The parable of Argentina: There are lessons for many governments from one country’s 100 years of decline

The parable of Argentina: There are lessons for many governments from one country’s 100 years of decline

Feb 15th 2014 | From the print edition

A CENTURY ago, when Harrods decided to set up its first overseas emporium, it chose Buenos Aires. In 1914 Argentina stood out as the country of the future. Its economy had grown faster than America’s over the previous four decades. Its GDP per head was higher than Germany’s, France’s or Italy’s. It boasted wonderfully fertile agricultural land, a sunny climate, a new democracy (universal male suffrage was introduced in 1912), an educated population and the world’s most erotic dance. Immigrants tangoed in from everywhere. For the young and ambitious, the choice between Argentina and California was a hard one.

There are still many things to love about Argentina, from the glorious wilds of Patagonia to the world’s best footballer, Lionel Messi. The Argentines remain perhaps the best-looking people on the planet. But their country is a wreck. Harrods closed in 1998. Argentina is once again at the centre of an emerging-market crisis. This one can be blamed on the incompetence of the president, Cristina Fernández, but she is merely the latest in a succession of economically illiterate populists, stretching back to Juan and Eva (Evita) Perón, and before. Forget about competing with the Germans. The Chileans and Uruguayans, the locals Argentines used to look down on, are now richer. Children from both those countries—and Brazil and Mexico too—do better in international education tests.

Why dwell on a single national tragedy? When people consider the worst that could happen to their country, they think of totalitarianism. Given communism’s failure, that fate no longer seems likely. If Indonesia were to boil over, its citizens would hardly turn to North Korea as a model; the governments in Madrid or Athens are not citing Lenin as the answer to their euro travails. The real danger is inadvertently becoming the Argentina of the 21st century. Slipping casually into steady decline would not be hard. Extremism is not a necessary ingredient, at least not much of it: weak institutions, nativist politicians, lazy dependence on a few assets and a persistent refusal to confront reality will do the trick.

All through my wild days, my mad existence

As in any other country, Argentina’s story is unique. It has had bad luck. Its export-fuelled economy was battered by the protectionism of the interwar years. It relied too heavily on Britain as a trading partner. The Peróns were unusually seductive populists. Like most of Latin America, Argentina embraced the Washington consensus in favour of open markets and privatisation in the 1990s and it pegged the peso to the dollar. But the crunch, when it came in 2001, was particularly savage—and left the Argentines permanently suspicious of liberal reform.

Ill fortune is not the only culprit, though (see briefing). In its economy, its politics, and its reluctance to reform, Argentina’s decline has been largely self-inflicted.

Commodities, Argentina’s great strength in 1914, became a curse. A century ago the country was an early adopter of new technology—refrigeration of meat exports was the killer app of its day—but it never tried to add value to its food (even today, its cooking is based on taking the world’s best meat and burning it). The Peróns built a closed economy that protected its inefficient industries; Chile’s generals opened up in the 1970s and pulled ahead. Argentina’s protectionism has undermined Mercosur, the local trade pact. Ms Fernández’s government does not just impose tariffs on imports; it taxes farm exports.

Argentina did not build the institutions needed to protect its young democracy from its army, so the country became prone to coups. Unlike Australia, another commodity-rich country, Argentina did not develop strong political parties determined to build and share wealth: its politics was captured by the Peróns and focused on personalities and influence. Its Supreme Court has been repeatedly tampered with. Political interference has destroyed the credibility of its statistical office. Graft is endemic: the country ranks a shoddy 106th in Transparency International’s corruption index. Building institutions is a dull, slow business. Argentine leaders prefer the quick fix—of charismatic leaders, miracle tariffs and currency pegs, rather than, say, a thorough reform of the country’s schools.

They are not the solutions they promised to be

Argentina’s decline has been seductively gradual. Despite dreadful periods, such as the 1970s, it has suffered nothing as monumental as Mao or Stalin. Throughout its decline, the cafés of Buenos Aires have continued to serve espressos andmedialunas. That makes its disease especially dangerous.

The rich world is not immune. California is in one of its stable phases, but it is not clear that it has quit its addiction to quick fixes through referendums, and its government still hobbles its private sector. On Europe’s southern fringe, both government and business have avoided reality with Argentine disdain. Italy’s petulant demand that rating agencies should take into account its “cultural wealth”, instead of looking too closely at its dodgy government finances, sounded like Ms Fernández. The European Union protects Spain or Greece from spiralling off into autarky. But what if the euro zone broke up?

The bigger danger, however, lies in the emerging world, where uninterrupted progress to prosperity is beginning to be seen as unstoppable. Too many countries have surged forward on commodity exports, but neglected their institutions. With China less hungry for raw materials, their weaknesses could be exposed just as Argentina’s was. Populism stalks many emerging countries: constitutions are being stretched. Overreliant on oil and gas, ruled by kleptocrats and equipped with a dangerously high self-regard, Russia ticks many boxes. But even Brazil has flirted with economic nationalism, while, in Turkey, the autocratic Recep Tayyip Erdogan is blending Evita with Islam. In too many parts of emerging Asia, including China and India, crony capitalism remains the order of the day. Inequality is feeding the same anger that produced the Peróns.

The lesson from the parable of Argentina is that good government matters. Perhaps it has been learned. But the chances are that in 100 years’ time the world will look back at another Argentina—a country of the future that got stuck in the past.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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