What’s holding the Argentinian economy back?
Does cutting government spending work?
This article covers an economic history of Argentina and more.
First, how has Argentina’s economy performed historically?
A history of Argentina’s economy
In the late 19th and early 20th centuries, Argentina was among the most advanced economies.
Argentina’s GDP per capita, a rough measure of living standards, was higher than that of Spain.
During this time, Argentina was benefitting from exports of agricultural products, such as beef, wool, wheat and corn.
To see Argentina’s economic fate, follow the blue line on the diagram below.
Over the 20th century Argentina has witnessed a slow, choppy rise in average living standards.
However other countries have experienced much faster rises in GDP per capita.
For instance, Spain’s GDP per capita overtook that of Argentina in the 1970s.
East Asian economies, such as Malaysia have also performed well in the second half of the 20th century. Malaysian GDP per capita overtook that of Argentina after the 2008 global financial crisis.
Why did Argentina fall behind?
What barriers to development has Argentina faced?
- Primary product dependence.
- Historically and even today, Argentina is dependent on exporting agricultural goods. This includes soybeans, wheat and beef.
- These are subject to high price volatility, creating uncertainty among exporters.
- Reliance on agricultural products benefitted Argentina in the early 1900s. Yet since then, other countries stepped up agricultural production and put tariffs on Argentinian agriculture, hitting revenues.
- Informality
- 18% of the Argentinian population live in informal settlements or “villas” as they are known locally.
- These are shanty towns or slums often found in large cities.
- In these locations there is poor access to social services, such as education or healthcare.
- Housing is of poor quality in the villas. There can be overcrowding and health issues, alongside social stigma, for those living in the villas.
- Difficulties in borrowing for consumers, firms and the government.
- A history of the Argentinian government defaulting on its debts can make it more difficult for the Argentinian government to borrow.
- It is difficult for households to take on mortgages to buy homes in Argentina. Argentina’s mortgage market is less than 1% of GDP, compared to 15% in the US or 10-15% in Brazil and Mexico.
- Uncertainty about the economy’s long-term prospects makes lenders less willing to lend and borrowers less willing to borrow. Households are likely to trust cash and are less willing to put money in banks.
- This makes it more difficult for low and middle income families to afford housing, as only the richest can afford to buy in cash.
- High inflation contributes to interest rates being higher. This makes it even more difficult to borrow in Argentina.
- Education gaps.
- There is a 30% drop-out rate of secondary education in Argentina.
- There are large differences between educational outcomes in the capital Buenos Aires and in rural areas.
- Other barriers include:
- Challenges to the rule of law.
- Issues with infrastructure development.
- Mismanagement of economic policy (see below).
To read more about barriers to development, see these notes (Edexcel A notes or AQA notes).
A large contributor is economic mismanagement. This includes inappropriate use of fiscal and monetary policy, as well as corruption.
As a result, Argentina has a record of high budget deficits and high inflation.
Inflation in Argentina
The graph below shows the annual rate of inflation in Argentina up to and including 2024.
The rate of inflation in Argentina peaked at over 200% at an annual rate in 2024. In other words, the prices of goods and services trebled within a year on average.
Inflation is not a new problem in Argentina. There have been several episodes of high inflation throughout its history, including hyperinflation at an annual rate of 2600% in the 1980s to the 1990s.
Inflation reduces the purchasing power of those whose incomes rise more slowly than inflation. This often includes public sector workers and retirees. It incurs menu costs for firms, who have to update their price lists much more frequently under high inflation.
High inflation means interest rates are likely to be higher. This makes it harder to borrow.
For more on the consequences of inflation, you can read my notes for students: Edexcel A inflation notes or AQA inflation notes.
What is a sovereign debt default?
Throughout Argentina’s economic history, there have been several ‘defaults‘ on government debt payments.
A so-called sovereign default is when a government fails to repay its debt or interest payments.
The most recent example of this was in 2020. Argentina’s government failed to repay $500 million in interest on an already delayed bond debt.
If a government defaults on its debt, it makes it harder for the government to borrow in the future.
Lenders, wanting to compensate for the elevated risk of non-repayment, may demand higher interest rates in return.
Sometimes if a loan is not repaid, the lender may seek to seize assets as compensation. For example, upon failure to repay a mortgage, a bank could seize the house from the homeowners.
However with government debt, there is no such threat nowadays. While in the past, countries have been invaded for not repaying debts (UK invading Egypt in the 1880s and US in Haiti in the 1910s), this is not likely today.
Instead, after their 2020 default, Argentina and lenders eventually agreed a “debt restructuring“. In other words, there was a negotiation which reduced the debt burden for Argentina.
At first glance a debt default does not sound so bad for Argentina. Nevertheless there can be serious consequences of a sovereign default:
- Higher interest rates for future borrowing / the impossibility for the government to borrow.
- Suppose banks are lending to the government. The bank could have to ‘write down’ (reduce the value of) the money the government owes them. This could lead to a banking crisis.
- Investors may move their money abroad. This could reduce aggregate demand, leading to a downturn and a fall in the value of the currency.
For example, in a 2001 default episode in Argentina, the government prevented the public from withdrawing from their bank accounts. A draconian measure designed to prevent a banking crisis.
Some economists claim that many defaulters can get away with defaulting on their debt.
Following the 2001 debt default in Argentina, Argentina’s economy saw a recovery from 2003 to 2006.
The devaluation of the peso had boosted net exports. However imports were only falling because of a rise in poverty levels.
Past economic policy in Argentina – the role of import substitution
Argentina’s economic policy throughout history has see-sawed between free markets and interventionist policies.
For example, after WWII, the then-president Péron began to pursue a policy of import substitution. This means replacing imports with domestically produced goods in order to be self sufficient.
This included protectionism with high tariffs, as well as taxing exports. Foreign direct investment was unwelcome.
The idea rested on Argentinian economist Prebisch‘s view of the economy.
He argued that, over time, the prices of agricultural products would rise more slowly relative to the prices of manufactured goods.
As the global economy grows, global incomes grow. This drives up demand for manufactured goods (luxuries) more than the demand for agricultural goods (necessities). This is one explanation for Prebisch’s claim about prices.
What does Prebisch’s argument imply?
- Given Argentina specialised in agricultural goods, exporting agriculture and importing manufactured goods would widen the trade deficit over time.
- Instead, it would be better to protect and grow an infant industry for manufacturing in Argentina.
- Note the contrast to Ricardo’s theory of comparative advantage. This argued that countries benefit from specialisation and trade.
Economists have since argued that this protectionism was the main reason why Argentina has been held back.
What are Milei’s economic policies?
The new president of Argentina, Javier Milei, came into office in December 2023.
Since then, Milei has tried to reduce the fiscal deficit in order to bring down inflation.
The largest spending cuts include:
- Government spending on pensions decreased by 36%.
- Less ‘discretionary’ spending as well as lower capital spending (e.g. on infrastructure projects).
- Lower monetary transfers to the provinces in Argentina.
- Reducing subsidies to energy firms.
While for now I focus on fiscal policy, there are other aspects to Milei’s plans. This includes deregulation, devaluation of the peso, pursuing free trade and monetary tightening.
Are Milei’s policies working?
The budget deficit has narrowed with the government posting budget surpluses in some months.
Moreover, the credit rating for Argentina has improved, which may make government borrowing easier in the future.
Inflation has fallen significantly. The annual inflation rate has begun to fall, from a peak rate of 292.2% annually in April 2024 to 66.9% annually in February 2025.
However this comes with tradeoffs.
The rate of unemployment has increased and real wages have fallen in both the public and private sectors.
The manufacturing sector saw a 9.4% contraction in activity in 2024. In particular the construction sector saw a decline in activity of over 27%.
Poverty levels had appeared to rise at first. Yet poverty now appears to be falling slightly in Argentina. I should note there are differences in figures from the government and the universities.
A technical analysis of Argentina’s setbacks (beyond A-Level Economics)
For those (thinking of) studying economics at university, we can dive into Argentina’s development in more detail.
Here are some technical readings that you may find interesting.
Be warned that these are technical and go well beyond the A-Level Economics course.
- An analysis into the different causes of Argentina’s stagnation and which is the most important.
- A discussion of different theories as to the timing of Argentina’s stagnation. Did it begin with the Great Depression or after WWII?
- The importance of consumer expectations of inflation in the context of Argentina and supermarkets.
- A government debt default (also known as a sovereign debt default) affects more than just the government. This paper uses a “natural experiment” and finds a fall in stock prices and the exchange rate following a rise in probability of debt default. In particular, exporters and foreign-owned firms can be hurt by a sovereign default.
Data sources include the Maddison Project Database and miscellaneous others.
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