Argentina’s Euro-Tango

Do you think Argentina will make a financial and economic comeback over the next five years?

December 10, 2001

Do you think Argentina will make a financial and economic comeback over the next five years?

The country has a welfare system like post-war Europe's, generous revenue sharing between the central government and the provinces, and a seemingly undying belief that it can hold on to a special status.

For whatever reason, many Argentines seem convinced that the economic laws that forced Brazil and Chile to bow to market pressure would somehow bypass them. But until Argentina recognizes the need for reform — as even Europe has already done — its ill-advised fascination with Europe's past will lead to its continued future decline.

During the 19th and early 20th centuries, the peak years of emigration from Europe, Argentina took in 6.5 million newcomers — 46% of them from Italy and 33% from Spain. That was second only to the United States. Argentina, uniquely in Latin America, also has large communities of Irish and British immigrants.

Other countries in Latin America pride themselves on their Native American and African heritage. But not Argentina. Its native tribes were largely wiped out in the second half of the 19th century. Today, it is the most homogenous nation in the Western Hemisphere, where whites make up 97% of the population. No wonder the Argentines love to proclaim themselves more European than Latin American.

Indeed, many parts of Argentina seem to have been transplanted there from Europe. Farms dotting the foothills of the Andes in the Mendoza province grow wine and olive oil. Many of them are run by third-generation Italian immigrants — and are reminiscent of an older era that no longer exists even in Italy.

Perhaps it is not surprising then that the country's political system, until the advent of democracy in the 1980s, seemed to have been a throwback to Italy at the time of Benito Mussolini and Spain at the time of Generalissimo Francisco Franco. Today, the peacock uniforms of the military junta may be gone, but the economy still appears to be mired in the country's European past.

Since the end of World War II, under the leadership of Juan Peron, the country has set out to emulate the European social model. Just as most Western European nations built welfare states under the leadership of Social Democratic parties, Peron's own political grouping, which is even now called Peronist, started life as the Labor Party. To wit, Argentina's workers under Juan and Eva Peron were provided with generous pensions and social benefits.

There were crucial differences to Western Europe, however. President Peron was an admirer of Mussolini, and Argentina came to resemble not only a European welfare state — but, crucially, a corporatist one akin to that which existed in Fascist Italy.

To sustain his political rule, Peron relied heavily on trade unions, giving them much power and influence in society and the political process. With this cozy but shady arrangement between left and right written deep into the country's political and economic fabric, his successors' task of reforming the country's economy and social structure was made all the more difficult.

Moreover, the Argentine model was flawed from the start. Europe always had a formidable industrial base that, once it was rebuilt after World War II, provided enough wealth for everybody to share.

Argentina, on the other hand, had highly efficient agriculture. This made the country rich in the early part of the 20th century. But after 1960, the Common Agricultural Policy in Europe and a green revolution in the developing world allowed other countries to grow plenty of corn and produce their own meat. Agriculture alone could no longer sustain a generous welfare state in Argentina. But Argentina proved remarkably slow to change.

Even today, agriculture is the country's largest hard-currency earner. True, Argentina has become more industrialized in recent decades, developing a successful automotive industry, for example. Only 12% of the labor force now works in agriculture, compared to 31% in industry.

In Argentina, industry now accounts for 39% of GDP. Remarkably, this is a larger proportion than Italy or Spain, where industry provides only around 30% of GDP. However, Western Europe has long moved away from manufacturing to services. Again, Argentina is simply behind the times.

Perhaps most disturbing, however, is not the comparison to continental Europe, but to the United Kingdom. Like the British, many of Argentina's opposition leaders appear to believe that the country has little to learn from its neighbors in the region. The UK — maybe out of a lingering sense of imperial greatness — holds the rest of the EU at arms length.

Many Argentines from the Peronist camp likewise seem determined to ignore the lessons that neighbors such as Brazil and Chile are ready to demonstrate. There is certainly no rational explanation for such thinking, but — like in Britain — it is deeply ingrained in the Argentine political psyche.

Unfortunately, it is not packaged with the UK's strong embrace of market economics. Until Argentines embrace the urgently needed reforms of their unsustainable welfare state, the country's downward slide will continue.

December 10, 2001