A century ago Argentina was counted among the wealthiest nations in the world. However, things have been different in the last five decades.

Rich in natural resources and with a population of about one-seventh and a land mass of about one-third of the United States, Argentina has all the elements in place to be a regional powerhouse.

The proud nation of European immigrants was once at the forefront of economic development, but in recent decades, Argentina has been bouncing from one crisis to the next with no end in sight. 

Argentina’s fall from grace is a stark reminder that no country is too rich to fall if it fails to invest in its human capital and create drivers of durable economic growth.

Argentina’s Lost Century

In the three decades to 1915, Argentina frequently recorded annual economic growth of about 6%, and at the time it was the fastest-growing economy in the world.

Argentinian farmers took full advantage of global demand for their agricultural and cattle products by becoming the farm to the world and earning a sobriquet riche comme un Argentin.

Global market conditions were in favor of Argentina, and international financial institutions were ready to invest in the infrastructure necessary to support its exports of agricultural output.

However, as agriculture technology developed, the real value and demand for Argentina’s products continued to fall dramatically over the century. For example, the real price of several agricultural products has dropped by as much as 80% over the last hundred years.

Shifting global trade patterns, bad policy choices, and isolationism conspired to cause Argentina to grow at a relatively slower pace between the Second World War and 1970, and then the economy outright stagnated for the next several decades as the nation struggled with multiple debt and default crises.

Most economists talk about the lost decades of Japan, where Japan’s economy stagnated and wages stalled for more than two decades, but Argentina is suffering its version of the lost century, where per capita income precipitously fell between 1928 and 2023.

Argentina was in the club of resource-dependent economies and wealthy countries like Canada and Australia, but over the decades, these nations managed to stay prosperous by diversifying their economies beyond natural resources.

Australia and Canada expanded beyond boom-bust cycles similar to oil prices, but Argentina still suffers from commodity cycles.

The often talked-about wealthy status of Argentina a century ago, when the nation’s riches were held by a small group of elites, did not spread among wider sections of society that could provide the basis for sustainable growth.

Argentina is the only country that has the distinction of falling from a wealthy nation to an upper-middle-income economy.

Populous Anger

In the last five years, things have gone from bad to worse, and about half of its population is living below the poverty line. With inflation in triple digits, the living standards of most families are falling at the fastest pace in the last six years. 

Critics often assail Argentina’s reliance on subsidized education, healthcare, and transportation services, largely funded by high taxes and public debt. Though these social programs are expensive for the Treasury, they are not the key obstacles to the nation's achieving permanent prosperity. 

Argentinians have been accustomed to political and economic instability for decades, but life was manageable despite bouts of high inflation. 

But it was the rampant inflation in the last two years that spread voter anger across the nation as citizens yearned for economic stability and struggled to make ends meet. 

Argentinians elected far-right libertarian economist Javier Miele as its president in late 2023, after years of rampant inflation, economic mismanagement, and the currency that keeps depreciating at an accelerated pace.

However, policies proposed by President Miele are likely to make the situation worse for most Argentinians, and the new president’s economic prognosis may be based more on ideological biases than historical realities.

With inflation approaching 200% and the poverty rate near 45%, it was not hard for people to select a new leader that could put the country on a different track.

To most people living outside of Argentina, the country appears dysfunctional, corrupt, always at the mercy of foreign investors, and with an economy that barely functions. 

While many of these perceptions are valid, Argentina’s economy is still the third-largest in Latin America, trailing only Mexico and Brazil. 

The economy has struggled to advance since 2012, and most families barely make ends meet. Rapidly rising inflation has ravaged the purchasing power and savings of its citizens.

Miele’s Reform Plans

 President Miele believes that dollarizing Argentina’s economy, abolishing the central bank, and cutting government programs will restore economic stability, lift living standards, and put this beleaguered nation on the path to prosperity. 

Miele believes that drastic cuts in government spending and dollarizing the economy will restore the nation’s standing in international markets and attract foreign investment to jumpstart the economy and create skilled jobs that are sorely needed.

Cutting wasteful spending and eliminating corruption should be top priorities for every government in any nation, but Argentina’s problems run deeper than fiscal imbalances. 

What is most likely to happen if Miele is able to abolish the central bank, dollarize the economy, and let an American-style free market run Argentina?

Will the inflation that is on the verge of hyperinflation go away, and if the central bank is abolished, will it create jobs, eliminate poverty, and close the gap between rich and poor?

To understand these long-term economic challenges, let’s start with Argentina’s inflation and debt spirals.

Argentina’s Fatal Attraction to Foreign Loans

Argentina, for most of its existence, has been running a federal government budget deficit, and the nation’s addiction to debt in foreign currency has been one of the critical catalysts for the current crisis.

Argentina has defaulted eight times over the last 200 years, and every bust following a boom has been accompanied by another increase in the nation's overall debt.

Inflation has become a permanent feature of Argentina’s economic landscape, and public debt defaults, in other words, breaking contracts, date back to 1890.

Moreover, the government is addicted to borrowing huge sums of money in international markets to finance various infrastructure projects that rarely generate sufficient returns to pay back its lenders.

About one-third of its population, fifteen million, lives in the megacity of Buenos Aires, and the rest of the country has seen little infrastructure development in the last three decades. 

Argentina’s last economic default in the early nineties is well chronicled and understood by investors, but the nation’s economy also enjoyed rapid economic progress between 2003 and 2018.

Higher commodity prices and surging agricultural and animal product exports to China drove the economic expansion during the 15-year period. 

In fact, Argentina’s annual goods exports now hover over $90 billion and services exports close to $15 billion; moreover, the country has been running a trade surplus of over $10 billion between 2019 and 2022.

So why is the economy in such dire straits and the peso in free fall?

Why does the peso keep falling?

High inflation has been a chronic problem in Argentina, and things got out of hand in 2018.

The number of factors worked against the country—some self-inflicted and others rooted in the COVID-19 pandemic. 

In 2017, the annual inflation rate jumped to 20%, trailing only Venezuela, but to the surprise of investors, the central bank eased its annual inflation target rate to 15% from the previous target rate not to exceed 12%.

The sudden relaxation of the inflation target put investors on alert, and jittery international investors with thin trust in the government’s ability to manage its finances looked for ways to get out. 

In addition, the central bank lowered its benchmark rate to 28% instead of increasing it, sending another wrong signal to international investors.

The distant but fresh memories of rapid inflation and debt defaults only three decades ago reared their ugly heads, and foreign investors began selling Argentine bonds in droves, leading to the start of the deep decline in the peso that continues today. 

Argentina’s addiction to foreign debt and persistent crisis of confidence among foreign investors are the root causes of the current malaise.

Of course, if the government managed its finances and relied on domestic and not international bond markets, the peso would have suffered less, and policymakers may have had more maneuvering room.

Once the exodus of investors started, the lack of political consensus and the onset of the COVID-19 pandemic only made things harder.

The government sought more foreign debt to pay for the previous debt in international markets, including an emergency loan from the International Monetary Fund with stringent fiscal conditions.

To make things even more difficult, interest rates, which once hovered below 2% in international markets, began to rise in 2021 after the U.S. Federal Reserve and the European Central Bank ended their nearly two-decade-long negative interest rate regime.

Argentina was now paying as much as 10% of its budget in interest payments, and the nation was facing its worst capital flight. 

Argentina’s Trust Deficit

The deep skepticism of foreign investors and how Argentina is held to a different set of standards is even starker when one compares Argentina's macroeconomic data with other nations.

Argentina’s total debt to its gross domestic product is about 80.3%. The economy rebounded in 2021 after contracting in the previous three years, only to slide again in 2023. 

Argentina’s annual budget deficit has averaged around 4.6% in the decade to 2022, slightly higher than the average in Latin America.

The gross debt to nominal GDP for the U.S. is above 120%, for the UK at 102%, for France at 117%, for Japan above 225%, for China at a whopping 286%, and for Singapore at 171%.

Moreover, one has to go back to 1965 to find international trade and budget surpluses in the U.S., yet the U.S. dollar is viewed by global economists and politicians as a financial standard to be emulated.

These lopsided comparisons should not serve as an excuse for Argentina’s current financial crisis, but when it comes to international credit markets, Argentina suffers from a trust deficit.

Argentinian policymakers and politicians should have known this, and with eight historical defaults, the nation should have steered away from borrowing in international markets.

Limits of Dollarization with Long-Term Consequences

President Miele’s dollarization plan is one of the most controversial and damaging aspects of his economic plan in the long term.

The dollarization in Argentina will fail beyond curbing hyperinflation, and the very people supporting the move will get hurt the most with the rapid rise of inequality and no new government spending. 

For sure, the dollarization will prevent frequent inflationary outbreaks and imbalances in fiscal and current accounts and stabilize exchange rates, but the plan will also increase inequality and not change country’s inherent competitiveness or lack of.

No doubt, inflation will plunge from triple digits to near 5%, the jobless rate will surge to more than 12% from the current rate of 6%, and the labor force will shrink to below 15 million from 21 million. 

The obvious question is: why?

Because if dollarization is not followed by foreign investment, then economic growth will slow down. Energy and mining are the only two sectors that are likely to attract foreign investments, but they are both capital-intensive and do not generate a lot of jobs. 

In short, dollarization will drive down the current rapid rate of inflation, but it will also lift the jobless rate and poverty rate even higher because at least three years will pass before private investment increases exports and generates jobs. 

There is a common misperception that dollarization will drive economic growth, increase per capital income, and create high paying jobs, and it makes the economy more vulnerable to external shocks and heightens volatility for a country relying on commodity exports. 

 We do not know if Miele’s government will manage to pull off its dollarization plan, but if the nation manages to implement dollarization, Argentina's problems will not end. 

Milei is selling a dream that will turn into a nightmare for most Argentinians. 

What Argentina needs is an honest politician who tells the truth to Argentinians: that there are easy answers but no quick solutions, and that at least one generation has to sacrifice to build the economy from the ground up. 

Policies for sustainable growth

Argentina is having the same crisis over and over again because, for one simple reason, it has the same economy that has failed to diversify beyond natural resources. 

That high-priced, commodities-export-driven economy worked because it was supporting only 4 million people in Argentina a century ago.

With a population exceeding 45 million and real commodity prices continuing to fall, Argentina needs to focus on its most prized asset, human capital, which can provide technology-enabled services in international markets. 

What Argentina needs is investment in education, preparing a labor force that is globally competitive, aligning its economy to the Euro Area and to the U.S. through service exports, and ramping up teaching English and science and technology to its young people. 

Natural resource-driven wealth is far less durable than that created by well-developed human capital, as Argentinians discovered in the last century. 

The mineral-rich Argentina should be a wealthy nation, but most of the wealth is under the ground and needs patient capital to extract.

But the true wealth of Argentina is above the ground, its people.

Dollarization is like a painkiller; it works for a while, then the real pain returns, and you realize now you can’t get off the pills.

Argentinians believe that President Milei has a quick solution for their long-term problems. When dollarization fails to show quick results, no one should be surprised if President Milei is thrown out of office in a few years. 

What Argentina needs is a political consensus on basic economic policies and discipline—keeping the government’s budget deficit to the gross domestic product ratio less than 1.5%, severely limiting the government’s ability to borrow in international markets, and keeping its current account in surplus. 

If all politicians can agree on these three simple goals, growth will return, foreign and domestic investment will grow, and wages will rise in real terms.

Argentina does not need to straitjacket its economy and rely on the unpredictability of the U.S. dollar printed by the government, which has its own serious fiscal problems. 

Missing Locomotive

Argentinian policymakers rarely focus on the root cause of government debt, which seems to only get bigger with time.

Between 1870 and 1930, when globalization was in full swing, Argentina benefited by supplying agricultural products, cattle products, and minerals to several European countries.

Those exports provided a steady income to support infrastructure development and create jobs, but then and now, Argentina has failed to leverage its newly found wealth into industrializing and modernizing its economy.

After the Second World War, Argentina gradually lost its ability to compete in world markets because of a lack of diverse economic growth drivers and progressively lost its competitiveness to fast-developing Asian economies as the nation exhausted its abilities to exploit cattle and agriculture-based economies.

Exporting meat and agriculture products to Europe was the main driver of the Argentinian economy, and ever since that loss of the locomotive, Argentina has struggled.

Other resource-rich countries like Canada and Australia have managed to diversify their economies and still enjoy prosperity, but Argentina has lost its way.

Argentina has not been willing or able to carry out structural changes needed to diversify its economic base and sell products or services to other large economies of the world, or locomotives, just as Japan, Korea, and China managed to do over the last sixty years by anchoring their economies to the U.S.

Argentina has two natural advantages that fast-growing and well-developed Asian economies lack: its relative proximity and continuous time zone with the U.S.

Targeting the U.S. economy and exporting services to the world’s largest economy could create high-paying jobs. 

Business processes, information technology, and construction services could provide a big boost to job creation at home.

Mandatory learning of the American English language in high schools and colleges could make the process of acquiring professional skills and building a thriving service sector easier.

For the last several decades, the agriculture and mining sectors have been the two drivers of Argentina’s exports, and the steady additional demand from China is a boon to shipments of commodities, but these sectors rarely create enough well-paid jobs.

Lithium is often touted in Argentina as the next export driver and economic game changer, but the ground realities of this rare mineral are far from attractive.

Lithium Triangle

Argentina shares about 70% of the world's lithium resource with Bolivia and Chile and could benefit from the rapidly expanding sale of electric vehicles and battery-operated devices around the world.

Lithium, dubbed white gold, is being eyed by mining and manufacturing companies in China, the U.S., South Korea, and Japan as demand for battery-powered mobile devices, electric vehicles, and computing devices continues to soar.

The lithium price per ton has soared from less than $4,000 in 2013 to a peak of $81,000 in late 2022 before dropping to $22,000.

Argentina is estimated to have about 873,000 hectares suitable for lithium mining, and the nation is more attractive to international mining companies after Bolivia and Chile restricted lithium exports and the role of the private sector in the mineral’s mining.

However, lithium mining is not without its problems, and much-ballyhooed export potential is also limited, which will not help solve Argentina’s jobs and economic growth crises.

A single copper mine can generate as much as $1 billion in foreign exchange, but a similar-sized lithium mine can barely produce $200 million.

In addition, lithium needs to be extracted through the evaporation process, which consumes huge quantities of fresh water and has the potential to pollute waterways with chemical contamination.

Extracting one ton of battery-grade lithium requires 500,000 gallons of fresh water, which has already created extreme water shortages and impacted the availability of fresh water for local farmers and cattle ranchers.

Lithium-powered batteries are supposedly considered green activities, but water-depleting and air-polluting lithium supply chains are anything but green.

Moreover, most lithium mining rights in Argentina are handed out by provincial governments, and mining companies are paying only about 3% of royalties to regional governments, not enough to make a dent in the finances.

In short, lithium mining is more likely to be environmentally damaging and not generate significant revenue for the nation. 

And what happens if the battery technology shifts to other chemicals, such as iron- ions or sodium ions?

As the demand for cheaper battery-powered vehicles and devices rises, the focus will shift to cheaper battery materials in the next decade, making most lithium mines less attractive.

The lithium boom of the past decade could go bust in the next decade.

Road Ahead

To create a growing and sustainable middle class, Argentina needs to diversify into exporting professional skills-driven services to the U.S. and other wealthy nations and take advantage of its multilingual young population. 

Argentina has the potential to create as many as two million jobs and export at least $50 billion in professional and information technology services to the U.S. and the eurozone.

In the past, people in Argentina have looked to Italy and Spain for professional advancement or business opportunities, or simply to emigrate to these nations because of their cultural and family ties.

Spain and Italy do not have the economic scale and dynamism, but by mastering the American English language, Argentina can create a sizable service export economy. 

Unless Argentia anchors its economy to other large economies and carves out its slice of the service market, the nation will continue to lurch from one crisis to the next.

President Milele can cut government expenses and dollarize the economy, but these measures will not create a middle class that will power durable economic growth for decades to come.