In P.J. O’Rourke’s book Eat the Rich a chapter entitled “How to Make Nothing from Everything” seeks to explain how Tanzania, a country endowed with beautiful beaches, plentiful forests, rich agricultural land, and magnificent wildlife, had contrived by the mid-1990s to become one of the world’s poorest countries in the world in spite – or, perhaps, because – of more than a billion dollars of development assistance. An even better example might have been Argentina.

 

The Financial Times a few weeks ago reported that Argentina, one of the world’s largest agricultural producers and until recently its fifth-largest wheat exporter, may have to import wheat this year (“Prospect of Wheat Imports Looms,” July 29). Farmers are expected to plant about 2.9 million hectares of wheat this year, down from 4.2 million last year, the smallest amount since records started over 100 years ago.  The government has blamed a drought, which has caused the worst planting season on record, and the financial crisis, which has made it hard for farmers to raise capital to buy fertilizer and seed. These problems are no doubt real, but I don’t recall severe droughts   in the Great Plains (and we have had them) turning the U.S. or Canada into wheat importers.

 

In 1913, Argentina was the 10^th (some say the 7^th) richest country in the world. Per capita income and wages were higher than in almost every country in Europe, one reason that more than half of all Argentines are of Italian descent.  Since then, things have gone badly. The IMF now ranks Argentina 58^th in the world in per capita GDP based on purchasing power parity (PPP). In 1913 Argentina’s per capita GDP was about 85% of that of the United States. Today it’s around 30%. What happened?

 

This year’s drop in wheat production can be directly attributed to several years of direct government intervention in wheat trading, which included a 2007 ban on exports followed by a 23% export tariff. These measures correlate directly with a drop in acreage harvested from 5.8 million ha. in 2007 to 4.2 million in 2008, a drop in production from 16.8 to 8.4 million metric tons, and a fall in exports from 11.2 million to 4.5 million tons. Incentives – and disincentives – do work.

 

Governments make this kind of mistake all the time, responding hastily and without sufficient consideration to a current crisis. What is disheartening is that the wheat cock-up is only one incident in a century of policy disasters. Even when the economy has spiked in response to sensible policy reforms (such as privatization and economic liberalization under the Menem government), nothing seems to break the long-term trend of decline, which by now seems to be deeply embedded in the politico-economic culture.

 

One can certainly blame Juan Peron for a great deal. Peron, a member of a military junta that overthrew the government in 1943 and was then elected President in 1946, was an enthusiastic admirer of fascist economics. In 1938, the Army sent him with several other officers on a study tour of Italy and Germany. Though the trip’s purpose was to study those countries’ military organizations, Peron was highly impressed by Italy’s corporatist system in which, in Mussolini’s words, “balance is achieved between interests and forces of the economic world… [This] is only possible within the sphere of the state, because the state alone transcends the contrasting interests of groups and individuals, in view of co-coordinating them to achieve higher aims.” Ideas do matter, and these ideas wrecked Argentina’s economy and civil society in ways still felt today. For some reason, Peron remains popular and  Argentina’s leaders still wrap themselves in his mantle. Carlos Menem and Nestor Kirchner – as well as Kirchner’s wife and current President Cristina Fernandez –call themselves Peronists.

 

Argentina’s decline, however, started well before Peron came to power. Following World War I, the country entered an era of negative or anemic growth which, with a few interruptions, has continued to this day, and which has provided more than a few thesis topics for students of economics. The explanations have included a  resurgence of colonial-era mercantilism, militarism, and political absolutism starting early in the 20th century, as well as more recondite theories of insufficient capital, relative declines in total factor productivity, and the effect of insecurity of property rights on growth of the money supply.   There is truth to all of these arguments, but they all seem to distill into one, which I find most persuasive: the “systematic creation of barriers to competition.”  According to a 2006 article that examines the causes of stagnation in Latin America in general, high import tariffs and quotas kept Latin American growth rates low for much of the 20^th century, and it is no coincidence that those countries that have liberalized the most completely – Chile is a stellar example – have grown the fastest.

 

It’s not just about foreign trade, though. Argentina’s economic reform has been a history of half-measures, which negate many of the benefits liberalization is supposed to bring. As an example, privatization of Brazil’s iron ore industry increased productivity by 140%. Most of Argentina’s state-owned industries privatized in the 1990s were allowed to retain the same monopoly status they had enjoyed as state enterprises, and productivity increased by an average of 46%. The 2006 paper’s authors state that: “policy changes that substantially affect the amount of competition faced by Latin American producers significantly and systematically change productivity… [which] suggests that Latin America indeed can achieve Western productivity levels when competitive barriers are removed.”

 

This is hardly a surprise. Those of us who still believe in free markets would have had to search desperately for explanations if the data did not support this conclusion. The more interesting question, though, is how Argentina, with a similar colonial experience to that of other Latin American countries, has taken such a different path. It’s worth asking why Argentina became so prosperous a century ago, when its neighbors did not. And now it’s worth asking why, since the 1990s when so many Latin American countries emerged from military dictatorship, Argentina has failed to implement the same kinds of reform that has transformed the economies of Chile and Brazil.