Summary: What is a reasonable worse-case scenario for America during the next generation or two? This post sketches one such, in which political weakness undermines America’s economic foundations. Whether or not this happens depends on our actions during the next few years.
People seeking to incite irrational fears — hoping to make us easy to manipulate — warn that America might “turn into” Zimbabwe. That’s nonsense, for reasons described here and here.
The real danger: becoming like Argentina. La oligarquia and their working class opponents each sought victory, and together destroyed Argentina. No amount of wealth and power can preserve a nation whose people forget their common citizenship, who divide into groups — each interested in their gains, seeing other groups as their enemies. This need not end in civil war to drive a nation from wealth to poverty. Economic stress breeding factions, factions fighting for power prevent agreement on necessary economic and political reforms, this causes a recession. Repeat until economic collapse forces reform or regime change (for good or ill). Downhill is always the easy path.
America is not Argentina. As T E Lawrence said, “analogies in human things {are} fudge.” But there are points of similarity enough for their experience to provide a warning to us. Whatever America’s problems, we have to solve them together. We need leaders like Solon, not General Peron.
“Argentina Cries for Itself“, Flora Lewis, New York Times, 15 May 1990 — Excerpt (red emphasis added):
At the turn of the century, ”rich as an Argentine” was a Parisian simile for great wealth. Here in the center of the country, surrounded by pampas, there are outsized copies of French mansions. ”All our grandparents were rich,” said a gracious local lady who isn’t. Talk focuses on ”the crisis.” Argentines no longer lift an eyebrow when you ask what’s wrong with their country, why it has failed. They ask the same question, though the answers are diffuse, uncertain, contradictory.
If conventional development theory were right, Argentina should be better off and more confident than Canada. It has vast resources, a varied but mostly temperate climate, a very low population density – some 33 million on land 5 times the size of France, though half are around Buenos Aires, an almost exclusively European population with no racial or serious ethnic problems, near-total literacy.
… But it has a foreign debt it can’t service of $62 billion, which means it received huge credits and wasted much of them. For the last 60 years at least, with minor interruptions, it has given itself bad Government. So conventional development theory has it wrong to the extent that it doesn’t take enough account of the people, and Argentina went seriously off track with its own bad mistakes. One-third of the nation, echoing Franklin Roosevelt, is and always has been miserable.
In an unpopular book called Why Argentina Doesn’t Function, Roberto Roth, a businessman, lists the old Argentine convictions of superiority: disdain for North Americans as yokels too busy making money to know how to live, indulgence for Europeans as failed emigrants left behind to look after the castles and cathedrals, and a view of other Latins as poor, backward relatives. The core of the problem, he says, is that the society has never been fairly represented by the political system and that a ”financial nation” always manipulated power behind scenes. ”We have Socialism without planning, and capitalism without money,” quips one landowner. ”We socialized the losses and exported the profits,” says another.
A brief look at the story of Argentina’s decline
Let’s hope the next chapters of our story don’t resemble those of Argentina after WWI. The following looks at the economic challenges Argentina’s citizens failed to meet, somewhat like those we face today. Excerpt from “Three Phases of Argentine Economic Growth“, Alan M. Taylor, National Bureau of Economic Research, October 1994 (subscription only). The headings inserted to the text are mine.
The story of Argentine economic growth in the twentieth century is one of decline unparalleled in the annals of economic history. Once one of the richest and fastest growing countries in the world, Argentina is now firmly entrenched in the ranks of less-developed countries; and the Belle Epoque, the turn-of-the-century golden age, a time of rapid growth, high culture and dreams of continued prosperity, is but a dim and distant memory for most Argentines. For the economic historian, the development economist, and even the international economist, the case of Argentine economic failure constitutes one of most puzzling case-studies of national development, and though all agree that Argentina underwent relative economic decline, few can agree on its nature and causes.
Low savings rate
… Relatively low Argentine savings rates made the country’s continued accumulation and economic growth a matter of external dependence on foreign capital, a precarious situation that may explain the onset of Argentine retardation at the time of the First World War.
… Thus low saving capacity could be to blame for low rates of Argentine accumulation, capital deepening and economic growth. A natural question arises: what was the origin of this low savings capacity? A full explanation is beyond the scope of this paper, but I have shown elsewhere (Taylor 1992) that Argentine savings were low in the early part of this century, at least when compared with savings rates in Australia and Canada. Whereas both Australia and Canada saved around 15% of GDP between 1900 and 1929, Argentina only saved around 5%.
WWI: disruption, loss of its primary creditor and the search for new sources of credit
The great boom of the Belle Epoque was brought to an end by the severe dislocations in international economic relations generated by the First World War and its aftermath. The immediate effect of the war in international markets was a sudden decline in foreign trade volumes and an equally pronounced downturn in the terms-of-trade, due in large part to the virtual shutdown of shipping in the Atlantic.
… The disruption was also evident in international factor markets. Perhaps the most dramatic change was in the operation of international capital markets. With the outbreak of hostilities, Britain suspended the operation of the Gold Standard, and it was 10 years before she was able to reinstate it. Thus ended the age of high imperialism, when British capital, acting from its power base in London capital markets, was able to spread its influence all around the globe (Edelstein 1981; Edelstein 1982).
Britain’s hegemonic power in capital markets was effectively broken by enormous war debts, and the new “bankers to the world” were the Americans, emerging into net creditor status; yet the Americans were less than enthusiastic about assuming this new responsibility as an international center for finance, and the rise of New York as a truly international capital market was somewhat slow and reluctant (Kindleberger 1986). This was certainly the case from the Argentine perspective, and accounts of contemporary observers confirm the difficulties faced by Argentina in trying to raise capital abroad after the onset of war, and adjusting to the shift from an established link with experienced lenders in London to forging new borrowing relationships with the bankers in New York.6 Peters (1934) and Phelps (1938) both record the restricted access to foreign capital experienced by Argentina after 1913. Before the mid-twenties practically no new capital emerged from war-torn Europe, and such loans as were forthcoming in New York took long negotiation, were limited in quantity, of short-term duration, and at much higher interest rates than formerly prevailed.
The Great Depression: economic collapse and the birth of an attractive but destructive political regime
In 1929, the perils of external dependence again rebounded on the Argentine economy, but this time with far more lasting effect. The liberal order had survived the pressures of wartime and maintained the commercial and financial status quo in Argentina through WWI and into the 1920s, continuing to emphasize external trade and links to the international economy. However, as the Depression bit, Argentina endured the retreat of American capital and exclusion from Imperial trade preferences, and political events took their own turn. A blend of nationalism and economic protectionism that was to spawn an entire economic philosophy, and provide the setting for the emergence ofhgentina’s best known political couple {Juan and Eva Perón}.
For more information
Reference pages about other topics appear on the right side menu bar, including About the FM website page. Such as…
- about America – how can we reform it?
- about the Financial crisis – what’s happening? how will this end?
Other posts about Zimbabwe:
- Can Obama turn America into something like Zimbabwe?, 22 February 2010
- The Fed is not wildly printing money, as yet no hyperinflation, we’re not becoming Zimbabwe, 2 March 2010
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