China Versus Argentina: Place Your Bets

In a world of now close to 200 countries, every day provides an updated report card as to what works and what doesn’t in economic policy. As reported by the IMF, World Bank, and UN, some countries have per capita GDP as much as 300 times more than the per capita GDP of other countries. What are the poor ones doing wrong?

Most countries largely stick with the same collection of economic policies for long periods of time, with only small changes. Unsurprisingly, the rich get richer, because what they are doing is working. The poor may or may not get poorer, but at best they stagnate, unless they are ready to try the things that have made the rich rich.

But every once in a while you get a country that makes a relatively significant change. Two that are doing that now are China and Argentina. Which one is more likely to be successful going forward?

Consider first China. In the late 1970s, after almost 30 years of effectively one-man rule by Mao Zedong, China was left dirt poor. A series of stupid centrally-planned economic schemes by people who had no idea what they were doing (a steel-making furnace in every back yard!) had led to rounds of mass starvation. Then Deng Xiao-ping came to power in 1978, and opened China to private business and investment. Over the next 30+ years, as profit-seeking investors set the direction of the economy, China experienced a true economic miracle. And then in 2013, it became the turn of Xi Jinping. At first, not much changed under Xi; but gradually, the clamp-down took hold. Little by little, owners of opposition press outlets have been imprisoned, surveillance has become pervasive, and investment discretion has been taken away from private actors and given back to the state. The economy slowed, and then slowed more. The state now seeks to set a new economic direction.

For the latest, we turn to a big front-page piece in today’s Wall Street Journal, headline “China Goes All In on Green Industry to Jolt Ailing Economy.” (probably behind pay wall). The backdrop is that China’s economy, which has been gradually slowing for years, continued that process in 2023:

[F]igures show[] the world’s second-largest economy expanded in 2023 at its weakest rate in decades, aside from the three years when China was closed to the outside world during the Covid-19 pandemic. A drawn-out property crunch means Beijing can no longer rely on debt-fueled real-estate investment to power the economy, and officials have shown little appetite to shift activity decisively toward consumer spending.

So what will they do to change direction? One idea might be to let private entrepreneurs take back initiative over investment and see what they might come up with. But freedom is anathema to the Xi government, and they think they have a better idea. So instead the new direction will be that the state will direct investment into what they call the “New Three” industries. From the WSJ:

Capital is pouring into factories as Beijing tries to nudge China’s supertanker economy onto what it hopes will be a healthier trajectory. Central to that ambition is a plan to dominate global markets in emerging industries, such as electric vehicles, batteries and renewable-energy gear. Chinese companies such as automotive giant BYD, battery maker CATL and solar manufacturer Longi Green Energy Technology are already among the world’s most prominent players in those markets. The hope is that growth in what Chinese officials refer to as the “New Three” industries and other favored sectors will help China’s economy banish the specters of deflation and Japan-style stagnation. . . .

Under the benevolent guidance of the all-knowing state, China is placing its big bets on EVs, batteries, and renewable-energy gear. It’s the “New Three”! Presumably, all or almost all of this stuff is to be sold to the idiotic West.

Are you left with an optimistic view of China’s economic prospects? If so, you will place your bet on that country.

Or consider Argentina. Their new Libertarian President Javier Milei was elected on November 19, 2023, and sworn in on December 10. Today he showed up at the World Economic Forum in Davos, Switzerland, and delivered an address that was, let us say, not the usual for that statist-dominated forum. Eurasia Review published a transcript of his remarks (translated into English). Here are a few excerpts:

Unfortunately, in recent decades, the main leaders of the Western world have abandoned the model of freedom for different versions of what we call collectivism. . . . We’re here to tell you that collectivist experiments are never the solution to the problems that afflict the citizens of the world. Rather, they are the root cause. Do believe me: no one is in better place than us, Argentines, to testify to these two points. . . . The case of Argentina is an empirical demonstration that no matter how rich you may be, how much you may have in terms of natural resources, how skilled your population may be, how educated, or how many bars of gold you may have in the central bank – if measures are adopted that hinder the free functioning of markets, competition, price systems, trade and ownership of private property, the only possible fate is poverty. 

Back in Argentina, Milei began on his first days in office with the project of cutting government spending. From the New York Times, December 12, 2023:

Mr. Milei’s government said it would halt new infrastructure projects; lay off recently hired government workers; reduce energy and transportation subsidies for residents; cut payments to Argentina’s 23 provinces; and halve the number of federal ministries, from 18 to nine.

Within days, mainstream press sources were reporting that Argentina was entering a recession, and somehow already blaming that on Milei’s election. From Reuters, December 14:

Argentina, which ushered in a new government last week, is battling likely stagflation on the horizon, a toxic mix of triple-digit inflation and recession that will likely squeeze people and push up the poverty rate, already at over 40%. The economic picture also likely darkened further at the end of the year, analysts said, with the political uncertainty that surrounded the October-November elections and recent sharp devaluations of the peso currency.

Since economists’ convention dictates that government spending gets counted one hundred cents on the dollar as an addition to GDP, and cuts as a comparable subtraction, expect to see imminently that Argentina’s economy has “shrunk” dramatically as a result of the cuts to government spending. I haven’t seen it yet, but it is coming.

But the question is, which country will be in a better position a year from now, or two, or five? I don’t think it is a difficult bet to make.