Understanding Argentina's Paradox from Prosperity to Under-development
A crash course on Argentina's political and economic history. Can Javier Milei shape Argentina's history for the better? By Prof. Nicolas Forsans
Argentina, once among the world’s wealthiest nations, now stands as a cautionary tale of economic mismanagement and political upheaval. Over a century ago, its thriving agricultural exports catapulted it to global prominence. Yet today, the nation grapples with staggering inflation rates exceeding 200%, surging poverty levels, and chronic political turbulence. This stark contrast defines the 'Argentine Paradox'—a journey from prosperity to prolonged crisis.
Amidst this backdrop, Javier Milei, Argentina's newly elected president, has emerged as a polarising figure with a radical agenda. Branded by supporters as a reformist saviour and by critics as 'El Loco' (the mad one), Milei’s unconventional methods and audacious rhetoric have reshaped the country’s political landscape. As his administration approaches its first anniversary, the question looms: has Milei's fiscal shock therapy paved the way for recovery, or deepened the nation's woes?
In this 'InFocus' analysis, we unravel the history of Argentina’s economic decline, the roots of its current crisis, and Milei's contentious rise to power.
The Argentine Paradox
Milei owes his victory in November 2023 to the deep economic crisis the country found itself in, and Argentines’ dissatisfaction with the status quo. An economy suffering from the third highest inflation rate in the world, at 211 percent year on year, a poverty rate north of 40 percent, and an economy in crisis for decades.
And yet, thanks largely to the fertility of Argentina’s vast pampas plain, the country was in 1910 one of the ten wealthiest economies in the world —much wealthier than Brazil and considerably richer than Japan.
Early Prosperity
Its early prosperity was built on an export-led boom and integration into the global economy, especially in agriculture. Large inflows of foreign physical, human, and financial capital shored up the expansion of primary products exports (in particular grain, meat, wool and leather) which then fuelled rapid economic growth.
While Argentina's early economic boom was marked by growth and prosperity, the decades that followed revealed the vulnerabilities within its development model. To understand the root of its current economic crisis, it is essential to trace the events and policies that gradually eroded this once-thriving economy.
In 1900, Argentina bore a closer resemblance to Canada than to Cameroon in terms of its economic potential. The country had all the markers of success and even achieved remarkable growth at one point, only to later slide back into under-development. This phenomenon is widely known as the ‘‘Argentine paradox’.
The challenge lies not in explaining a lack of development but in understanding how a nation that once prospered found itself unable to sustain its advancement.
A Historical Overview of Argentina’s Economic Decline
Argentina’s economic problems have been building over decades, yet scholars disagree on when its decline began and what drove it. Some pinpoint the 1930 Great Depression as the pivotal moment, while others argue that earlier developments set the stage.
Broadly, Argentina’s trajectory can be divided into three phases. The pre-World War I era marked its Belle Époque, a period of economic prosperity and global significance. Between the two World Wars, the nation experienced a noticeable deceleration in growth. Post-1945, the decline became more pronounced, signalling deeper systemic issues.
Argentina’s Position in the Global Economy
Despite these challenges, Argentina maintained an enviable position well into the mid-20th century. By 1947, it ranked 10th globally in terms of per capita income, a testament to its historical achievements.
Between 1870 and 1913, the nation’s income per capita rose dramatically, reaching parity with developed countries by the eve of World War I. During this golden period, Argentina could credibly be described as an advanced economy.
Competing Explanations for Decline
The reasons behind Argentina’s fall have been hotly debated, giving rise to a vast body of literature on the ‘Argentine paradox.’
While scholars diverge in their interpretations, some recurring themes emerge. Argentina’s heavy dependence on international markets for its exports left it vulnerable to external shocks. The disruptions of World War I, the Great Depression, and the subsequent closure of global markets dealt severe blows to its economy. Domestically, the adoption of excessively protectionist policies by successive governments compounded these external challenges. Public deficits further weakened the economy, while inadequate political and institutional frameworks exacerbated the decline.
The political instability of the 20th century played a significant role as well. Argentina experienced frequent transitions between dictatorial and democratic regimes, which created an environment of uncertainty that stifled sustainable economic growth. The erosion of the rule of law, particularly during the 1930s, was accompanied by widespread electoral fraud that fuelled dissatisfaction and a desire for populist solutions. The military coup of 1943 and the subsequent rise of Colonel Juan Perón marked a turning point in the country’s history, where populism took center stage and further undermined the possibility of establishing stable, balanced governance.
The Enduring Legacy of Peronism
Perón’s presidency left an indelible mark on Argentina’s political and economic landscape. His populist policies weakened institutional checks and balances, contributing to a cycle of instability that persists to this day. Peronism remains a contentious legacy, symbolising both a response to inequality and a source of enduring challenges for Argentina’s development.
Searching for Stability
The case of Argentina illustrates the complex interplay of economic, political, and institutional factors that can shape a nation’s trajectory. Its journey from prosperity to decline serves as a cautionary tale, offering valuable lessons for understanding how potential and success can be undermined by systemic vulnerabilities and governance failures.
The Dominance of Peronism in Argentina’s Politics
Argentina’s trajectory reflects a broader challenge faced by nations heavily reliant on agriculture: the transition to a manufacturing economy. While other nations successfully moved upwards into industrialisation, Argentina faltered.
Despite significant pro-manufacturing policies introduced after the 1940s, the country never emerged as a significant industrial powerhouse.
Lacking an abundance of low-wage labor or a strong foundation for technological innovation, Argentina remained trapped between its past agricultural success and the unrealized potential of industrial growth.
In the aftermath of the Great Depression, Argentina shifted away from its successful agricultural export model in a bid to reduce its reliance on global markets. This transition marked the beginning of a broader political and economic movement that has dominated the country for decades: Peronism.
The Birth of Peronism: Economic Independence, Social Justice, and Sovereignty
Emerging in the 1930s and 1940s, Peronism quickly became a defining force in Argentina’s politics and social fabric. The movement is built on three pillars—economic independence, social justice, and political sovereignty. Its early years were shaped by the socialist-leaning policies of army colonel Juan Domingo Perón and his wife, Eva Duarte, who came to power in 1946.
Under Perón, vast industries were nationalised, and the state took on a more interventionist role in the economy. His government aimed to create self-sufficient industries through import substitution, using high tariffs to protect domestic production and subsidies to support local businesses. At the same time, Perón sought to uplift Argentina’s working class by granting wage increases, paid holidays, and promoting greater social welfare. Eva, known affectionately as “Evita,” championed the rights of the poor, migrant workers, and women, leaving an indelible mark on Argentina’s cultural and political identity.
Eva’s legacy is omnipresent in Argentina. Her image graces currency and government buildings, and her social reforms—such as the push for women’s suffrage in 1947—earned her a reputation as a saint among many Argentines. Her face is printed on 100-peso bills, decorates a mural on a government building, and greets guests from an altar placed in a restaurant called El Santa Evita in Buenos Aires.
Yet her prominence also drew criticism, with detractors accusing her of hypocrisy, noting her luxurious lifestyle even as she positioned herself as a defender of the poor.
Huge government expenditures in public works, welfare programmes, the construction of military bases and arms factories, salaries of civil servants and the military, and purchases of public service foreign companies gave rise to government deficits funded by Argentina’s central bank through the emission of money. The result: economic difficulties and the devaluation of the peso, fuelling inflation.
The political repression that followed led Perón to be overthrown by the military and his party to be banned in 1955.
👉🏾 For a critical account of Peron’s first presidency I highly recommend this piece published in Forbes
Perón's Legacy: Inflation In Argentina, An Institutionalized Fraud
Peronism’s Economic Challenges and Controversies
While Perón’s policies brought immediate benefits to workers and domestic industries, they also sowed the seeds of long-term economic instability. Government spending ballooned, encompassing public works projects, welfare programs, and the nationalisation of foreign-owned companies.
These expenditures, funded largely by printing money, led to inflation and a devaluation of the peso. Critics argue that the import-substitution model and excessive government intervention stifled growth by creating inefficiencies and discouraging competitiveness.
The political turbulence that followed Perón’s first presidency culminated in his overthrow by the military in 1955, but his legacy remained contentious.
Some view Perón and Eva as champions of social justice who uplifted the working class, while others criticise their administration for fostering corruption, patronage, and an over-reliance on government support.
Evita died of cancer in 1952, aged 33. For many Argentines, she is a Saint. Many union members think of Evita as their patron, feeling that she and her husband, three-time President Juan Domingo Perón, brought prosperity to their country through an equality and social justice-driven movement named after him.
Juan Perón died two decades after Evita, in 1974, but his name continues to spark both admiration and hatred, yearning and blame, writes AP. His critics claim that Perón was an “authoritarian leader and his movement’s social assistance disguised corruption and patronage while generating too much dependence on the government”.
Critics addressed Eva too. “Her foundation pressed donors for resources”, some say. “She was careerist and a hypocrite”, others assert. “On the one hand, she claimed to defend the poor and on the other, she dressed in Dior”, writes AP.
Peronism’s Enduring Legacy
Since the return to democracy in 1983, Peronism has remained a dominant force, with its candidates frequently winning general elections.
However, its ideological vagueness—described by The Economist as a blend of nationalism and labourism—has led to starkly divergent policies under its leaders. Carlos Menem pursued free-market economics and aligned closely with the United States, while Néstor Kirchner and later his wife, Cristina Fernández de Kirchner, adopted a more nationalist and protectionist stance.
This ideological inconsistency has left many Argentines confused about what Peronism truly represents.
Despite its contradictions, Peronism has shaped Argentina’s political landscape for decades, contributing to cycles of economic mismanagement and fiscal instability.
The Cost of Decades of Peronism
The impact of Peronism and other flawed economic policies has been severe. Argentina has defaulted on its debt nine times since its independence, including three defaults since 2000.
Government spending, primarily financed through borrowing, consistently outpaced revenue and economic growth, leading to repeated crises, a weakened peso, and chronic instability.
Critics argue that inefficient public services, corruption, and unsustainable social programs have prevented Argentina from achieving sustainable development.
Amid this backdrop of economic and political turmoil, a new kind of leader has emerged. Javier Milei, a political outsider, captured the frustrations of a weary electorate, promising radical solutions to address the challenges left by decades of Peronism.
Javier Milei: The Anti-System Outsider
Latin American voters are known for their pragmatic approach to elections, often casting their ballots for leaders they believe can improve their living conditions. Argentina, facing an acute economic crisis, exemplified this trend in 2023.
With inflation exceeding 200 percent annually, a central bank policy rate of 100 percent, and an exchange rate that surpassed 800 pesos to the US dollar, the population’s dissatisfaction with traditional politicians—especially Peronists—reached a boiling point.
Amid this turmoil, Javier Milei, an anti-system candidate, emerged as a beacon of radical change. Milei’s platform resonated with voters disillusioned by decades of economic mismanagement and political stagnation.
He pledged to overhaul Argentina’s political and economic systems, promising to close the central bank, privatise education and healthcare, and drastically shrink the state’s role in the economy. His campaign also aimed to shed Argentina’s reputation as a serial defaulter, a recurring problem that has stymied the country’s economic growth.
An Outsider with Radical Promises
Milei’s rise is remarkable given his lack of political experience. He entered Congress only in 2021, representing his newly formed political party, Avanza Libertad, and has no ties to Argentina’s established political networks.
His outsider status and unorthodox approach appealed to voters yearning for an alternative to the political mainstream.
Central to Milei’s rhetoric is his staunch opposition to socialism, which he labels one of the world’s greatest evils. He has vowed to “take a chainsaw to the state” and return Argentina to a free-market approach.
His foreign policy reflects his ideological stance: he promised to sever ties with socialist-leaning countries and demonstrated his resolve by firing his foreign secretary for voting against the U.S. embargo on Cuba at the United Nations—a vote that aligned with 186 other nations but clashed with Milei’s anti-socialist principles.
A Radical Approach to Economic Reform
On the domestic front, Milei’s economic strategy is focusing on ending years of fiscal mismanagement. He proposed halting capital spending, reducing the government workforce, and tying increases in pensions and public-sector salaries to rates below inflation. These measures aim to curb government deficits and address the rampant money-printing that has fuelled inflation.
Milei’s proposals signal a sharp departure from Argentina’s traditional economic policies, tapping into the electorate’s desire for dramatic change.
However, the implementation of such radical reforms will be a significant test of his leadership and the nation’s tolerance for upheaval.
Argentina’s Currency Conundrum
The economic pain facing Argentines has tested their patience as they await the benefits promised by Milei’s reforms. These include a stable currency, lower inflation, and a resurgence of foreign investment.
While Milei has taken bold steps to deregulate Argentina’s economy and reduce union power through sweeping decrees, the results have been mixed.
The Dollar Shortage
Although Milei succeeded in bringing monthly inflation down and balancing the government’s books, rebuilding Argentina’s scarce foreign exchange reserves and restoring access to international capital markets remain elusive goals.
The central bank’s negligible reserves of hard currency present a persistent challenge. Much of these reserves are spent maintaining an artificial exchange rate with the peso, a measure designed to prevent inflation from spiralling further.
Meanwhile, Argentina’s export revenues have suffered due to falling global prices for key commodities like soybeans and corn.
Next year, Milei faces a major test as Argentina must repay over US$14 billion in sovereign debt to bondholders and multilateral lenders.
This looming obligation underscores the urgency of securing dollars, a resource in critically short supply.
Dollars Hidden 'Under the Mattress'
To address this crisis, Milei introduced a generous tax amnesty aimed at coaxing undeclared dollar savings—commonly held “under the mattress”—back into the financial system.
Years of skyrocketing inflation, strict exchange controls, and a loss of faith in the peso have driven Argentines to hoard US$277 billion outside the formal economy. These hidden funds, stored in safety boxes, overseas accounts, or even cryptocurrency, now amount to almost half of the country’s annual economic output.
The amnesty allows up to US$100,000 in assets to be declared tax-free, with penalties of 5 percent and 10 percent applied for later declarations. Additionally, an information-sharing scheme with U.S. banks, effective since October, now alerts Argentina’s tax authorities to overseas accounts. A similar system already operates with other countries, threatening those outside the amnesty with back taxes, interest, and fines.
These measures have yielded results: dollar deposits surged 40 percent since Milei took office, reaching US$19.8 billion—the highest levels since 2019. In just three months, US$12 billion flowed into the formal economy, a significant boost to Argentina’s reserves.
Dollarisation: Abandoned or Redefined?
During his campaign, Milei proposed full dollarisation of the economy and the dissolution of the central bank.
While dollarisation has since been abandoned due to insufficient reserves and a lack of precedent in similar economies, Milei’s team has pivoted to a policy of “currency competition.” This approach would allow the peso to coexist with other legal tenders, but the specifics remain unclear.
Capital controls, a critical barrier to such reforms, also remain firmly in place without a clear timeline for their removal.
A Crossroads for Argentina: Lessons from the Past, Hopes for the Future
Argentina's history is a complex tapestry of economic highs and lows, political turbulence, and cultural legacies that continue to shape its present. The rise and enduring influence of Peronism encapsulate the nation’s struggle to balance social justice, economic independence, and sustainable growth. While leaders like Juan and Eva Perón inspired loyalty through programs aimed at uplifting the working class, the unintended consequences of excessive state intervention, mounting public debt, and political instability have perpetuated cycles of economic crisis.
As President Javier Milei implements radical reforms aimed at reversing decades of economic mismanagement, Argentina stands at a pivotal crossroads.
His policies, which promise to shrink the state and revitalise the economy, offer hope for a return to prosperity but come with significant risks. The initial pain of these measures, seen in deepened poverty and public discontent, poses the question of whether Argentines will endure the short-term sacrifices for potential long-term gains.
Argentina's path forward will depend not only on Milei’s ability to execute his vision amid political opposition but also on the country’s capacity to rebuild trust, stabilise its institutions, and foster a resilient economy.
The lessons from its past—marked by ambition, division, and resilience—may yet offer guidance as Argentina navigates this uncertain future.
In a follow-up article we assess Milei’s achievements during his first year in office.