Argentina was among the wealthiest economies at the beginning of the twentieth century, according to the “Argentine Paradox” case study by Harvard Professor Rafael di Tella and New Change FX Chief Operations Officer Ingrid Vogel.[1] The authors claim that under the global gold standard, international capital flooded into the country to exploit the unbounded investment opportunities. The economy maintained an average annual inflation rate of just 1.5 percent for fifty years after 1890. Parallel to low inflation, from 1900 to 1930, Argentina’s economy grew at an average annual rate of 4 percent—faster than the United States, Australia, or Canada. However, over the turn of the new millennium, Argentina no longer featured among the group of richest nations but rather languished toward the bottom of the middle-income group. This demise came despite the country’s natural resources and fertile land, the large flows of ambitious immigrants, and the high level of education. The political development of Argentina during this period had gone through several phases. Among the dominant figures were President Juan Domingo Perón and his charismatic wife Evita. Their populist policies had fundamentally shaped Argentina’s political, economic, and social evolution. Among the most notorious and devastating is a trade and economic policy that advocates replacing imports with domestic production known as industrialization through the substitution of imports. In addition to closing the economy to foreign trade mainly by increasing tariffs and quotas (including export tariffs), a variety of private companies and natural resources were nationalized.
The pursuit of import-substitution industrialization had three main consequences. First, since the size of the economy did not support large-scale operations, factories were less than fully efficient, particularly when the lack of emphasis on exports (which could have introduced some competitive forces) was considered. Second, since imports did not fall to zero and traditional agricultural exports were heavily taxed, foreign exchange bottlenecks periodically developed. These bottlenecks generated balance of payments crises that led to sharp devaluations. Third, the inward-focused development strategy created a large and powerful industrial interest group that was able to induce continuing unsustainable state subsidies and intervention, which led to large fiscal deficits and mounting inflation.
After decades of failed industrialization through the substitution of imports, the Argentinean economy is now on the verge of a precipice. About half of the population is considered poor (according to the IMF), the economy is shrinking at an annual rate of almost 3 percent, and the nightmare of hyperinflation is around the corner. In the face of extreme polarization, millions of desperate Argentineans elected Javier Milei to the presidency. This unprecedented election implied that a self-declared libertarian would rule a populist society with a divided legislative branch and an opposing government in the powerful city of Buenos Aires.
Will the heavy weight of the Peronist populist tradition make it impossible for a drastic shift toward libertarianism (following Robert Nozick and Friedrich Hayek)? Will Javier Milei moderate his agenda toward the traditional liberalism of Adam Smith? Only time will tell. However, Milei mentioned on national TV back in 2019: “I feel deep contempt and hatred for the State. The State is our enemy. Taxes are theft.” According to Andrew Gamble from the University of Sheffield, pure libertarianism entails that “all state functions, including police, fire services, education, and even defense, can be provided by private contracts between sovereign individuals. Therefore, it is considered that all taxes to maintain public services should be abolished because they are perceived as coercive.”
Probably Milei´s interpretation of libertarianism will only go as far as dollarizing the currency and decreasing the Central Bank´s powers. More likely than not, Argentina’s legislative checks and balances will limit the privatization efforts—which are already underway—to the oil (YPF) and energy (Enarsa) industries, the public media and infrastructure conglomerates, the train and mail systems, the state water (AySA) and airline (Aerolíneas Argentinas) companies, and a few others. Throughout history, huge gaps have existed between the campaign’s extreme populist rhetoric and the actual policies while sitting in office. In theory, Milei “should” moderate its hard-core libertarian promises and policies and welcome dissenting voices into his government. But the truth of the matter is that nobody can accurately predict if Milei will become a pragmatic politician. That is because Milei is an outsider with weak political roots grounded in a newborn party.
1. Rafael di Tella and Ingrid Vogel, “Argentine Paradox: Economic Growth and the Populist Tradition,” Harvard Business School Case 702-001, December 2001.
Antonio Lecuna, PhD, is Assistant Professor of Entrepreneurship at Fort Lewis College (Katz School of Business).
