Lessons from Argentina, and Copperfield

As Argentina’s economic problems worsen, with capital controls reintroduced and the value of its debt fallen back to around 40c on the $, I have been reflecting again on a recent trip there. It is a wonderful country, with beautiful countryside and delightful people. My memories are clouded though by the economic lessons that are impossible not to see around you. It was unfairness visible.

I was there on the day in August of the primary elections when current President Mauricio Macri was trounced by his populist rival Alberto Fernandez. These votes didn’t mean anything in themselves other than foreshadowing the real thing, due at the end of this month. There had been huge and angry demonstrations leading up to the election date, and the streets were filled with political billboards. During the day itself, the streets seemed quiet and the main impact I felt personally was the ban on alcohol sales until 9pm on the day of any vote.

The waiter who brought me that 9pm beer was thus particularly welcome, but he was also particularly glum. The exit polls were already showing victory by 40% by Fernandez, which he regarded as a disaster. Others were more positive: I am told supporters of Fernandez flooded some streets in Buenos Aires in noisy celebration, though I didn’t witness that.

The currency markets, however, agreed with my waiter: the peso fell almost at once by 25%, and share prices by 35% (in non-peso terms, shares halved in value), putting further pressure on an economy already facing steep recession through Macri’s tough austerity programme. Unemployment is high, and inflation is creeping upwards despite administrative controls — in spite of those controls, it is running at over 50% a year.

I have never before travelled in an economy falling apart in front of my eyes. Cuba was non-functional but still people coped; everyone seemed to have some small scam going, mainly revolving around getting hard cash from the tourist market. The number of people who ought to have more productive lives who were operating as tour guides was hugely depressing. In a similar vein, I vividly remember the shelves of a supermarket in Soviet Russia holding only distinctly blue-tinged milk, and nothing else; and yet the people seemed to expect nothing better and survived. Both were messes in their own ways, but in their own ways they were steady state situations. Argentina was different.

I had only before studied the theory of shoe leather costs — the daily grinding additional burdens that arise in an economy weighed down by high inflation. But in Argentina there was no escape from seeing its reality. There were long daily queues at cashpoints to take out the meagre amount permitted for withdrawal each day — P2000, at a fee of P350-450 per transaction (those administrative measures to limit inflation are pretty blunt). The blackboards showing prices which changed rapidly, or the multiple labels on menus to reflect the fact that last week’s prices no longer reflect economic reality; or the side-stepping of both with lengthy negotiations about what price is appropriate and can be afforded on both sides. Silent queues of protest outside the offices of the failing municipal utilities. In a country of high unemployment and little opportunity, time is cheap and so gets wasted in various mundane frustrating ways. Soviet Russia used to formalise this by requiring shoppers to queue up three times to make a single purchase, should there have been anything other than blue milk to buy. This was in part a make-work scheme and in part a make-slow scheme. But Argentina demonstrated that formality is not needed and queuing can become a way of life. Mostly those queues and protests were quiet and dignified but the underlying anger was not hard to sense, and it was not hard to imagine more of those quiet protests at some point boiling over into something more — the point at which unfairness can no longer be tolerated.

One of the most poignant sights of a proud economy that is failing came at the border with Brazil — the mutual bridge proudly painted with each nation’s colours to halfway, the green and gold of Brazil glowing with a recent coat and the blue and white of Argentina cracked and peeling. The saddest sight was the bags and bags of onions seized at the border. Smuggling even this mundane a product was lucrative enough to justify the risk of being caught and all that might entail. 

But Argentina’s problem is more fundamental and mundane even than onions: with 10% unemployment and a third living in poverty life is impossible for many, but even the average middle class wage of around P30000 a month is no longer proving possible to live on. As inflation has outstripped wage rises, everything has become too expensive, so even the middle class is struggling and barely coping. Perhaps the queues at the bank would be still longer if people had more money available to them to spend. Discussing the situation reminded me of Wilkins Micawber in Charles Dickens’ David Copperfield (freshly and dazzingly brought to our screens by the magical Armando Iannucci). He states the problem with precision:

“Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

Micawber, like too many Argentines, is always the wrong side of that equation. The tragedy of Micawber is that while his sunniness in the face of what ought to be misery allows him to believe that something will turn up to unlock him from the inability to afford to live, we the readers believe that it never will (though Dickens is ever a benevolent author). That we have whole economies now operating on the false promise that something will turn up is our current tragedy — it is unfair that we seem to be lying to such people, who do not have the benefit of salvation at the hands of a kindly writer.

And sadly we cannot assume that this phenomenon is restricted to emerging economies. How else can we explain the ever-increasing personal debt levels, the use of equity in housing and rising credit card balances, that are a feature across major developed economies? While interest rates are low, significant portions of the world are now operating on the never never. While it temporarily keeps individuals’ heads above water, overall it will not make us more prosperous. Indeed, it might seem that there are pockets of troubled economies hidden within the wider, supposedly prosperous developed economies: that’s what our inequalities and unfairnesses have brought us to.

Take the latest Bank of England figures on consumer borrowing (above). There has been no overall repayment of consumer debt since 2012, and while the monthly growth in debt has reduced marginally in recent months it still has a run-rate of around £1 billion a month, and now totals over £200 billion (this is in addition to mortgage borrowing, which also continues to grow, at around $4 billion a month, and totals some £1.4 trillion). That £1 billion a month, £12 billion a year, is a significant portion of the overall level of household expenditure in the UK, which runs at around £300 billion annually. Mr Micawber’s hopes make up around 4% of personal spending. The inequalities and unfairnesses that we all face mean that we are collectively hoping that something will turn up. False and unfair aspirations are likely to end in tears.

To return to Argentina, and the lessons that we might learn from it, I can do no better than quote from the conclusions to a recent (US) National Bureau of Economic Research working paper on Latin American populism: 

“Populists implement redistributive policies that violate the basic laws of economics, and in particular budget constraints. Most populist experiments go through five distinct phases that span from euphoria to collapse. Historically, the vast majority of populist episodes end up with declines in national income. When everything is over, incomes of the poor and middle class tend to be lower than when the experiment was launched. I argue that many of the characteristics of traditional Latin American populism are present in more recent manifestations from around the globe.”

On Latin American Populism, and its Echoes Around the World, by Sebastian Edwards, NBER Working Paper No. 26333, October 2019