The Geopolitics of Argentina: The Superpower That Wasn’t
undefined and Director of Analysis at RANE
Adriano Bosoni
Director of Analysis at RANE, Stratfor
10 MIN READAug 8, 2022 | 18:17 GMT
Protesters wave an Argentine flag at an anti-government rally in Buenos Aires on July 9, 2022.
Protesters wave an Argentine flag at an anti-government rally in Buenos Aires on July 9, 2022.
(LUIS ROBAYO/AFP via Getty Images)
On Aug. 3, the Argentine government appointed its third economy minister in roughly a month, a testimony to the country’s seemingly never-ending saga of political volatility and economic decay. The new minister’s challenges are daunting: handle skyrocketing inflation amid dangerously low levels of central bank reserves, resurrect a fragile debt restructuring deal with the International Monetary Fund, restructure a massive network of subsidies and welfare payments that drains state revenue, and convince foreign investors that Argentina is a reliable country to do business. Like his predecessors, the new minister will probably fail to meet these challenges, prolonging the political, economic and social factors that have kept Argentina from reaching its full potential.
Argentina’s perennial cycles of economic turbulence are particularly baffling if we consider that, from a geopolitical perspective, the country has a lot going for it. In fact, Argentina shares many geographic and strategic commonalities with much more prosperous and stable countries like the United States and Australia, including a vast and resource-rich territory, protection from external aggression, and access to a large network of rivers and oceans that facilitate trade, along with a growing, educated and multicultural population. Argentina also has a legal and political system that (at least on paper) ensures a division of power, protects private property and promotes free markets. And yet, Argentina went from being one of the ten largest economies in the world at the beginning of the 20th century to barely making it to the top 30 at the beginning of the 21st century. While the reasons for Argentina’s economic decline are manifold, two stand out: the progressive erosion of the rule of law under both military and democratic governments, and the destructive expansion of populism.
An Advantageous Geography
While geography alone does not fully explain why a country should be prosperous, it is a good place to start thinking about why it could. Argentina is one of the world’s ten largest countries by territory and faces no significant threats of foreign aggression, a luxury that most other countries do not enjoy. The Andes, one of the world’s highest mountain ranges, protect Argentina’s entire western border and make an invasion from Chile virtually impossible. To the country’s south, there’s the vast South Ocean and almost uninhabited Antarctica. And to its east, there’s the Atlantic Ocean, which separates most of Argentina from the rest of the world, while the Rio de la Plata (the widest river in the world) offers enough buffer from potential aggression from neighboring Uruguay.
With three of its four borders secured, the main threats to Argentina’s territorial integrity come from the north, which explains why most of its post-independence wars in the second half of the 19th century (including with Brazil and Paraguay) took place in this area. But even in this case, Argentina’s northern borders are very far from its main population and economic hubs in the center of the country. These geographic features enabled Argentina to build a state after gaining independence from Spain in the early 19th century, and significantly expand its territory (including the conquest of Patagonia, a feat similar to the United States’ expansion to the west around the same time) without facing any meaningful external threats. Another benefit of this geography (and the lack of major quarrels with its neighbors) is that modern Argentina can afford to keep a very modest military budget, which frees up state resources to spend in other areas.
In addition to protection from external aggression, Argentina’s large territory offers significant natural resources that make it self-sufficient in two crucial areas: food and energy. The Pampas region in central Argentina has some of the most fertile lands on the planet, putting the country in a privileged position to produce massive amounts of food and other commodities. A large network of rivers, most notably the Rio de la Plata and its many affluents, and direct access to the Atlantic Ocean have traditionally made it cheap for Argentina to export its products. Argentina also has significant oil, natural gas and shale oil reserves, which makes Buenos Aires less exposed to global energy shocks compared with other import-reliant countries.
Argentina’s demography should also be conducive to economic growth: Like virtually every other country, Argentina’s fertility rate has fallen in recent decades. But it’s still above 2.1 births per woman, the so-called "replacement level" needed to maintain population stability (by contrast, fertility rates in countries like Spain or Italy are below 1.3). This means that Argentina’s population will continue to grow in the coming decades, and that while the country will still face the demographic challenges of an aging and shrinking workforce (and a potentially unsustainable welfare state), it will do so much later than most Western countries. Argentina also has lax immigration laws and a long history of welcoming foreigners, which means that "importing" workers to help offset its demographic decline will not be as politically risky for Argentina as it is in places like Europe.
A Weak Rule of Law
Argentina’s unprecedented economic decline reveals why advantageous geography alone is not enough to build a prosperous country. Some of Argentina’s problems can be traced back to its colonial roots. The Spanish colonizers left an uneven distribution of wealth (as lands were concentrated in few hands), an economic model based on the extraction of commodities with little to no incentive for private entrepreneurship (especially in manufacturing), a tradition of opaque decision-making from often corrupt political leaders, and a tendency for local warlords (or "caudillos") to resort to violence to pursue their political agendas.
Argentine leaders in the 19th century failed to solve most of these problems, and the transition to a sovereign republic left many of the economic and political structures of the colonial era virtually unchanged. These shortcomings became particularly acute in the mid-20th century when a series of coups led to military dictatorships that consolidated violence as a viable way to access and preserve power, abolished democratic institutions and severely weakened the rule of law while systematically violating human rights. Most of Argentina’s democratic governments in the late 20th century and early 21st century were only slightly better, as they circumvented, colluded with, or coerced the country’s legislative and judicial branches and used the state as a vehicle to benefit themselves and their political, social and economic allies.
This institutional weakness has impeded Argentina’s economic development and explains many of the country’s current problems. The absence of an independent and transparent judiciary that ensures everyone plays by the same rules has created an environment where property rights and contracts are selectively enforced (Argentina has a tendency to nationalize and sometimes expropriate everything from private companies to people’s bank savings; the government defaulting on its sovereign debt has also become a national sport.) This further contributes to a weak rule of law and creates inherent risks for both companies and households, which, in turn, undermines economic development by deterring investment and consumption.
Similarly, corruption prevents the laws of the economy from working freely and fosters an uneven distribution of wealth by concentrating economic resources in the hands of corrupt business elites and the public officials who back them. This has also given way to a large informal economy (which employs roughly half of Argentine workers), as companies and households often choose to perform their activities off the books because of selective control from the authorities or excessive taxation. As a result, Argentina’s formal economy has failed to reach anywhere close to its full potential.
In such a volatile political and economic context, it’s no surprise that Argentine governments tend to make abrupt policy changes that make it almost impossible for companies and households to plan long-term by forcing them to adapt quickly to ever-changing rules.
This highly uncertain policy environment tends to produce frequent economic crises by undermining domestic and foreign trust in both the Argentine economy and the Argentine government’s ability to control the situation. In response to those crises, the country’s leaders in Buenos Aires repeatedly make hasty decisions to try to turn things around (as most recently evidenced by the appointment of three economy ministers this past month), which, more often than not, exacerbates the fundamental challenges hindering Argentina’s progress by only casting more doubt about the country’s political and economic stability.
The Perils of Populism
But while Argentina’s weak rule of law and uncertain policy environment certainly haven’t helped, the expansion of populism is perhaps most to blame for the country’s enduring economic malaise.
Echoing similar trends that were taking place in other parts of the world at the time, in the 1940s former Argentine president Juan Peron realized that there were massive political gains to be made from extending economic benefits to the large sectors of the population that had been hitherto neglected by previous Argentine governments. In the decades since, most of Argentina’s governments (the majority of which have been led by Peronists, with the party winning 10 of the 15 presidential elections that took place between 1946 and 2019) have based their power on an ever-increasing network of clientelism and patronage that keeps a vast sector of the population dependent on assistance from the state to cover their basic needs.
The main goal of this system is to secure a critical mass of support from voters in presidential and congressional elections. With the false pretext of helping those in need, most Argentine governments in recent decades have kept large sectors of the population dependent on the state, to make sure that they kept voting for the leaders that guaranteed the continuity of the patronage system. But populism is expensive, which explains why expansionary fiscal and monetary policy frequently results in very high levels of inflation amid deep fiscal deficits; and corrupt and inefficient governments are unreliable, which also explains Argentina’s frequently high borrowing costs in debt markets and the never-ending saga of financial crises and sovereign defaults.
In their book "Why Nations Fail," Daron Acemoglu and James Robinson argue that "poor countries are poor because those who have power make choices that create poverty. They get it wrong not by mistake or ignorance but on purpose." This is painfully true for Argentina, a country where conscious political decisions and mismanagement are directly to blame for its economic decline. For about a century, Argentine governments have resorted to clientelism, corruption and authoritarianism, which has progressively weakened the rule of law, hindered economic development and increased poverty.
The problem is that once populism takes over a country, ending it or at least removing its most pernicious aspects becomes extremely difficult. Each month, roughly half of Argentina’s population currently receives direct payments from the state in one way or another. The government also subsidizes key services and goods, like energy and transportation, for most of the population. Even if done progressively, the lifting of these welfare payments and subsidies would almost certainly result in widespread social unrest and violence that would oust the government that lifted them. This means that even if the system’s shortcomings are evident, present and future Argentine governments will remain reluctant to change (let alone end) it.
Even if, as most opinion polls suggest, the conservative opposition defeats the incumbent Peronists in the presidential elections in October 2023, the new government will struggle to turn things around. Populism has built a time bomb at the heart of the Argentine economy that is virtually impossible to dismantle, which will likely perpetuate (and perhaps worsen) the country’s vicious cycle of political instability and economic volatility, regardless of a geopolitical context that should ensure prosperity.
