October 2023
“If a man is hit by 700,000 bullets, it’s hard to tell which one killed him.” Rafael di Tella
In the early part of the 20th century, Argentina boasted the 9th highest GDP per capita in the world, rivaling Germany and France, and surpassing Austria, Italy, Finland and Japan. Ample land, fertile soil, moderate climate, abundant natural resources (oil, natural gas, copper, gold, aluminum, zinc, etc.), numerous sea ports, capital inflows, an educated workforce, and a liberal democracy checked all of the boxes for a flourishing, free society. Argentina’s future looked bright. However, today, Argentina is in the thralls of hyperinflation (124%), is the biggest IMF debtor, and GDP per capita is lower than it was in 2015. What went wrong?
Between 1930 and 1946 Argentina witnessed a seismic political shift, during which seven of the following eight presidents were military generals, the most notable being Juan Peron, who was elected in 1946. Peron quickly moved to support all labor unions, and under his government the number of public employees grew four times faster than the population, which crowded out the private sector. In 1947, espousing the words of John Maynard Keynes, Perone’s Finance Minister argued that “It was necessary to resort to deficit financing, which would inject vitality into the economy.” The following year, public spending tripled in comparison to 1946.
Perone closed the economy to foreign capital and competition, nationalized railways, utilities, and a number of industrial and shipping companies, and created public financial institutions to finance government controlled industrial development. He went on to nationalize bank deposits and mortgage credit. Foreign trade was relegated to the control of (nationalized) the IAPI, a state agency.
Peronists believed they could simply print money (modern monetary theory) to pay for their socialist agenda, hence they denounced central bank independence, and ceded monetary policy to government control. Not surprisingly, tax revenues didn’t keep up with growing government expenditures, and the central bank printed money to purchase government bonds. This, of course, resulted in a falling peso and soaring inflation.
Clientelist political practices, political favoritism, and populist redistribution of wealth and income fomented the collapse of traditional democratic institutions. Supreme Court justices were put on political trial, forced to resign, and replaced with justices friendly to Peronist policies. Political opponents were imprisoned, government oversight and power were strengthened via nationalization of private industry and a regulatory framework that diminished property rights and rule of law. The government launched a massive propaganda/indoctrination campaign targeting schools to promote Marxist ideology and values. Perón and his highly popular wife, Eva Perón, excused such policies, as well as violent protests, in the name of social justice.
As inflation worsened, price controls were implemented, and evictions (of nonpaying tenants) were suspended, which further undermined property rights, increased transaction costs, and decimated capital investment. The effects were rampant inflation and subversive macroeconomic instability. In less than ten years, Peronist corporatism and populism exploited the weakness of the institutional environment by dismantling the rule of law to the point of breakdown.
Perone and his compatriots weren’t necessarily bad people. Rather, they likely believed their policies would serve the common good. But the road to hell is paved with good intentions. Civilizations rise and fall based on ideas, and some ideas are simply better than others. Freedom is better than oppression. Free trade promotes wealth creation whereas protectionism benefits favored companies/industries. Free markets create wealth, command economies do the opposite.
The history of Argentina is by no means a unique one. A similar tale could have been told about Venezuela, Brazil, Peru, Mexico, or a dozen other countries. In each case, bureaucrats in the capital city embraced ideas and promoted policies that were, and always will be, anathema to liberty and prosperity. But perhaps the loss of freedom and prosperity is the tuition each generation must pay to learn that socialism always ends in weeping and gnashing of teeth.
Mark Lazar, MBA
CERTIFIED FINANCIAL PLANNER™
pathwaytoprosperity.com
A Cautionary Tale
October 2023
“If a man is hit by 700,000 bullets, it’s hard to tell which one killed him.” Rafael di Tella
In the early part of the 20th century, Argentina boasted the 9th highest GDP per capita in the world, rivaling Germany and France, and surpassing Austria, Italy, Finland and Japan. Ample land, fertile soil, moderate climate, abundant natural resources (oil, natural gas, copper, gold, aluminum, zinc, etc.), numerous sea ports, capital inflows, an educated workforce, and a liberal democracy checked all of the boxes for a flourishing, free society. Argentina’s future looked bright. However, today, Argentina is in the thralls of hyperinflation (124%), is the biggest IMF debtor, and GDP per capita is lower than it was in 2015. What went wrong?
Between 1930 and 1946 Argentina witnessed a seismic political shift, during which seven of the following eight presidents were military generals, the most notable being Juan Peron, who was elected in 1946. Peron quickly moved to support all labor unions, and under his government the number of public employees grew four times faster than the population, which crowded out the private sector. In 1947, espousing the words of John Maynard Keynes, Perone’s Finance Minister argued that “It was necessary to resort to deficit financing, which would inject vitality into the economy.” The following year, public spending tripled in comparison to 1946.
Perone closed the economy to foreign capital and competition, nationalized railways, utilities, and a number of industrial and shipping companies, and created public financial institutions to finance government controlled industrial development. He went on to nationalize bank deposits and mortgage credit. Foreign trade was relegated to the control of (nationalized) the IAPI, a state agency.
Peronists believed they could simply print money (modern monetary theory) to pay for their socialist agenda, hence they denounced central bank independence, and ceded monetary policy to government control. Not surprisingly, tax revenues didn’t keep up with growing government expenditures, and the central bank printed money to purchase government bonds. This, of course, resulted in a falling peso and soaring inflation.
Clientelist political practices, political favoritism, and populist redistribution of wealth and income fomented the collapse of traditional democratic institutions. Supreme Court justices were put on political trial, forced to resign, and replaced with justices friendly to Peronist policies. Political opponents were imprisoned, government oversight and power were strengthened via nationalization of private industry and a regulatory framework that diminished property rights and rule of law. The government launched a massive propaganda/indoctrination campaign targeting schools to promote Marxist ideology and values. Perón and his highly popular wife, Eva Perón, excused such policies, as well as violent protests, in the name of social justice.
As inflation worsened, price controls were implemented, and evictions (of nonpaying tenants) were suspended, which further undermined property rights, increased transaction costs, and decimated capital investment. The effects were rampant inflation and subversive macroeconomic instability. In less than ten years, Peronist corporatism and populism exploited the weakness of the institutional environment by dismantling the rule of law to the point of breakdown.
Perone and his compatriots weren’t necessarily bad people. Rather, they likely believed their policies would serve the common good. But the road to hell is paved with good intentions. Civilizations rise and fall based on ideas, and some ideas are simply better than others. Freedom is better than oppression. Free trade promotes wealth creation whereas protectionism benefits favored companies/industries. Free markets create wealth, command economies do the opposite.
The history of Argentina is by no means a unique one. A similar tale could have been told about Venezuela, Brazil, Peru, Mexico, or a dozen other countries. In each case, bureaucrats in the capital city embraced ideas and promoted policies that were, and always will be, anathema to liberty and prosperity. But perhaps the loss of freedom and prosperity is the tuition each generation must pay to learn that socialism always ends in weeping and gnashing of teeth.
Mark Lazar, MBA
CERTIFIED FINANCIAL PLANNER™
pathwaytoprosperity.com