As many commentators have noted, perhaps the most important factor behind the Argentine collapse was the national philosophy, the zeitgeist if you want to be German about it, which caused a perennial policy bias towards government intervention and the hope of a free lunch. National philosophy is often a cause of economic failure; the question is, what can outsiders usefully do about it?
In Argentina’s case, the link is pretty clear, as usefully explored in Sunday’s “Washington Post.” The initial leaders of independent Argentina, notably the dictator Rosas, elevated the “gaucho” ideal of the carefree cowboy and ran the economy into the ground. Only when the British-influenced Domingo Sarmiento took control of policy after the constitution of 1853 did economic growth take place. Sarmiento was inspired both by Britain and the United States, and combined an American view of the free market with an (already old fashioned) eighteenth century British view of rule by an enlightened oligarchy. The result was enormous economic success.
Regrettably, the Lei Roque Saenz Pena of 1912, providing Argentina with universal suffrage, enfranchised the urban proletariat, in particular the huge influx of southern European immigrants, lacking any free market tradition, that had arrived since 1890. The result was the death of the oligarchy; it was able to perpetuate itself after 1930 only by abolishing democracy and ruling through a series of increasingly unstable military regimes. The 1930’s in any case were a difficult decade, with the worldwide breakdown of the pre-1914 system of free trade hitting Argentina particularly hard.
Juan Peron, who came to power in 1945, at the apogee of Argentina’s foreign exchange position though not of its per capita Gross Domestic Product, reverted to the gaucho philosophy, spent the foreign exchange reserves with gay abandon, and expanded the public sector rapidly. The result, by 1953, was Argentina’s first postwar economic crisis. Since his time, Argentine elections have always favored big government, and have generally favored economic populism of one sort or another. Only non-democratic rulers, such as President Arturo Frondisi in 1958-61 and the military governments of Generals Jorge Videla and Leopoldo Galtieri in 1976-82, pursued the small government free market policies that had made Argentina rich before 1929. These policies were highly unpopular with the Argentine populace (Galtieri invaded the Falklands largely to distract attention from their strictures), and when pursued under economic duress by democratically elected President Carlos Menem and his finance minister Domingo Carvallo in 1989-93, were modified as quickly as possible to win Menem re-election in 1994.
In short, the playing field in Argentina is hopelessly tilted against sound policy. Until this changes, the country will merely lurch from crisis to crisis.
National philosophies can of course change. A good example of this is Britain, where the national philosophy changed twice, in 1830-1845 and after 1976. In 1830-1845, the rise of social-conscience novelists such as Dickens and the early Disraeli, and the cementing in power by the 1832 Reform Act of the anti-capitalist Whigs over the pro-business Tories, convinced the middle classes that the eighteenth century Anglo-Scottish virtues of thrift and enterprise were no longer valid. Dickens’ creation of Ebenezer Scrooge, alone, probably knocked several tenths of a percentage point per annum off British GDP growth.
After 1976, the reverse process occurred. The economic crisis of 1974-76, and IMF intervention, convinced the British electorate finally that government control of the economy didn’t work. After 1979, of course, the political reality shifted sharply in favor of free enterprise although curiously, the public mood didn’t. Support for tax cuts, for example, peaked early in the Thatcher years, and by 1992 increased public spending was a clear favorite. Nevertheless, the preference for public spending remained weak, and the view of government control remained negative, so that at least in its early years the Blair government felt a stance of fiscal prudence was both economically and electorally necessary.
Since its re-election last June, the Blair government has embarked on a program of increased public spending, which by 2003-4 must inevitably bring tax increases or large deficits in its wake. It will be interesting at that point to see what happens. Either the British electorate will revert to its pre-1976 tolerance of government control (which would be good news for both Blair and the Europhiles) or its post-1976 views will remain in place, in which case there is likely to be a massive Thatcherite rejection of Blairism. The best chance for the opposition Tories is to retain a Thatcherite leader and posture; shifting to a centrist stance would increase the likelihood of the electorate reverting to its pre-1976 ways, in which case the Tory goose would be cooked, at least at the next election.
Philosophy also plays an important economic role in continental Europe, increasing tolerance of big government, but also (unlike in Argentina) maintaining a huge respect for education and skill, allowing European countries to build relatively successful economies on the basis of a highly educated middle class and a large reserve of highly skilled specialist craft workers. After World War II, unlike in Britain, defeat spurred France, Germany and Italy to an ethos of hard striving, to rebuild their countries from devastation – in all three countries at that time, national pride proved a spur to economic efficiency. Spain, which before 1936 had a national philosophy similar to that of Latin America, in which individual effort was felt to be futile and government was looked to as the provider, was also changed by the 36-year rule of General Francisco Franco, who was a big government man but emphasized hard work and individual effort. After 1975, albeit with a somewhat shaky transition, Spain has retained much of Franco’s devotion to hard work, and has added to it the core Western European respect for education and craft skill (for example, IESE in Barcelona is by some measures the best business school in Europe.) The result is an economy which has distanced itself from Latin America and is rapidly catching up with its European partners.
Of the other Latin American countries, Venezuela has the Argentine disease, but to an even greater degree because of oil revenues, while Brazil has cemented a moderate form of the disease into its system by the foolish 1988 Constitution. Mexico, too had it, particularly in the heyday of the PRI governments, and retains it in a somewhat attenuated form. — it was hoped that President Fox’s accession to power would have increased the attraction to Mexicans of the U.S. model, but this does not appear to have been the case. Colombia, thirty years ago a beacon of Latin American hope, appears to be in an even worse state because of the economic success of the narco-barons. Only Chile underwent a Franco-style awakening under President Pinochet, but in Chile’s case the right keeps losing elections by small margins, and the country seems to be reverting to Latin American type.
Asia includes a number of interesting case studies. Traditional Sino-Japanese culture, with its Confucian respect for hard work, appears eminently suited to economic success, as has been demonstrated by Japanese, Korean and Chinese expatriate success in a number of countries. After all, as outlined by restructuring expert Anders Aslund last week, Chinese policy has been no better, or even somewhat worse, than that in Eastern Europe and the former Soviet Union; the difference, which has produced Chinese growth that is overstated but still quite impressive, is the highly growth-friendly philosophy of the Chinese people themselves.
The downside in East Asia is excessive respect for authority, which in Japan allowed the government to garner ever more of the nation’s resources during the bubble years, and to continue doing so after the bubble burst, thus giving modern Japan a very severe fiscal headache. In this respect, Prime Minister Koizumi remains a beacon of hope, not so much for his economic reforms, which remain modest, but for his breaking the linkage between the LDP barons and the construction industry that has resulted in Japan’s huge wave of wasted infrastructure spending. A Japanese electorate that is skeptical, and that demands lower taxes and tightly controlled government spending, is a Japanese electorate that will fairly quickly see the return of economic growth – in their appetite for hard work and their respect for education and qualitative perfection, the Japanese people have a huge proportion of the requirements for ultimate success. Only a long term decline in confidence, which could lock Japan into a lengthy repetition of the U.S. 1930’s, remains a danger.
The United States, finally, has combined a British respect for the free market and distrust of government, with much of the traditional German respect for education, craftsmanship and hard work. It’s proved an excellent combination, the most successful in the world. The U.S. problem is overconfidence, a tendency to seek the quick buck and to spend more than they earn. This manifested itself in the early years of the republic (and was remarked on by foreign visitors such as Fanny Trollope) it caused problems in the 1920’s, and it has been hugely apparent in the bubble economy of the late 1990’s. The dot-com mania, the appallingly low savings rate and high consumer debt levels, and the belief by Enron executives that by hiding debt they could magically wish away the adverse effects of leverage, are all examples of an underlying U.S. philosophy gone seriously astray.
In the 2000’s, the U.S. people will have to pay for these follies, and the period of expiation will not be short or mild. Let us hope, at least, that it does not prove excessively prolonged, in which case American confidence, so overblown in the late 90’s, could disappear, at which point the populace would start looking to failed government nostrums for assistance, rather than relying on hard work, self help and entrepreneurship as in the past. It is for this reason, above all, that I would have favored a tight, pro-recessionary monetary policy last year; a short sharp economic shock is far less likely to cause long term damage to U.S. self confidence than a long slow decline.
The above outline I hope demonstrates that national philosophy is crucial to economic success, that it can be changed, and that there are several alternative philosophies which appear to produce good results. It must follow therefore that an institution such as the World Bank or the IMF which wishes to push a client country onto a more successful economic growth path should focus heavily on the potential to change its national philosophy, to the extent they believe it to be economically harmful.
Of course, in some poor countries such as China, Vietnam and to a large extent India, national philosophy is not really the problem; in China and Vietnam the problem is a counterproductive government/political structure, while in India it is simply a question of time and policy changes ridding the country of the remnants of 1930’s British Fabian socialism which had been imposed on the country by Nehru.
Nevertheless, in the majority of poor countries, in Latin America, Africa and the Islamic world, at least one of the major problems, and in many case the most important problem, facing the economy is that of the national philosophy. The aid agencies need to study carefully the philosophies of the successful countries in each region (Chile and to some extent Spain and Portugal for Latin America, Malaysia and the Gulf states for the Islamic world, and Botswana for Africa) to determine what philosophical changes proved feasible in the light of existing culture, and how they were adopted. After that, aid and development efforts should be focused almost entirely on generating the necessary philosophical changes in other client countries. In Latin America, the primary need is probably education, the reduction of corruption, and a cultural shift towards valuing business over political success in status determination. In the Islamic world, the primary need is probably the adoption of a suitably modified “Protestant work ethic.”
In Africa, whose economic position is most desperate and where the transition will inevitably be slowest, the need is probably for a complete top to bottom revolution in the prevailing philosophy, so that corruption and violence are greatly reduced, the economy is opened up, taxes and arbitrary laws are greatly reduced and the political process is clearly subordinated to the needs of the economy. Here at least the necessary changes will probably be the work of a couple of generations; it is the foremost responsibility of the Western world to ensure that the resources needed for them are intelligently applied, and that foolish nostrums such as the “African road to socialism” are stamped out before significant aid and investment flows begin.
Aid and investment to a country with a counterproductive national philosophy is simply pouring money down a rathole. That we must stop, so that we can devote the resources to those who will make better use of them.
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
This article originally appeared on United Press International.