Populist economic thought: the legacy of Juan Domingo Perón
Carlos Newland (ESEADE) and Emilio Ocampo (UCEMA)
Summary: This paper summarizes Peron’s economic ideas, which guided his economic policies and those of his contemporary successors.Peronism emphasized income redistribution in favor of the urban masses by promoting the expansion of an inward looking industrial sector, imposing trade and financial autarchy, taking control of the banking sytem, enforcing financial repression and putting key areas of economic activity under state control. Peronism had a lasting, decisive and negative impact on the evolution of the Argentine economy after 1945 and introduced path-dependence on inflation, deficit and stagnation.
During a recent official visit of Argentina’s president Alberto Fernandez to Germany, Chancellor Angela Merkel asked him what was the ideology of Peronism, the political party founded by Juan Perón in the 1940s. Since a transcript of their conversation was not made available, we don’t know what was Fernandez’ exact answer. A blogger from The Economist provided an imaginary version of their conversation that sounds plausible (Bello, 2020). Outside Argentina, Peronism is an enigma to sociologists and political scientists. The categories they apply in most countries don’t seem appropriate. It is not Fascism but draws many elements from it, it is not socialism but appeals to class struggle and leads to similar results. Extremists from the right and the left claim to be Peron’s true heirs and still cohabit, not without conflict, in the party he created. According to New York Times columnist Roger Cohen (2014), “to give expression to its uniqueness, Argentina invented its own political philosophy: a strange mishmash of nationalism, romanticism, fascism, socialism, backwardness, progressiveness, militarism, eroticism, fantasy, musical, mournfulness, irresponsibility and repression. The name it gave all this was Peronism. It has proved impossible to shake”.
Peronism has also been defined as the quintessential Latin American version of populism. Which may not help much to understand it, since political scientists, economists and sociologists cannot
agree on a definition of the latter (see Ocampo, 2019). In their classic study on the macroeconomics of Latin American populism, Dornbusch and Edwards (1991) defined it as a set of policy measures that emphasized income redistribution and ignored economic or financial constraints. They also described the typical populist experiment as having three phases: an initial boom followed by bottlenecks, inflationary pressures and foreign exchange shortages followed by a crisis and a period of austerity. The idea that deficit financing through monetary expansion can lead to high inflation is anathema to populist policymakers (and their voters). Instead, they believe it stimulates domestic consumption and an expansion of real output. In reality, as Dornbusch and Edwards pointed out, it leads to shortages, high inflation and, eventually, a financial crisis. At the end of the populist cycle, orthodoxy prevails and real wages are always lower. The paradox of populism is that those who are meant to benefit from its policies end up suffering the most. According to Edwards (2019b) Perón’s economic policies during 1946-1949 were the archetype of this economic policy paradigm.
In the last decade, both left and right wing populism have spread beyond Latin America. Although both versions present a threat to liberal democracy they have a different approach to economic policy. Right wing populism favors protectionism and crony capitalism, whereas left wing populism adds income and wealth redistribution and extensive state intervention to the mix (Ocampo 2019). In recent years, some elements of the Latin American populist policy paradigm have surfaced in the US in the form of what is called “Modern Monetary Theory” (MMT). As Edwards (2019a) has explained, the types of policies advocated by MMT supporters have been tried in several countries in Latin America with disastrous results. Argentina is in fact a prime example of what happens to a country that consistently applies those policies. In fact, we argue in this paper, that Perón was a precursor in the implementation the MMT policy paradigm (see Ocampo 2020).
Four decades ago, Samuelson (1980) argued that Schumpeter’s prediction that socialism would inevitably replace capitalism was still valid. In his view, problem with the original version was that the definition of socialism proposed by Schumpeter was incorrect. According to Samuelson, the biggest threat to Western mixed-advanced economies was not the Soviet or Maoist version of socialism, the one proposed by Oskar Lange in the 1930s, the one advocated by Jan Tinbergen and Joan Robinson in the postwar era or the 1970s Scandinavian variety, but the type of
populism prevalent in South America, particularly Argentina since Juan Perón. Given the growing number of countries governed by populists in recent years and the emergence of policy prescriptions such as those offered by MMT, it may be worth delving into the economic ideology behind Peronism, a subject that has not received the attention it deserves from economists and historians (exceptions are Di Tella and Dubra, 2010; Llach and Gerchunoff, 2007, and Sowter, 2015). Peronism not only determined Argentina’s economic trajectory since 1945 but also influenced the policies of many other countries in Latin America, like Peru and Venezuela.
This paper is organized as follows. Section 2 analyzes the main features of the Peronist economic policy paradigm. Section 3 describes the consequences of applying this paradigm. The final segment offers some concluding remarks.
- The Peronist Economic Policy Paradigm
According to Edwards (2019b) the Latin American populist policy paradigm is best condensed in a letter sent by Perón in 1952 to the newly elected president of Chile, Carlos Ibáñez del Campo:
Give the people, especially to the workers, all that is possible. When it seems to you that you have already given them too much, give them more. You will see the results. Everybody will try to frighten you with the specter of an economic collapse. But all of this is a lie. There is nothing more elastic than the economy, which everyone fears so much because no one understands it.
It is ironic Peron would give such advise when those policies had given him such poor results. By the end of 1951, the Argentine economy was on its knees, having endured four years of stagflation and growing social unrest. It was evident by then that the economy was not “elastic”, as Perón had just launched his “Austerity Plan”. In 1952 Argentina’s GDP per capita ended up roughly at the same level as in 1946. When comparing these years the level of real wages remained constant. (Newland and Cuesta, 2017).
Peron was an unknown army colonel until June 4, 1943, when together with a group of fiercely nationalist army officers he staged a coup d’état. Even after his death in 1974, he has remained the dominant figure of Argentine politics. Although Peron gave himself airs of a profound thinker and pretended to be deeply knowledgeable about most public policy issues, his economic
ideas were a contradictory mishmash representative of past and contemporary zeitgeists with an Argentine flavor. Perón exemplifies well Keynes’ dictum about the power of the ideas of economists and political philosophers on both statesmen and practical men. He claimed that he had learned economics during his two-year stay in Italy, a country that, in his opinion, had “the best economists” (Luna, 1971, p. 59). Italy certainly had great economists, but most of them in fact opposed Fascism (see Ocampo, 2020a). One exception is Franco Modigliani who in his youth was an enthusiastic supporter. In 1936 Modigliani even received “an award for economics writing from the hand of Benito Mussolini himself” (Klein and Daza, 2013, p.472). Modigliani was by no means the guru of fascist economics but in several articles he wrote in 1937 and 1938, before racist laws forced his emigration, he succintly described its essence. In one of these articles he explained that the goal of a Fascism was to prevent “the exploitation of the weak by the strong”, which he considered the inevitable result of a free market economy, and promote the advent “of a higher social justice” (Klein and Daza, 2013, p.477). The same could be said about Peronism (or Justicialismo, as Perón liked to call it). Social justice is one of its key tenets of Peronism. The other two were being economic independence and political sovereignty, also common to Fascism.
Peron’s economic policies were predicated on two assumptions, which he also shared with Fascist economic policies. First, a communist revolution was an imminent and existential threat to Argentina. Second, communism originated in the injustices engendered by unfettered capitalism. A third important assumption was that foreign interests allied with a local oligarchy had imposed a capitalist system in Argentina to exploit “the people”. From a policy perspective, his solution to this problem was the “Third Way”, which entailed creating a “Corporate State” along the same lines as the one Mussolini imposed in Italy during the 1920s and 1930s.
From 1944 until 1949 Perón was very influenced by José Figuerola, a Spanish exile who became one of his key economic advisor and collaborators. Trained as a lawyer, Figuerola had been a government official in Spain under the right-wing dictatorship of general Primo de Rivera. After the latter’s downfall, he moved to Italy where he studied the fascist labor legislation that was embodied in the Carta del Lavoro. In the early 1930s he moved to Argentina and joined the National Labor Department (NLD) where he was responsible for compiling statistics. Shortly after the 1943 coup d’état, Perón took over the NLD and turned it into a ministry with the
intention of making it the springboard of his political career. Perón took an immediate liking to Figuerola, who authored the first five-year economic plan announced in October 1946.
Ramon Cereijo, who Perón appointed as his first Minister of Finance, was also influential in giving a theoretical patina to Peronomics. Cereijo was a finance professor who had been greatly influenced by the Catholic Church’s social doctrine, Roosevelt’s New Deal, and Keynesianism, particularly as articulated by Alvin Hansen. Above all, Cereijo emphasized that Justicialismo had “perfected” economic theory with its rejection of liberal and free-market ideas (Cereijo 1947; Cereijo 1950). A useful document to understand Peronist thought is a manual written to indoctrinate the regime’s cadres (Apuntes, 1954). The starting point of Justicialismo is the existence of a central conflict between workers and capitalists. Although it recognized the Marxist notion of class struggle, as in Mussolini’s fascism, it rejected the annihilation of the private sector proposed by communism. Instead, it proposed that the Government (Perón), the State (public officials) and the “organized community” would determine a fair distribution of income among workers and businessmen. Basically government had to regulate market forces when demand or consumption exceeded supply by imposing price control or rationing. In line with Peron’s speeches, Cereijo argued that foreign companies in general did not operate in a market of perfect competition, but instead sought to “exploit” the countries in which they operated. Once again, an active state intervention was necessary, particularly in foreign trade. Supposedly, bulk purchases and sales through a state export-import monopoly would increase Argentina’s negotiating power in world markets. An active government intervention and planning was necessary to achieve “economic independence”, another key tenet of Peronism. Perón felt that the “revolutionary doctrine” that he had developed with his collaborators had refuted “the old capitalist truth that is struggling in retreat, persecuted by those people it exploited for centuries” (Perón, 1951, p. 230).
The strong role in economic affairs Perón granted to the State was not new in Argentina. In fact, the idea of the paternalistic state preceded Perón. In 1942, Francis Herron, an American journalist who spent a year visiting Argentina observed the following:
I am at last beginning to appreciate government is important, important beyond anything which North Americans can imagine. Argentine society depends upon
governmental paternalism. Government, not individuals or individual Enterprise, creates the great utilities of the nation, influences the educational system, and directs the development of the country. Enterprise in the Argentine is something which the people believe must be “fomented” by government. Because of the nature of Argentine society, this view of things is natural. The force of private capital is not known in the Argentine as it is in the United States… Foreign capital is regarded as predatory, and whether it be of English, United States or German origin it is not popular… In a country where individual enterprise is uncommon and where success is difficult to achieve, wealth can most easily be obtained by a quick stroke at the expense of others. Hence a capitalist is not esteemed. He is considered to be a schemer, an opportunist, at times even a thief. A capitalist is not admired; he is more hated than admired. A capitalist is not regarded as one who promotes civilization; he is thought of as a plunderer. If he does good, it is regarded as a simulation, and the good he does is presumed to be for the ulterior purpose of placing himself in a position so that he can make another profitable deal at the expense of others. This conception of the capitalist has been inherited from the Spanish colonial system (1943, p.155-156).
One can go back to the colonial era to find the roots of these ideas. At that time Juan Bautista Alberdi, Argentina’s most prominent liberal thinker, argued that one of the greatest obstacles to the development of Argentina and Spanish America was a deeply ingrained negative attitude towards business and businessmen. As Alberdi pointed out, all of Argentina’s heroes were generals that had victoriously led its armies during the wars of independence. Entrepreneurs were ignored at best and despised at worse (Gómez and Newland, 2014). Peron viewed himself as the successor of general San Martin, who in Argentina was and is stil widely considered “the father of nation” and the “Liberator of South America”. He promoted the notion that he waged a war for Argentina’s economic independence against foreign interests and was thus completing San Martin’s epic.
- The Economic Consequences of Peronism
When analyzing the economic policies of the first Peronist experiment, it is essential to distinguish four phases, the last three of which follow exactly those described by Dornbusch and Edwards (1991) as typical of Latin American populism. The first phase started at the end of October 1943 when Perón appointed himself Secretary of Labor and started to exert a growing influence on the military regime’s social and economic policies. He consolidated his power by early 1944, accumulating the titles of Vicepresident, War Minister, Labor Minister and head of the National Postwar Council (NPC). This was the militaristic authoritarian phase of Peronism. The second phase started at the beginning of 1946 when Perón won the presidential election and ended in January 1949, when after a long crisis when he fired Miguel Miranda, his “finance czar”. It was during this period that the economic policies of Peronism that are considered the archetype of populist economic policies were defined and implemented. A “muddling through” phase followed during which Perón avoided taking any drastic measures to correct the imbalances generated by his policies in the previous phase for fears that they could jeopardize his reelection. Shortly after he won the presidential election of November 1951, started the last phase. In early 1952 Perón launched an “Austerity Plan” that emphasized increasing productivity and private sector investments, particularly foreign. This “quasi-orthodox” phase ended in September 1955 when Perón was overthrown by a military coup. When Perón returned to power in 1973 his economic policies were almost identical to those of the 1946-49 period.1
During the 1930s, increased government intervention was the norm in Europe and North America. In Argentina, it involved greater control of monetary policy, exchange rates and international trade. This trend deepened during World War II. Argentina was no exception. Although after the war there was a trend towards liberalization, particularly in foreign trade, government intervention continued to grow in many economies through the nationalization of public utilities, the increase in public employment and the implementation of national development plans. The UK under the Labor Party was a typical example, which may have been an inspiration for Perón. Some of his biographers claim that after returning from Italy, he read
- The Kirchners did the same during 2007-2011. In all three cases a boom in international agricultural commodity prices helped finance a “Peronist party”, which entailed confiscating income and wealth from farmers and savers to urban workers and protected manufacturers. The Kirchners’ main innovation was to secure the support of a growing portion of non-workers through clientelism.
works by Harold Laski and the 1942 Beveridge Report as well as the welfare program developed by Leonard Marsh for Canada (Pavón Pereyra, 2018).
Peron’s first five-year plan compared itself favorably to the Beveridge plan with respect to pensions. However, the government that emerged from the 1943 military coup led by Perón took government intervention to a higher level.
Between 1946 and 1955 Perón closed the economy to foreign competition and intensified state intervention. The measures he took during his presidency included the nationalization of the railways and utilities, as well as some industrial and shipping companies. In the banking sector, he eliminated Central Bank independence, created new public financial institutions to finance industrial development, allocated credit on a discretionary basis to benefit mostly the urban industrial sector and nationalized deposits as well as mortgage credit. Foreign trade was put under the control of IAPI, a state monopoly which was presided by the president of the Central Bank2.
The Peronist regime also increased government bureaucracy. Between 1943 and 1955, the number of public employees doubled while population grew by only 25%. Public expenditures grew 60% between 1946 and 1955. Compared with the rest of Latin America, by the end of the period Argentina had the largest public sector (CEPAL, 1958, pp. 134, 139). The growth in government expenditures was unchecked by a Congresss dominated by Peronist legislators who obeyed Peron’s orders to a tee. The constitutional reform that Perón enacted in 1949 reduced the role of the Legislative power by allowing the Executive to replace annual budgets with bi-annual or tri-annual ones.
On average between 1945 and 1955, fiscal spending exceeded public revenues by 14% (CEPAL, 1958, p. 149). Although tax pressure increased markedly from 10% of GDP in 1946 to 17% in 1951 (Bellini, 2014, p. 124), revenues did not match growing expenditures, which led to persistent and growing deficits. In addition, the government incurred in off-budget expenditures that on average represented half of total budgeted expenditures (Reutz, 1991). The fiscal gap was partly covered by the issuance of low-yielding bonds that were forcibly placed in state controlled
- A comprehensive description of Peron´s economic reforms and be found in Cavallo and Cavallo Runde (2017), pp. 118-125.
pension funds (leading to their actuarial bankruptcy). The off-budget deficits were indirectly financed with increases in credit from state-owned banks. At least during the first years of the Perón presidency, monetary and credit expansion were not a concern for the government, since the underlying assumption was that it would lead to increases in output and therefore not generate inflationary pressures.
In line with Keynesianism, Minister Cereijo argued that sometimes it was necessary to resort to deficit financing. In his view if properly implemented, this policy would inject “vitality” into the economy (Cereijo, 1947, p. 37). Anticipating MMT, Juan De Greef, a leading Peronist legislator who was in charge presenting the Executive’s budget in Congress, explained that according to the “Peronist Theory” of public spending the notion of a balanced budget was irrelevant. “No other ghost frightened our rulers so much as that of the invincible financial deficit .. but the advice was thrown on deaf ears, and the State began to spend.” De Greef proudly boasted that in 1948 public spending had tripled in comparison to 1946. Against demands for greater fiscal austerity, he advocated the principle of “spending well”, which he deemed more appropriate to the management of a “modern” State (Degreef, 1950, pp. 34-35).
In many regards, Peronism can be considered a precursor in the application of MMT like policies. The general idea was that deficits did not matter and that an increase in the monetary supply would have real effects on the economy and no impact on inflation. Perón himself articulated these ideas in many of his speeches (1953, p. 861), and government officials in charge of formulating and implementing economic policy followed his lead.
Apparently, it was Miguel Miranda, a wily unscrupulous businessman who convinced Perón about the “wonders” of using “other people’s money.” In 1944 Perón had called in the Central Bank’s economic experts to help him find a way to finance an ambitious five-year development plan. They replied that the plan was not viable given that the government was already running a substantial deficit. Perón then turned to Miranda. Many years later he recounted the story of their meeting:
I told him [Miranda] about the exchange with the experts and he said: “General! Do you think that if they were capable of something they would be earning a miserable salary as advisers [at the Central Bank]?” –“But Miranda,” I said, “we
have to spend a lot and we don’t have any money!”– “That’s the way to buy anything, without money,” he replied. “Only fools buy with their own money!” – This is my man, I thought to myself… Miranda was a true genius. His intuition, his great capacity for synthesis and his acute business acumen earned the Argentine Republic in one year more than what its economists, who are no more than dilettantes and generalizers of routine and inconsequential methods and systems, had earned in fifty years… (Perón, 1956, p. 37)
In May 1946 Perón, who was not yet president, had Miranda appointed as President of the Central Bank and IAPI, a newly created state agency that had as its mission to control Argentina’s foreign trade. The following year he elevated to the role of Chairman of the National Economic Council, the supreme authority on economic matters. Until January 1949 Miranda was the all powerful “finance czar” of Argentina.
Miranda had a very particular vision of monetary policy: he maintained that as currency issuance returned to the nationalized banking system in the form of deposits, which the Central Bank controlled, there was no cost to the government (Brennan and Rougier, 2013, p. 80). The government faced no financial constraint. It was possible to create wealth by simply expanding the money credit. As evidenced in a speech to provincial finance ministers in 1947, Perón clearly shared Miranda’s unorthodox views on monetary policy:
We must not forget that we have an annual currency circulation that is much higher than what we had when we took over the government. The old banking system had managed to produce an annual turnover of fiduciary circulation equivalent to four times the issuance: that is, about 16 billion pesos, considering that the value of the issuance was 4 billion. Now we are turning over eight times the value of the issuance, so that the annual wealth in circulation has become 32 billion pesos. And we have to take it to ten times, so that we have an annual turnover of approximately 40 billion. This increase in wealth will mean an increase in inflation, but also increased economic activity, which is what matters. In any case, the resulting inflation will always be kept twenty percent below that
of the country with the lowest inflation. We cannot abandon the natural relationship that must exist in international trade. I have always thought that, in the economic sphere, we were going to live without any crisis during the six years of my government. Today, as a result of new studies being carried out, I believe that we will have sixty years without crisis (Perón, 1947, p. 29).
According to Antonio Cafiero, a rising star in the Peronist movement who was Minister of Trade (1952-1955), the quantity theory of money had to be discarded. Money could not be an “insurmountable obstacle to the strengthening of the national economic capacity” but instead a tool to promote the country’s industrialization. (Cafiero, 1974, p. 206, 208). Central Bank independence was anathema and monetary policy had to be subordinated to the government’s development plans. Alfredo Gómez Morales, who was president of the Central Bank (1949-1952) and Minister of Economy (1952-1955), expressed similar ideas. In his view, the main objective of the monetary authority was not to safeguard the value of the currency or to dampen macroeconomic fluctuations but to finance the Government’s development plans and “promoting, guiding and carrying out… the appropriate economic policy to maintain a high degree of activity ”(Gomez Morales, 1949a, p. 352). The Central Bank also had to allocate banking credit according to the “superior interests of the community” (Gómez Morales, 1949, p. 355). Essentially, Peronist policymakers believed that monetary expansion accompanied by an “equivalent creation of wealth” would not generate inflation (Gómez Morales, 1949b, p. 430).
Reality soon refuted these notions. In a very short period of time expansionary monetary and credit policies led to higher inflation. Between 1946 and 1949 money supply grew at a 25% annual rate. In the same period, overall credit grew by 36% per annum while credit to public sector entities by almost 100% per annum. From 1900 until 1945 Argentina’s inflation rate had averaged 2.1% per annum, slightly below that of the US. Five years later, it had increased almost twenty fold. The rise in consumer prices between 1946 and 1955 was at least 500% despite strict price and rent controls. This sustained increase in consume prices was a direct consequence of the increase in the money supply, facilitated by the gradual abandonment of minimum gold reserve backing behind paper issuance that Perón decreed in 1949.
As mentioned earlier, the experience of Peronism between 1946 and 1955 closely follows the three stages of populist economics described by Dornbusch and Edwards (1991). After an uncontrolled fiscal expansion and monetary issuance, the development of an inflationary process, bottlenecks and FX shortages followed by an external crisis a recession. In Argentina the crisis broke out in in mid 1948 when the country ran out of dollars to finance its growing trade deficit. In January 1949, Perón fired his “finance czar” and appointed Gomez Morales to lead his economic team. But Perón dithered as he faced a reelection in 1951 and feared that following Gomez Morales’ recommendations could jeopardize his chances of victory. In 1949 annual inflation rate reached 34% and GDP fell 1.6%. The tfollowing year the National Economic Council, which had overall authority on all economic policy matters, provided Perón with a diagnosis of the macroeconomic situation went against everything the government had done in the past:
Given the importance that the amount of public expenditures has in the inflationary process, it is important to continue with the policy followed to date, even though it would be difficult if not impossible, to make greater reductions than those introduced to date without running the risk of paralyzing some essential services (cited in Bellini, 2014, p. 124).
It was in 1952, a few after months after securing a second mandate, that he launched an “Austerity Plan” that sought to limit public spending and reduce the deficit3. In the first year of adjustment, GDP fell almost 5% while accumulated inflation reached almost 50%. However, the fiscal deficit was reduced to half its level in previous years (Bellini, p. 127). According to Gómez Morales, it was no longer possible to continue with what he described as the “Keynesian policies” initiated by Miranda because the economy had already reached full employment (Vercesi, 1995, p. 48). The application of a more restrictive monetary policy was also effective. Overall credit fell 36% in real terms between 1950 and 1953 (Bellini, 2014, p. 121). These measures, coupled with strict price controls, managed to reduce inflation to 16% in 1954 and half that level in 1955.
- On the stabilization Plan of 1952 see Cavallo and Cavallo Runde (2017), pp. 128-129.
But as Dornbusch and Edwards (1991) pointed out, politicians and societies with a populist culture have limited memory. When Perón returned to the presidency in 1973, he followed he repeated the same economic policy cycle. This time however, the consequences were a lot more serious. Public spending increased from 37% of GDP in 1972 to almost 50% in 1975. The result was a growing fiscal imbalance that reached 13% of GDP in 1975, leading to the first bout of hyperinflation in Argentine history.4 This is not surprising since the deficit was financed primarily through money creation (Newland, 2017). The story did not end there. It is an accepted dogma among contemporary Peronist policymakers that there is no direct link between monetizing deficits and inflation. For example, during Cristina Kirchner’s government both the Economy Minister and the President of the Central Bank publicly denied that an increase in the money supply would lead to higher inflation:
It is totally false to say that [monetary] issuance generates inflation. Only in Argentina prevails that idea that an expansion in the quantity of money generates inflation…. We rule out that financing the public sector is inflationary, because according to that view, price increases are due to excess demand, something that we do not see in Argentina. In our country the means of payment adapt to the growth in demand and price tensions are on the supply side and the external sector (Zaiat y Lukin, 2012)
Given the above, it is not surprising Argentina continues to have persistent and high fiscal deficits, recurrent sovereign defaults and one of the world’s highest inflation rates. Given the permanence of these phenomena and the way policy maker interpret their causes, their explanation must surely be sought in deeper cultural and/or psychological causes (see Ocampo, 2018).
- According to Cagan’s classic definition, early 1975 does not constitute a hyperinflationary episode. However, as
Cagan himself admitted his definition was “arbitrary” and only “suited the purposes of his study” (1956, p.25). In
March 1976, the monthly inflation rate was 37.6% under strict price controls. The peso depreciated against the dollar even at a faster rate. For all practical purposes, at that time Argentina was in hyperinflation. The change of expectations brought about by the March 1976 coup d’etat reduced inflation to more tolerable levels.
- Digression: Rules and Monetary stability.
It is clear that if there had been legal or institutional restrictions on the issue of currency and if these were accepted by the political power, the inflation would have been different. An example was given by the Gold Standard, fully in force in Argentina between 1899 and 1914. During this period the country enjoyed monetary stability and economic growth that placed it among the most prosperous nations on earth. Although the Gold Standard was suspended with the First World War and was only reinstated in a brief period between 1927 and 1929, Argentina did not abandon an orthodox monetary policy that implied remarkable price stability until the arrival of Perón to the government after 1943. Another historical moment should also be noted, the “Convertibility” policy applied between 1991 and 2000. This scheme applied a simple rule: the government would not issue currency that was not backed by foreign reserves or public securities in foreign currency. This rule that was applied during the government of Peronist Carlos Menen and implemented by his Minister of Economy, Domingo Cavallo, was very succesful in drastically reducing inflation. One of its most beneficial effects of the Convertibility plan was the resurgence of a domestic capital market. But the system eventually failed because it was not compatible with growth in public spending financed by domestic and external debt. Fiscal inconsistency led to a run on bank deposits. With internal convertibility in doubt, external convertibility became unsustainable.5
A related topic is the issue of public debt: Argentina holds the world record in defaults and restructuring. Succesive governments have raised debt abroad to fund unsustainable fiscal and current account deficits. The same can be said for domestic debt, leading to the gradual disappearance of the domestic capital markets. These irresponsible policies have inevitably led to recurrent crises and the intervention of the International Monetary Fund. In many instance the IMF’s financial assistance has paradoxically contributed to fiscal irresponsibility and economic stagnation. The typical IMF recipe has been to raise taxes in an economy already overburdened with taxes. Predictably, this has led to lower private investment and lower growth
- On the convertibility scheme see Cavallo and Cavallo Runde (2017), pp.195-199. On why convertibility can not be called a Currency Board see Hanke (2008).
Until the turn of the 21st century it seemed that the reformulation of Schumpeter’s prediction that a “populist democracy” similar to Peronism would became dominant was too pessimistic. However, the resurgence of populism in Europe and North America in the last decade and its persistent appeal in Latin America suggest otherwise. Many of the ideas that took Argentina down the path of decadence have become standard fare in progressive platforms. Although right-wing populism may seem more innocuous from an economic standpoint, it can be as harmful. Populism is essentially chameleonic and opportunistic. It not only degrades institutions but also leads to lower economic growth.
At the time these words are written, the global Covid-19 pandemic hit Argentina. The aadministration led by President Alberto Fernández followed the Peronist “Manual of Economic Policy” to a tee. In recent months, the government has vastly expanded public expenditures exacerbating the fiscal deficit, which is being mostly financed by a massive expansion of the money supply. If history is any guide, Argentina will graduate from having a high inflation to having extreme inflation, and maybe even hyperinflation.
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