Over the last decades, Argentina has been struggling severely with its political economy. This resulted in a situation of economic stagnation and financial difficulty, also known as the ‘middle-income trap.’ Several governments have been trying to solve this problem in a number of ways.
Argentina’s last dictatorship left the country with a huge debt that still burdens its monetary policy today.
As poor countries get developmental aid, rich countries are able to influence world politics. But what if a country is ‘stuck’ in the middle and does not belong to either of these categories? In 2007 scientists came up with the term ‘middle-income trap’ to describe a situation of economic stagnation in the middle-income category . There are various definitions of the middle-income trap, focusing on different aspects of this phenomenon, such as the institutional, political, or economic aspects. This article treats Argentina in particular. Argentina is considered a paragon of the middle-income trap, because it has been unable to innovate and upgrade the economy to a high-income economy. The country has known rapid economic growth in the 19th century, but this growth stagnated radically in the 20th century. The 20th century has been very turbulent for Argentina: several dictatorships, adequate and less adequate presidents, different economic landscapes. Indeed, it has not been an easy century for the land of steak and tango. As a result, the country has been struggling with its position in the international economy .
The core problem of the middle-income trap is when countries are unable to upgrade their economy from one that is solely based on the manufacturing and/or agricultural sector, to a more knowledge-based economy, focused on domestic innovation . When a country is focusing exclusively on agriculture, the domestic market usually contains but a limited amount of customers for these products. After the agriculturally focused period, export becomes a possibility, due to saturation of the market . In this stage the economy opens up to foreign capital and the country becomes vulnerable to forces from foreign countries. It is the task of the country to find a balance between establishing an open economy that brings economic growth and protecting their own economy and population. It is precisely this balance that Argentina is struggling to find.
In the 20th century, multiple dictatorships left Argentina traumatised. The last dictatorship ended in 1983. Besides emotional damage, this dictatorship left the country with a huge debt that still burdens the monetary policy of Argentina today . Various governments and presidents have dealt with this debt in different ways. In 1989 the Brady Plan was introduced. This plan was developed by Nicholas Brady who was part of the American government of George H. W. Bush. The plan was based upon the assumption that the debts could only be reduced with the help of banks and other creditors. This was considered to be the only way to still receive (part of) the money borrowed by the countries that were in debt. Many South-American countries were connected to the Brady Plan. Part of the Brady Plan was to implement neoliberal policies in the country . At that time, Menem was the president of Argentina. As he was neoliberally minded, the Brady Plan was an excellent opportunity to implement his neoliberal policies. At the same time, the Washington Consensus was introduced. The Washington Consensus was a list of ten neoliberal attributes that would help a country to develop and upgrade its economy. The Washington Consensus was developed by the World Bank and International Monetary Fund and took many Latin-American countries even further to the neoliberal side of politics. The World Bank and IMF were the main institutions to borrow money from in order to develop an economy. Simply put; they set certain criteria and by meeting these criteria, countries could borrow more money .
It is the task of the country to find a balance between establishing an open economy that brings economic growth and protecting their own economy and population.
In the 1990s a neoliberal wave went through Argentina and the rest of Latin-America. During the first half of the 1990s, the Argentinian economy grew rapidly. In the second half of the 1990s the neoliberal policies started to reveal their downside . The Argentinian peso was pegged to the American dollar. At the same time, the value of the Argentinian peso was connected to the inflow of foreign capital. The inflow of foreign capital was extremely high, because of the open borders that were inspired by the Washington Consensus. Thus the artificial value of the peso was no longer correct, it had to be devaluated.
Another measure of the Washington Consensus was to privatize many state-owned enterprises. In the second half of the 1990s, the income derived from the sale of the state-owned enterprises was gone, but big fiscal deficits needed to be paid, so the debt only grew. On top of this, unemployment was rising to a level of 18% in 1997. Argentina is a strongly left-oriented country with strong labor unions. This made the labor market rather inflexible. The high unemployment rate made social expenses higher, which lead to an even more complex economic situation for Argentina .
In a globalizing world such as we live in today, it is important for an economy to find a balance between the international globalizing forces and the protection of the national economy.
The debt eventually climaxed in a severe economic crisis in 2001. Following the crisis, the main goal of the Argentinian government was to recover the economy and reduce poverty. Argentina relied mostly on the agricultural sector , but due to an international rise in prices of commodities, the income from agricultural exports was rising as well . The government introduced taxes on exports in order to generate more income. This influenced the internal economic situation positively, but did not improve Argentina’s position in the international economy. The government thought it impossible to have an open economy and to maintain a well distributed economy at the same time . They used the extra income obtained through the export taxes for unemployment programs and introduced subsidies on services such as water and light. The amount that was allowed to be charged for these services came under tight control of the government and the subsidies helped in keeping the household expenses low. The government transferred the profit from the agricultural sector to the government. By doing this, the government could use this extra money to stimulate growth and to help domestic consumption grow. By the year 2007 the economy was growing, and employment and domestic consumption were increasing. But in the end, this did not last. The government’s expenses were increasing too much and because of the stimulation of consumption, the demand for goods kept rising. This increase in demand made prices rise as well. The government subsidized certain companies and goods in order to increase household incomes, sustain the low costs of social services and to support the supply of public goods .
the world seems to be opening up to Argentina.
In a globalizing world such as we live in today, it is important for an economy to find a balance between the international globalizing forces and the protection of the national economy. Protecting the national economy by taking active measures is called protectionism (Wade, 2012). The policy-direction of Argentinian governments was protectionist for a long time. Neoliberalists consider protectionism to be counterproductive. Nowadays, many production chains go beyond borders. By intervening in these international flows of goods and services, the natural process of the global market is obstructed. Since 2015 Argentina is ruled by a new government, with president Mauricio Macri as its leader. His vision is more neoliberalist than the previous governments which is why Argentina’s position in the international economy is changing . In his first year in office, he already removed subsidies on for example public transport. Such measures did not make him very popular with the Argentinian population. Since the presidency of Menem, neoliberalism has a bad connotation for most people in Argentina. Thus, Macri might be confronted with some strong opposition from the Argentinians .
In my opinion, the answer to the title of this article – Is Neoliberalism Always the Solution for Escaping the Middle-income Trap? – would be; it has not been so far, but it might be now. The circumstances are different and the world seems to be opening up to Argentina. In a few years, the answer will reveal itself.
Editor: Deirdre Meursing