The Cause Of Argentina’s Decline: Populism

Based on the various policies implemented mostly by the Argentine populist party(and the military, when in power), we use Dornbusch and Edwards(1990) to develop a comprehensive analysis of the interaction of various economic phenomena to discover a vicious cycle: under populist regimes, execution of trade protectionism, has seriously hampered the growth of the Argentine economy; the implementation of trade barriers resulted in a non-competitive domestic market with a seriously underdeveloped industrial sector, thereby affecting the labor market, leading to long-term unemployed workers, and even direct loss of jobs; the proportion of poor people continues to rise and social conflicts between rich and poor continue to escalate. In order to ensure social order the government-supported by the majority of the people’s vote-, increase spending in social security in order to ease the short-term pressure on the survival of the poor, leading to rising government debt.The increase of government debt in order to ease the pressure to raise taxes on the one hand, on the other hand the excessive monetary emission to sustain an ever increasing public sector and government deficit has led to high domestic inflation, thereby affecting the real lending rates to enterprises. These two measures in turn contributed to an underdeveloped industrial sector, thus the Argentine economy entered a vicious cycle.Furthermore, we build a dynamic model and use it to analyze the relationship between economic growth and GDP growth meassured in real wages. The results show that frequent populist economic fluctuations in real wages caused by fluctuations in the economy are a major cause of the long-term downturn in the Argentine economy. Finally, this paper presents reasons why the populist party gets elected over and over again.We use the Acemoglu(2011) model of populist election based on the political leaders chosen in Argentina to expand the analysis. We find that the majority of Argentine voters believe that the economic development of the upper class has been due to the use of political influence and not because of its own productive capacity and economic contributions. Thus, the implementation of government policies detrimental to the wealthiest sectors of society leading to populism and policy instability followed, thus affecting private sector investment. The implementation of trade protectionism, high debt, high corruption, increasing participation of the state in economic activities, populism and disregard for a democratic republic order, sunk the country in a vicious cycle. We analyze the challenges currently faced by Argentina and discover that in order to make growth enhancing long-term policies, the first step is to vote the populist party out of power. A detailed assessment of the economic policies follow.