The Invisible Hand of God: Returning to Argentina

The Invisible Hand of God: Returning to Argentina

By Tim Harcourt*

Reporting from Buenos Aires, Argentina

In order to measure the standard of living across international borders, The Economist magazine invented the ’Big Mac Index’ to see what its cost to buy a ‘Big Mac’ hamburger in McDonald restaurants in each country in the local currency. It’s a very rough rule of thumb to make international economic comparisons.

But try getting a Big Mac in Argentina. I noticed here on my recent trip to Buenos Aires that The Big Mac and its price are not on the board on any McDonald’s restaurant you walk into in Argentina (there is a ‘Triple Mac’ listed), although you can ask for it.

Why? Is it because the Argentines don’t want some sneaky economist to record the price and get a handle on Argentina’s inflation rate and its relative cost of living? It could be. But locals explained to me that it is due to random price controls imposed by the Argentine Government. In order to combat inflation, the government randomly selects items – Big Macs, mobile phone and the like – that are bought universally in an era reminiscent of the price controls of the early 1970s in places like Australia and the USA. So Big Macs are priced artificially low, so McDonalds doesn’t want you to buy it and the government wants you to think inflation is under control and consumer items of affordable to the average Argentine.

This is an example of both the randomness of a microeconomic policy in modern Argentina despite growth spurts ‘between crises’ as the locals say. This is also classic example of the lack of transparency in Argentina’s economic institutions that causes economic dislocation.

Another example concerns an Argentine icon – Diego Maradona. When Argentina last won the World Cup in 1986, Argentina defeated England in the quarter finals, thanks to two goals by Maradona. One was the famous ‘hand of god’ where Maradona punched the ball over England Goalkeeper Peter Shilton and into the net. The other – which was the sealer – Maradona took the ball in defence and dribbled majestically past nearly the whole England team before again defeating Shilton and English hopes. Yet when Maradona was interviewed years later he was most proud of the ‘’hand of god’’ as a form of innovation and genius even though it was against the rules. This is an amazing statement given how his raw skill and individual brilliance, allowed him to (fairly) score the other goal which effectively won the match – and later the World Cup.

Perhaps these examples – the BA Big Mac and Maradona’s choices are symbolic of some of the problems facing Argentina currently. Argentina has brilliance and flare, a beautiful country, great resource endowments and a great stock of human capital (bolstered by immigration). Yet by the policy choices it makes and the institutions it forms, at crucial times it severely underperforms as an economy. After all, a country’s institutions – political and economic – make a real difference to their progress according to the seminal work by Daron Acemoglu and James A. Robinson, Why Nations Fail. According to the authors, political rights and property rights make a big difference so all players know the rules of the game. Institutions rely on transparency and trust, in economics, in politics in sport as in life.

As noted in various economic studies, institutions are thought to be the big difference between the economic development of Argentina and Australia. Economic historian Ian McLean has famously looked at the difference for example in landownership in 19^th century agriculture in Australia and Argentina. Whilst Australia broke up the “squatters” grip on agricultural land to democratize land ownership, in Argentina (as in most of Latin America and Africa), a group of elites managed to control land for a longer period. As a result the urban working class, consisting of many Italian and Spanish immigrants who flocked to Argentina at the turn of century (1 in 4 people in Buenos Aires in 1870-1900 was born overseas) were landless and turned to Peronist protection and economic intervention. And despite bouts of liberalization for a short time, this interventionist impulse remains with Argentine policy institutions. By contrast, Australia re-made its economic policy agenda over the last 30 years, slowly but surely opening up its economy, whilst maintaining strong social protection (not trade protections) through a Prices and Incomes Accord with the trade unions, and the provision of the ‘social wages’ through universal health care, education, labour market programmes and pensions (superannuation), with appropriate targeting and means tests.

But despite the divergence with Australia and the recent woes Argentina still has great potential. It still has a major resource endowment in terms of agriculture and untapped mineral resources. In fact, institutional reform could make a big difference to Argentina’s mining industry. At the moment, half of the Argentine provinces still ban mining, and when I was in Argentina, the Brazilian mining giant Vale pulled out of the province of Mendoza because of regulatory uncertainty.

 A concern in Argentina is the impact of mining on agricultural land, the environment and indigenous rights. Corporate Social Responsibility (CSR) is very important to the Argentine community and there is potential for Australian mining companies who are world leaders in CSR, to help develop this in Argentina as they have in the rest of Latin America, particularly in the Andeans states of Chile, Peru and Colombia.

Another bonus to Argentina is that economically speaking it now has good neighbours mostly in Latin America.  Compared to the 1980s and 1990s, Brazil’s economy has vastly improved, Chile is the ‘Jaguar of South America’ (the equivalent of an Asian Tiger), Uruguay has strengths in agriculture and times are vastly improving in Peru and Colombia. During the global financial crisis of 2008, Latin America was neither a cause nor a drag on global growth. Argentina has for once, found itself in a sweet spot in the world economy, and can forger stronger ties regionally.

Finally, there’s human capital. Argentina has large reserves of human capital and individual Argentines still excel in international management, science, research, sport and culture on an international scale despite the problems at home. There’s still an opportunity to tap into the talent banks abroad and encourage Argentines to bring their learning back home to help reshape institutions. Whilst there are not as many Argentines studying in Australia as there are Brazilians and Colombians, on average they are high achievers and integrate well on campus and into Australian society overall.

But there is still a big need for economic reform. Economic reform in Argentina was a bit like Nirvana – it was big in the 1990s – but there’s hasn’t been not a lot since. The efforts of Dominic Cavallo, for example, were a bit too short sharp shock and hence caused reform fatigue and another crisis. By contrast, the Australian gradual model of the Hawke-Keating era, opted for a medium term strategy opening up the economy to Asia and the rest of the world whilst maintain strong social institutions to absorb any economic dislocation.

But there is a good piece of news. The authors of Why Nations Fail, see Democratic rights as important as property rights and in 2013, Argentina celebrates 30 years of the restoration of democracy. For Argentina to succeed, it needs to restore its economic institutions to build trust and transparency, just as it has done in terms of democracy.

Australia has shown in its last 30 years of economic reform, you can couple price signals and market mechanisms with strong social institutions providing healthcare, education and other safety nets to support social justice. By combining price signals and market mechanisms with social protection (not trade protection) Argentina can potentially rebuild its institutions and make important steps on the road to long term recovery.

And a good way to start is to build price signals back into the Argentine economy, starting with the Big Macs at McDonalds and perhaps Maradona could boast about his truly brilliant goal rather than when he showed economists how the invisible hand really worked in practice rather than in theory.

*Tim Harcourt is the J.W.Nevile Fellow in Economics at the University of New South Wales, Sydney, Australia and author of The Airport Economist www.theairporteconomist.com

He travelled to Argentina courtesy of the Australian Department of Foreign Affairs and Trade (DFAT) and the Council of Australian Latin American Relations (COALAR). Thanks are due to Ambassador Patricia Holmes, Lisa Davidson, Magdalena Luppi, Norma Ramiro and Fernando Perez Tain for hosting in Buenos Aires.