Cheta Nwanze, Lead Partner, SBM Intelligence

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Like Peronism Buhari’s populism will die hard 12 Nov 2019

President-elect of Argentina, Alberto Fernandez

Economic populism has resurrected in Argentina with the election of Alberto Fernandez as President and Cristina Fernandez de Kirchner – the former President – as Vice President. The pair beat pro-business incumbent President Mauricio Macri in last month’s presidential election.
President Macri lost popularity with Argentine voters because of the country's continuing economic woes. He had come into office in 2015 with the promise to push through some difficult market-oriented reforms. But it didn’t work out well enough. His fate has now been sealed with the economic crisis – high inflation, rising unemployment and recession – the country has been facing. “Peronism,” the political cum economic nationalism ideology Macri defeated to become President four years ago, has made a comeback.

The history of Argentina's economy is one of the most studied in the world. The "Argentine paradox" makes a good study. Argentina once accelerated ahead of its peers in terms of economic development. But it has had a spectacular reversal of fortune. While Nigeria has never risen to the level that defined Argentina’s economic heights, we should be mindful that we may sink to the persisting Argentine low.

The period from 1880 to 1913 was Argentina’s Golden Age. This period followed its independence from Spain in 1816. The Argentinian economy was, however, buoyed by trade with Great Britain. Argentina sold grains and livestock to Britain and imported manufactured products from the imperial power. To diversify its domestic economy, Argentina encouraged inflow of foreign capital. Foreign companies invested in railroads, ports, communications, water, electricity and energy. Argentina also encouraged immigration into the then-sparsely-populated country to improve the stock of skills and expertise in the economy.

As a direct benefit of these policies, Argentina, by 1888, became the sixth largest exporter of grains in the world. And, by 1907, its grains economy was only surpassed by the United States and Russia.

Quite noteworthily, the size of the government remained small. Argentina’s public spending remained below 9 per cent of GDP. Inflation was low, and the country was stable. This spurred more capital importation, and development. Illiteracy decreased from 78 per cent to 35 per cent; the rail network expanded from 6,000km to more than 25,000km in record time; and grain exports skyrocketed from 389,000 metric tonnes to 5,294,000 metric tonnes.

But Argentina’s commodity-export economy was vulnerable to external shocks. This became a reality during the First World War, which disrupted international commerce. But Argentina was not the hardest hit by the war or its immediate aftermath that saw the victorious Western economies introduce protectionist trade policies. Between 1920-1929, its GDP per capita grew at 1.75 per cent, which was faster than that of the United States at 1.22 per cent, per year.

What hit Argentina very hard was the financial crisis of 1929 and the Great Depression that followed shortly afterwards. Demand for its exports to Europe and the U.S. suddenly collapsed. As revenues plunged, the Argentine government could no longer pay workers, causing unrest. In a knee jerk reaction, the military conducted a coup and kicked out President Hipolito Yrigoyen in 1930. This resulted in many other coups and counter-coups. For the remainder of the 20th Century, more generals (14) than civilians (11), ruled Argentina.

Argentina’s second military coup in 1943 brought Juan Domingo Peron to prominence. Peron was in charge of the Department of Labour, and became well-known among union workers. Eventually, the military rulers became fearful of his popularity, and he was incarcerated in 1945. Five days after his incarceration, a general protest led by Evita, his wife, pressured the government to free Peron and called for elections, which he eventually won in 1946.

Upon assumption of power, President Peron made government involvement in the economy a mainstream policy. The legacy of his administration was a series of nationalisation and re-nationalisation of private sector businesses. Argentina became the country with perhaps the longest history of nationalisation in the world. His other policies involved the redistribution of wealth from capitalists to workers, and currency controls.

Peronomics made the public sector, rather than the private sector, the commanding height of the Argentine economy. Price controls kept the costs of some products artificially low. Fiscal spending grew from 16 per cent to 29 per cent of GDP. Money supply expanded by 250 per cent between 1946 and 1949. Moreover, inflation soared to unprecedented levels in the country. By 1949, the populist economic model of Peron was in crisis. Wages started to grow more slowly than inflation. Price controls had discouraged local investment.

Faced with the reality of his failed economic policy, Peron started to reverse himself. He opened certain industries to private investment, froze wages in an attempt to stymie runaway inflation, and reduced fiscal spending to control the deficit. Whatever progress he could make with his new policy thrust was truncated by a military coup in 1955. He returned to power in 1973, and died one year after.

Peronomics would, however, endure. Its import substitution policies lasted for another two years, ending in 1976. But curbing government spending was harder. The large wage increases President Peron had instituted drove a chronic cost-push inflation through to the 1980s. Similarly, all these perils are now real prospects of the economic policies of Nigerian President Muhammadu Buhari.

Also familiar to Nigerians under the administration of President Buhari, is a large government. In programmes similar to Buhari’s Social Investment Programmes, President Peron generated an oversized and overstaffed government. In order to finance them, he aggressively increased taxation, closed the economy to foreign trade, and subsidised some economic sectors.

Argentina has come from being a prosperous nation and the pride of Latin America, with aspirations of becoming a First World country, to a nation that cannot feed its 45 million people, 26 per cent of whom currently live below the poverty line.

The election of Mauricio Macri as president in 2015 on a platform of reform created some hope that Argentina would be able to break out of the vicious cycle of credit defaults. However, Macri failed to carry out many of the reforms needed such as reducing fiscal spending, reforming the pension system, revamping the tax code and decreasing the power of workers’ unions.

Why was it so hard for Macri to carry out these reforms? Economic populism is sweet music to the ears of the masses. Delivering hard reforms is very difficult. In Nigeria, it has been impossible to end the subsidy of petrol, although it has been shown to be unsustainable. In 2018, the petrol subsidy cost the government over N1 trillion, whereas total fiscal revenue collected was between N3.7 trillion and N5 trillion, depending on the government source reporting it. Similar to economic rent among the elite, it is almost impossible to reverse populist policies that supposedly benefit workers and the masses. Faced with the prospects of the kind of resistance that has dogged the French President Emmanuel Macron’s fundamental reform agenda, leaders tend to take a gradual approach. Instead of a big bang reform agenda, incremental approach is more politically correct.

Macri chose the gradual approach to fixing the macroeconomic imbalances of Argentina. But this has only made high inflation, high unemployment and high taxes to persist, while causing further depreciation of the Argentinian peso. The expanded fiscal deficit has been funded by issuing debt in the international markets and expanding the monetary base. The country is now in stagflation and has been in recession for four of the last seven years since 2012, three years before Macri came into office.

Despite modest achievements of his reform between 2017 and 2018, Argentinians decided not to be patient with Macri. The voters have acted in line with their nostalgia toward Peron’s populist policies, notwithstanding its long-term negative consequences.

Surely, the deep reform that the Nigerian economy needs now will be harder to implement by Buhari’s successors. Such reforms would be construed as attempts to increase the sufferings of the masses, unmindful that Buharinomics had been a constraint on growth and the driver of rising unemployment and poverty.