Argentinian presidential elections were concluded on Nov. 19 with a significant macroeconomic disorder: a contracting gross domestic product (GDP) with an inflation rate above 100% (143% to be precise), negative international reserves – indicating a lack of necessary currency to meet external payment commitments – and declining wages in purchasing power terms for eight years.
All the above are macroeconomic issues, things that can be handled by just the right economic management without major changes in the system. In other words, they are just the tip of the iceberg of the Argentine economic problems. The root of the problem is deeper and wider; that is, historical and structural.
The third largest economy in Latin America, after Brazil and Mexico, Argentina has vast natural resources (oil and gas, mines and agriculture). It has a diversified economy extending from a significant agricultural sector to manufacturing. It has the second-largest global reserves of shale gas and shares with Chile and Bolivia the main world reserve of lithium. It has one of the largest coastal lines among world countries. It has a relatively young and educated population.
What else would you need to form a strong economy and a happy society?
But the reality is the polar opposite. So, how did Argentina manage to turn all this fortune into a messy economy? What went wrong, and what can be done to restore it? Let’s keep our answers to these questions for the end while trying to get clues from the broad lines of what happened in the Argentinian economy since the end of the 19th century.
Argentinian economic mess: Genesis without exodus
Argentina has some of the most productive lands in the world, which allowed the country to achieve high growth rates during the late 19th and early 20th centuries, making it one of the main suppliers of food to (among many others) the United Kingdom, then the global hegemonic power.
After the 1929 crisis and the Great Depression, which made Argentina’s role as the primary goods provider, the country adopted policies to promote industrialization. In the second half of the 20th century, import substitution-based industrial policies were implemented. At the time, import substitution prevailed in many Latin American countries and included other protectionist and promotional measures, financial instruments and support institutions. After the second half of the 19th century, similar industrial policies were utilized by many "late developed" countries, spanning from the United States to Japan.
No doubt, industrial policy (as in the case of all types of public policies) faced various problems and limitations. However, in Argentina, it was broadly a huge success. The summary outcome was that the Argentinian economy sustained a per capita GDP growth that was not significantly divergent from that of the U.S.
However, starting from the last military dictatorship in 1976-1983, trade and financial liberalization policies, deregulation and dismantling of industry protection and promotion mechanisms were implemented under the influence of the Chicago School. The complete and sudden opening of the economy, coupled with a significant appreciation of the national currency, made exports uncompetitive and imports easy and attractive. This, in turn, led to a rapid flood of imported industrial goods into the Argentinian economy, drastically increased the technological content deficit and eroded technical capabilities. From that point onward, its per capita GDP increasingly diverged from that of the U.S.
There was some industrialization in the decade following the end of the military dictatorship. Argentina’s industrial exports slightly increased at the expense of raw materials. Although these are low-tech products, there was an improvement in their growing share, as their share in exports surpassed that of basic commodities.
Starting with 2004, with new industrial policies (mostly protectionist measures), the deficit in net technology content decreased, reaching its lowest level since the mid-1970s by 2014 (although not recovering pre-dictatorship levels). However, this occurred without significant changes in the industrial specialization profile. On the import side, the share of primary products grew to 15%, largely due to the increase in the energy deficit. Technological capabilities improved rapidly thanks to public investment growth in science and technology, and the country’s economic sophistication also increased (as Argentina’s Human Development Index has shown), driven by economic growth and improved income distribution.
However, from 2015 to 2019, another neoliberal-oriented government once again implemented a strong and rapid process of trade and financial liberalization and accelerated indebtedness, leading to a re-primarization of exports, the destruction of technological capabilities and a severe debt crisis.
After all of the policy zigzags through the decades, the outgoing government in November, which had to navigate through the pandemic, the impacts of the war in Ukraine and the worst drought in Argentine history, could not resolve the problems (such as inflation and loss of wage purchasing power) inherited from the previous governments. In fact, the issues were rather exacerbated. Like almost all incumbents who faced the pandemic, it lost the elections.
The winner, Javier Milei, is a libertarian candidate who has, rather abruptly, emerged in the media and social networks, advocating for closing the central bank, adopting the U.S. dollar as the currency, drastically reducing the size of the state, fully opening and deregulating the economy, and privatizing education, public health and scientific and technological research. It remains to be seen which policies the Milei government will effectively implement, but like in many cases of unprepared utopic liberal winners, the Argentinian economy is likely to face chaos soon. The prime loser will likely be the remaining hope of a major overhaul of the Argentinian economic structure any time soon.
The future
Argentinian economic administrators have achieved the difficult outcome of wasting all the resources the country has, which would make the country an economic welfare hub. The reasons are clear from the above account. Firstly, there have been too many zigzags in policy. Secondly, the technology and innovation gap with the world’s faster runners widened instead of being removed. Thirdly, the country experienced several premature and unprepared liberalization waves that worsened the situation.
The new government does not have a robust and rational policy set, and it will likely exacerbate the economic woes of Argentina. If the new government works hard, it can also manage to worsen the economic structure. Likely, there will be quick returns of economic and political imbalance. But more importantly, Argentinian long-term issues will not be addressed, starting with making the Argentinian economic structure competitive and robust.
It is evident that import substitution industrialization had significant problems and limitations. However, with the implementation of neoliberal-inspired policies, the aim was not to correct or modify industrial policy to overcome its limits but to eliminate it through openness, deregulation and privatization, leading to the destruction of productive and technological capacities, creating an imbalanced industrial structure with little development of value chains and limited international integration.
Neoliberal experiences failed, and subsequent governments sought to revive some instruments of the old import substitution model, more as a "repair" action for the damage caused by neoliberal policies to the industrial and social structure.
Argentina needs to find a new consensus to address the challenges of development. What is clear is that this includes a new industrial policy.
*A former IMF economist, author and academic. He has taught at Georgetown and Columbia Universities
**Professor and researcher at the National University of San Martin (UNSAM), Argentina