leadership based on Peronist policies of radical protectionism and the corporatist relationship between labor unions and the state, this sowed the seeds for the economic turmoil that would soon ensue. Triggered by President Juan Perón’s death, Argentina entered one of its most challenging periods in the 1980s. Markets collapsed, prices rose, the currency depreciated, and those who could leave the country left. The government turned to the central bank for help, which responded by printing money. This, of course, led to hyperinflation.
Theories of economic growth often underscore the importance of sound and stable institutions and their contribution to total factor productivity. Sadly, a major cause of Argentina’s troubles is its institutions (or lack thereof). Throughout the 20th century, coups and insurgencies were commonplace in Argentina. Perón, who is (infamously) credited with shaping much of Argentinian political and economic thought, also came to power through a coup. In recent years, Argentina has been a relatively stable democracy, albeit one with questionable commitments to pro-growth and anti-protectionist policies. Recent episodes of economic instability and rising inflation have further eroded the trust of citizens in the country’s financial institutions and the government.
Unsound policies and political polarization have also contributed to Argentina’s struggles. Historically, Argentina has ricocheted between pro-business and populist administrations, the latter being propagated by Perón. Neither type of administration has been successful in keeping the country’s budget in check. Excessive spending is most often funded by borrowing and money creation. Currently, Argentina has 44 billion USD in outstanding debt with the IMF, and its total debt sits at 275.1 billion USD. It also has a long history of defaulting on said debt, which has deteriorated investor trust.
As Argentina enters a pivotal election season, the world watches with anticipation, hoping that the nation will elect a leader capable of steering it away from the looming crisis.
But if nothing else, the Argentinian story highlights the importance of prudent policies and stable institutions in the growth and well-being of developing countries.