Pope Francis poses with Argentina's President Cristina Fernandez de Kirchner during a private audience at the Vatican, March 17. 2014 (CNS photo/Alberto Pizzoli, pool via Reuters).

Argentine Capitalism and the Economic Memories of Pope Francis

When we listen to Pope Francis speak about the global economy, capitalism, or even the discipline of economics, most of us have no inkling of what he and other Argentines went through during their lifetimes. “Stranger than fiction” is an understatement.

In the United States, major changes to economic policy have generally been rare and gradual. The introduction of big-ticket domestic spending programs, such as Social Security by Franklin D. Roosevelt, Medicare and Medicaid by Lyndon B. Johnson, and the Affordable Care Act by Barack Obama, were spaced apart by several decades. This was also true of the tax cuts engineered by John F. Kennedy and those undertaken by Ronald Reagan to stimulate the economy. Major changes to fiscal policy have been few and far between; examples include the short-lived price controls under Richard Nixon, the abrupt tightening of the money supply by Federal Reserve Chairman Paul Volker in 1979 to reduce inflation, and the massive quantitative easing policy of the Federal Reserve in the wake of the 2008 financial crisis. We live in a country where most changes in economic policy are gradual and based on some level of consensus. We also live in a decentralized society; while major decisions are made in Washington, D.C., there are major financial centers across the U.S., and policy advisors come from all over the nation.

Argentines have experienced a very different form of capitalism. A democratic wasteland for many decades, it experienced major changes under the guidance of technocrats and outside experts. Such a tyranny of experts, as Bill Easterly of New York University notes, is common in developing countries, often going hand in hand with financial aid from the United States, the United Nations, the World Bank or the International Monetary Fund.

This article reviews the major episodes that took place in Argentina during Pope Francis’ lifetime (he was born in 1936), amid the populism of the Peróns and the harsh abuses of dictatorships. When we hear Francis speak critically of capitalism and the discipline of economics in general, we can understand that his views reflect almost any reasonable person’s reaction to recurring tyrannies, both of military dictators and of technocratic experts.

The Beginnings of Perónism

During the 1930s and early 1940s, Argentina was cut off from importing manufactured goods, both from Europe and its Latin America neighbors. This led to major industrialization: Argentina had to start producing more of the manufactured goods it needed, even if these goods were not going to be sold on world markets. Economic isolation was not a deliberate policy at that time, but instead a hard fact of life due to the global depression and World War II. It was at this time that the labor unions grew as a political force, as the country’s workforce shifted from rural occupations.

Juan Domingo Perón became minister of labor in 1943 and grew increasingly popular for advocating higher wages, better working conditions, and the right to organize. In 1945, he was arrested by military forces, but Eva Duarte, then his romantic partner, led a countrywide strike of the “shirtless ones” that resulted in Perón’s quick release. Perón and Duarte married and formed a political partnership; he was easily elected president in 1946.

During this post-war period, Europe was badly in need of food supplies, including grain and beef, and Argentina was ready to fill that need. The country quickly accumulated cash from export earnings, and large farm estates grew rich quickly. The Peróns formed an alliance between the military and the working class against this agricultural elite. The couple pushed through extensive social-welfare programs for the working class and poor in Argentina.

(On a personal note, when I was working in Argentina over a decade ago, a Jesuit of the same age as Pope Francis sternly rebuked me when I chided him about his staunch support for the Perónists. He told me he was a child of Italian immigrants and would have had to quit school to work in a tailor shop were it not for the Peróns. He was able to stay in school, go to government-sponsored soccer camps at Mar de Planta, and then go on to the university. He then became a Jesuit, while a younger brother became a judge. Like many elderly Democrats in the U.S. who remember F.D.R. and his wife Eleanor as transformative figures in their lives, many Argentines recall the Peróns with great devotion.)


Eva and Juan Peron, October 1951 (Wikimedia Commons)

Perón was ready to name his wife, popularly known as Evita, as his vice-presidential candidate when he ran for a second term in 1951. (She had been instrumental in the granting of voting rights to women during his first term.) However, military elders blocked Perón from doing so. Evita continued to distribute funds for housing and other social-welfare needs through the quasi-official Eva Perón Foundation, and she traveled to Europe, where she received the Isabel la Catolica medal from Spanish leader Francisco Franco. Her speechwriter and spiritual director was a Jesuit named Hernán Benitez. As we know, she became ill and died of cancer at the age of 33 in 1952.

After his wife Evita’s death, Perón was at a loss. He tried to follow the same policies of government social largess, but earnings from exports to Europe were shrinking, partly because that continent’s agricultural sector had begun to recover.

Perón also had a personal scandal arising from a sexual affair with a 15-year-old girl. There was a military coup against him, and he was excommunicated by the Catholic Church. He first fled to Panama, where he met an Argentine cabaret dancer, María Estela Martínez, better known by her stage name of Isabelita. From Panama he went to the Dominican Republic, taken in by that country’s president, Rafael Trujillo. He then went to Madrid, where Franco offered him asylum.

During this time the government was faced the problem of the body of Evita, resting in Recoleta Cemetery in Buenos Aires. She was remembered as a saint, and her resting place became a pilgrimage site. To erase the memory of Perón, the government had her remains shipped out of the country.

Juan Perón, now teamed up with Isabelita, managed to secure his previous wife’s remains, and he kept her coffin in the guest room of their Madrid apartment. By this time, Pope John XXIII had lifted the excommunication, so he and Isabelita were married in the Catholic Church. One of their bodyguards, a magician from Argentina, José López-Rega, convinced Isabelita that she was destined to become the new Evita for Argentina.

The Post-Perón Interlude

After the exile of Perón, Argentina was ruled by military dictators, with only brief periods of democracy. Father Benitez campaigned for the return of the Peróns, and at the request of Pope Pius XII, was expelled from the Society of Jesus for his overt political involvement in Argentina.

During this time, one economic theory caught on like wildfire both in Argentina and in the rest of Latin America. It was attributed to two economists—Raul Prebisch, an Argentine, and Hans Singer, an Austrian—working at the Economic Commission for Latin America, a United Nations organization based in Santiago, Chile. The Prebisch-Singer hypothesis predicted declining terms of trade for natural-resource exports from Latin America to the North. This was due to new forms of “synthetic substitution” in the North (for example, polyester for raw cotton), as well as the greater use of recycling methods for steel. The economic notion of “elasticity pessimism” asserted that as the Northern countries grew, there would be less demand for commodities and other natural resources from South America. While this thesis was intuitively compelling, it was never empirically verified.

The major policy implication of the Prebisch-Singer hypothesis was the promotion of import substitution industrialization (ISI). Under this theory, the only way for countries like Argentina to grow and develop was to impose high tariffs and quotas on imported manufactured goods in order to develop their own industries.

This policy quickly led to multinational corporations opening branches in Argentina. If the Ford Motor Company could not export cars to Argentina, why not just produce the cars in Argentina? “Tariff jumping” is one of the major reasons for the growth of multinational companies. Of course, Ford and other companies would use yesteryear’s technology in the products they manufactured in these Latin American countries. The market was limited and effectively locked in, free of competition. (When I first went to Argentina in 1982, for example, I saw brand-new, straight-off-the-production-line Ford Fairlane 500 big-fin cars on the streets of Buenos Aires. This model, which came out in 1958 in the U.S. market, was the first car I had driven. There in Buenos Aires I had a “back to the future” experience.)

The first phase of ISI policies was known as Structuralism I. At first it seemed to be a success. But soon enough, the new industries realized that their domestic markets would soon be saturated. There was too little domestic demand to sustain these new industries if they continued to be locked in to just their home countries.

The next phase of ISI was called Structuralism II. Seeing the beginnings of the European Common Market, Latin American countries had the idea of creating a series of common markets in their region. Examples include the Latin American Free Trade Area and the Andean Pact, signed in 1969. However, Structuralism II did not do much to help. Unlike the European Common Market, with its fully developed road and rail networks, Latin American countries faced natural barriers to trade, such as the Andean Mountains and the Amazon jungle, and little infrastructure such as rail links among the countries of the region.


Isabelita Peron (Wikimedia Commons)

By the end of the ’60s, the ISI scheme inspired by Prebisch and Singer had run its course. Stagnation and inflation were taking hold. Disgruntled Argentines looked back to the glory days of Perón. Also at this time, Marxism gained in popularity among young people throughout the world, and Argentina was no exception. Followers of Perón split into two groups: the traditional Catholics, inspired by Father Benitez, who saw Perónism as the embodiment of Catholic social teaching, and those inspired by Che Guevera, who saw Perónism as a path to Argentine-style Marxism. Both types of Perónists would make visits to their leader in Madrid to consult with him about politics back home and to pay respects to their patroness, Evita (still resting in her coffin in the guest room).

In 1973 Perón came back to Argentina and was elected president, with Isabelita as vice-president. After one year in office, he died, and Isabelita became president, with her former bodyguard López-Rega as her chief advisor. As the Perónist movement became increasingly divided, López-Rega initiated civilian militias, equipped with Uzi weapons imported from Israel, to “take care of” the Marxist Perónists. It was at this point that the military intervened. One thing a military estate cannot abide, especially if it has ruled in the past, is the existence of an armed civilian militia. So the military deposed Isabelita and took over for itself the “dirty war” of killing the Marxist elements in Argentine society.

No one knows how many were killed by the military during this period. Most agree that official estimates are far below what actually happened. It was at this time that Francis became the provincial superior of Jesuits in Argentina. The Catholic hierarchy did little to protest the abuses of human rights in Argentina, in contrast to Cardinal Silva Henriquez in Chile under the dictator Augusto Pinochet.

The “Chicago Boys” and the New Orthodoxy in Economics

It was at this time that the “Chicago boys” came to town. Professor Arnold Harberger, married to a Chilean, recruited talented young economists to study at the University of Chicago, with grants from the Ford Foundation. He took special care of his charges from Latin America, who called him Tio Alito. Mentoring their doctoral work in public economics, monetary policy and trade theory, he would often act as a consultant for his former students when they returned to their home countries and assumed positions of authority in the central banks or ministries of finance. After the coup against Isabelita, newly appointed finance minister José Alfredo Martínez de Hoz appointed many of Alito’s students to key positions in the Ministry of Finance and the Central Bank of Argentina.

The main tasks of the Chicago boys were to open up the country to free trade, to open the markets in finance, and to make domestic markets, both for labor and goods, more flexible and competitive. To be sure, the military dictatorships in Chile and Uruguay also made good use of the Chicago boys at this time. The regimes’ economic changes were known in as the “Southern Cone experiments.” Brazil, also under military dictatorship, did not adopt such extreme policies.

The key element of these new orthodox economic policies was an improvement in the exchange rate while reducing tariffs (thus making imports less expensive) and removing limits on international borrowing. At this time, the Eurodollar banks in London, awash in funds from “petrodollar” deposits from OPEC countries, were all too eager to send funds to the Southern Cone countries, which were newly open to international trade and finance. The military governments, wanting to promote investment, added to the moral hazard of the economic policies by providing official guarantees to the investments made by the foreign banks.


The “Chicago Boys”

The “original sin” of the financial deals at this time was that the debts were denominated in U.S. dollars and thereby linked to that nation’s interest rate. In a stroke of bad luck for the Southern Cone, in 1979 Paul Volker assumed the leadership of the U.S. Federal Reserve Bank and took on the job of reducing inflation in the U.S. at any cost. Volker turned to an abrupt monetary tightening, which pushed interest rates up to almost 20 percent. These high rates caused the U.S. dollar to appreciate, and sent the American economy and most of the world into a recession.

The unusually abrupt switch in U.S. monetary policy pushed Argentina, along with most other Latin American nations, into a lost decade of zero or negative economic growth. It was like an economic “Nightmare on Elm Street” or “Friday the 13th.” The values of the debts owed by these nations suddenly increased; the cost of servicing the debts almost doubled; and the world went into recession. As a result, the potential to export goods to earn dollars to pay off the debts also diminished. The experience is akin to a worker having his or her salary cut, only to return home and discover that the rent has increased, and that the interest rates on outstanding debts has doubled.

There was no default, to be sure, by Latin American countries, but widespread moratoria on debt payments were declared, starting with Mexico in 1982. Capital flows to Argentina and the rest of the region dried up.

At this time, the military junta in Argentina, desperate for popular support as the economy unraveled, instigated the ill-fated war with the United Kingdom over the Malvinas (named the Falkland Islands by the U.K.). The failure of the war led to the collapse of the military regime and the return to democracy under President Raúl Alfonsín. To his credit, Alfonsín brought the military junta members to trial for human rights abuses; many military leaders were convicted and sent to prison.

The Heterodox “Shock Treatment”

By the time the new democratic government took office, inflation had taken hold. There was widespread belief among the experts that “gradualism” would not work for reducing inflation, and that a shock treatment was needed. MIT-, Harvard- and Yale-educated economists, working in Brazil and then in Argentina, devised a “heterodox” shock treatment. In contrast to the orthodoxy of the Chicago boys, this approach consisted of several economically heterodox government interventions: temporary wage/price controls to reduce inflationary expectations; the introduction of a new currency and a conversion table to convert the longer-term contracts written in the old currency into the new currency; and a slow reduction in government budget deficits. The idea was that the heterodox shock treatment would reduce fears of continued inflationary instability and thus make the inflation rate more responsive (in the downward direction) to the fiscal austerity programs. In theory, any pain would be outweighed by the gain from lower inflation.

The introduction of this heterodox plan at first was a resounding success in Argentina. Inflation was reduced. Unfortunately, it is always easy to confuse a victory in the first battle with a victory in the overall war. The government failed to deliver on the longer-term fiscal adjustment in government spending. With the return to democracy after the long years of military dictators, there were, naturally, strong pressures on the Alfonsin government to ease up on fiscal austerity programs and to increase social spending.

In 1989 the Alfonsín government left office early, allowing the newly elected Carlos Menem to assume the presidency amid the chaos of renewed inflation.

Menem and the “Plan Cavallo”

Menem had been jailed under the military dictatorship. One of his first acts was to release the jailed members of the junta (using something closer to an “indult” than an outright pardon). Many thought this was a brilliant act. If Menem needed to create cohesion for economic reform, he needed to accept the fact that the military was part of the political process, and he needed to ensure their support.

His first foreign minister, Harvard-educated Domingo Cavallo, was eventually appointed minister of the economy. Cavallo brought in a team from his economic think tank, the Fundación Mediterránea in Córdoba, to plan a new policy regime. The Plan Cavallo was essentially the implementation of a Hong Kong–type currency board system for Argentina. There would be a new currency, set one for one with the U.S. dollar. The amount of currency in circulation would be equal to the amount of U.S. dollar reserves. The government’s central bank could no longer print up new money, unless it had new U.S. dollar reserves from export earnings or inflows of U.S. dollar investments.

As with the heterodox shocks of the ’80s, the Cavallo plan was a resounding initial success. Inflation vanished. Unfortunately, being linked to the U.S. dollar in the ’90s proved not to be a very good idea, since the U.S. dollar appreciated very strongly. This meant that Argentine exports rose greatly in cost, and the country was at a major competitive disadvantage to Brazil, whose currency was not linked to the U.S. dollar. A further crack in the sustainability of Argentina’s currency board came in the failure of the central government to contain deficits by provincial governments. While the Cavallo plan limited the ability of the central government to run deficits and expect bailouts from the central bank, many provincial governments began to overspend. The Cavallo plan eventually collapsed, and inflation came back with a vengeance.

After Menem left office, amid the continuing economic crises, there were three failed presidencies. Then Nestor Kirchner was elected in 2003, served for four years before dying in office and was succeeded by his wife, Cristina Fernández de Kirchner, who won elections in 2007 and 2011. (She is ineligible for a third term, and her successor will be chosen on October 25.) The Kirchner economic regime is a “back to the future” program of the ’50s-style import substitution policy, with strict controls on imports. Both of the Kirchners have been Perónists and have promoted “industrial development” and the formation of region-wide common markets.

Lessons from a “Stranger than Fiction” History

The overall economic performance of Argentina stands in sharp contrast to that of Chile. Under Pinochet, many of the policies of the Chicago boys were implemented, and when democracy returned in 1988, Chile was much more astute in keeping the best of the reforms. One of the keys to the Chilean success story was the privatization of the pension system. Workers are required to deposit a fraction of their earnings in a pension system, as is done in the United States through Social Security. But the pension system of Chile is based on investments in industry. The government allows pension plans to compete for the workers’ deposits, though they are closely monitored. This pension reform scheme, updated and monitored by the democratic governments, is one of the keys to Chile’s success both economically and politically, relative to its neighbors in the Southern Cone of South America.

The major lesson one can take from this “stranger than fiction” history of Argentina is that economics is never separate from the politics and the history of particular countries. Argentina was never, and will never be, a blank slate for experts to try out their pet theories in the real world. Economics as a discipline is becoming more behavioral and historical, especially in understanding processes of economic growth. The overall success of economic development programs is the outcome of a “search and learning” process at the local level, not the outcome of top-down policies mandated by experts.

Argentina has gone through much needless economic turmoil, due to the dictatorship of tyrants and technocrats. To be sure, there are many successful policies that Argentina can emulate from its Southern Cone neighbor, Chile. These two countries, however, but for the intervention of the Vatican, nearly went to war several decades ago over the Beagle Island. Creating a climate of trust will likely take several generations. How soon Argentina emerges from the “middle-income trap” —the term for countries that are not desperately poor but still not moving into successful growth—will depend on achieving a stable, sustainable climate where political dialogue can take place amid a transparent search-and-learning process.

Paul McNelis, S.J., is Robert Bendheim Professor of Economic & Financial Policy at the Gabelli School of Business at Fordham University.