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Economic Comparison of Argentina and Chile

Paper Type: Free Essay Subject: International Studies
Wordcount: 3962 words Published: 8th Feb 2020

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 Argentina and Chile are “sister” countries comprising the bottom tip of South America.  Both countries sitting geographically next to each other share the same weather patterns and similar natural resources. Because of its size, Argentina has a larger agrarian culture than Chile.  Chile, though, is rich in copper and one of the world’s leading exporters in this mineral.

 At the turn of the nineteenth century, Argentina and Chile were prosperous and thriving countries.  Argentina was experiencing her Belle Époque.  Descriptions bring to mind Great Gatsby-ish images of towns filled with laughter and an “easy street” lifestyle.  Consumer confidence was high, borders were open, globalization was embraced and the countries were flourishing.  The Great Depression of the 1930s and ensuing political unrest sent both countries into a downward economic spiral for most of the twentieth century.  Today, Chile once again has a strong economy and a firm foundation in the global economy.  Yet, Argentina continues to struggle with the correct mix of monetary and fiscal policies required for long-term success.

Argentina Economic History

 Since the Great Depression Argentina has been in relative economic decline for most of the 20th century and continues to struggle into the 21st century.  Historically, Argentina’s exports have been mainly from the agrarian industry.  These agricultural products have a relatively low elasticity of demand and are rather responsive to cyclical fluctuations in consuming countries.3  In response to the Great Depression, countries around the world “tightened their belt” and demand dropped for these exported goods creating balance of trade difficulties for Argentina.    In response to balance of payment difficulties, Argentina created the Banco de Central in 1935 with blended features of the United States Federal Reserve System and the Bank of England.  The Banco de Central had an easy time monitoring the economy up until World War II when gold stocks, valued at 435 million pesos, revalued to 1,346 million pesos.   In addition, England and United States, started to recover from the depression and began purchasing Argentina agricultural products and raw materials once again, reaching the 1928 level in 1937.3  

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Unfortunately, with the onset of World War II, the European market declined again.  Europe was Argentina’s main source of imports and a large portion of export receipts were from the European block.  In response to Europe’s decline, Argentina looked to the United States to fill the gap on imports.  This response created a stringent dollar shortage and protectionist policies were put in place.  Quotas were imposed on imports from the U. S. in order to conserve the dollar exchange, trade agreements were signed with neighboring countries, and large surpluses of grain were purchased to maintain domestic production and employment.  These controls created favorable balance of trade payments for Argentina.  The nationalist policies were a favorable short-term fix and great gains were made in the manufacture of textiles, chemical, medicines, and processed foods.3 But by 1941 inflation started to rise.  Exports were outnumbering imports creating positive balance of trade. Prices were rising from increased demand and decreased supply.  Inflation was becoming Argentina’s biggest economic problem. 

Officials of the Banco de Central that Argentina would face a serious recession.  They argued that the proper changes required to prevent this were to strengthen the countries industry and non-agricultural employment.  For the short run however, inflation continued to be the primary problem.  Table 1 shows that Wholesale price index increased from 110 to 193, the cost of living index went from 103 to 135, and the index of monthly wages in manufacturing rose from 102 to 142 from 1940 to 1945. 3 

Index of Wholesale Prices, Cost of Living, Monthly Wages in Manufacturing and Employment in Argentina, 1937 to 1953

Table 1 Index of Wholesale Prices, Cost of Living, Monthly Wages in Manufacturing and Employment in Argentina, 1937 to 1953, Source: Dye, H. (1955). Development of the Banco Central in Argentina’s Economy. Southern Economic Journal

In response, the government put further protectionist controls and contractionary policies in place.  Foreign imports were frozen, income taxes were increased and excess profits and luxury taxes were enacted.  In addition, the government took steps to develop domestic industrialization.  Unfortunately, these developments were more long term than short-term fixes and the attitude of the public continued to worsen as inflation rose and a political realignment was ushered in with the Peron Administration. 

The Peron administration began a decades long era of protectionism and military unrest for Argentina.  Inflation worsened in the 1950s climbing up to 40%. The cost of living increased and wages decreased.  Industrial employment was down by 10% in 1953.  There was a slowdown of industrial and technical growth. Under Peron labor unions gained unprecedented power and in 1955 labor strikes paralyzed the country.  Peron was exiled and the military intervened once again. 10   Political and military unrest seized the country for much of the next 30 years with a series of unjust military leaders. Inflation surged to over 600 percent, there was rising inequality among the population, and an explosion in the country’s foreign debt. 

In 1983 democracy finally returned to Argentina after a majority of the population decided that the military was unfit to run the country.  Economic stability remained elusive however.  “Under President Alfonsin, public payrolls swelled while government revenues remained stagnant.” 10   Inflation reached an unprecedented 5000 percent.  Food prices rose so quickly that store managers were forced to announce prices over a loud speaker throughout the day.10   With a failing economy, Alfonsin relinquishes power to Carlos Menem 5 months early. 

For most of the 1990s Argentina’s economy was growing and fairly stable.  In 1991 consumer inflation was at 171 percent, by 1992 it had reduced to 24.9 percent and continued to reduce throughout the nineties even turning negative in the late 1990s.

Argentina’s Macroeconomic Indicators: 1991-2001

Table 2, Argentina’s Macroeconomic Indicators: 1991-2001, Source: Geethanjali Nataraj, & Pravakar Sahoo. (2003). Argentina’s Crisis: Causes and Consequences. Economic and Political Weekly


Table 2 indicates that the GDP growth rate was fairly good in the early the 1990s staying right around 8 percent.  Except for 1997, real GDP started to decline in the latter part of the decade.  Going down 3.4 percent in 1999, down another 0.4 percent in 2000 and deteriorating more in 2001 by another 4.5 percent. 1  For most of the 1990s Argentina was well on its way to economic improvement.  Because the Menem administration had pegged the peso to the dollar, it was overvalued when compared to its neighboring countries.  Since these countries had floating exchange rates they were better able to adjust to the market fluctuations.  Stuck with an overvalued exchange rate, Argentina had to borrow to make interest payments on foreign debt.  The countries debt was 50 percent of its GDP in 2001 and reached 30 billion by 2002. 1 The country could no longer borrow to make payments and was forced to default on loans and devalue the peso at 29 cents.  Rising wages caused by the demands of labor unions created high production costs and prices.  Argentina’s exports become more expensive and investors started to lose faith in the countries economy.  The combination of high exchange rate, high external debt and rising prices all attribute to the collapse of the economy in 2001.

Duhalde is spiraled into presidency during one of Argentina’s greatest depressions.  2000 or more fall below the poverty line daily under his rule.  By 2003 half the population is below the poverty line and unemployment is at an estimated 28 percent.2  Nestor Kirchner takes over presidency in 2003. In an effort to save the failing economy, he negotiates the largest debt cut in history, raised the minimum wage, and pumped money into housing and infrastructure.  During his tenure, he fought to keep the peso competitive and the growth rate rose to 8 percent per year. 11 In 2007 his wife, Cristina took office.  She continued with Nestor’s policies until his death in 2010.  Once Nestor was gone, she moved away from them, and raised public spending, nationalized companies, and subsidized many industries and forms of daily life.  In addition, her government controlled the exchange rate creating heavily distorted prices once again.4

When President Macri took office in 2015, it was with the promise of ending all distortions.  Supply and demand would determine prices and not the state. 4  Among his first changes he “put an end to government controls and began a campaign to repair Agrentina’s reputation with foreign investors”. 4 Under Macri the economy made short-term gains. But the peso is once again overvalued and as Table 3 shows, inflation has been rising dramatically in recent months. 5

Argentina Inflation Rate

Table 3 Argentina Inflation Rate, source: Cohen, L. Argentina’s economic crisis explained in five charts, retrieved from https://www.reuters.com

In May of this year, Argentina once again deferred to the IMF for help to meet financial obligations and boost the countries reserves.

Chile Economic History

Like Argentina, Chile’s economy was hit hard by the Great Depression.  Exports, which were 30 to 40 percent of the national production, dropped by 88 percent in the three years between 1929 and 1931 and foreign loans were eliminated by 1933.6  Gold reserves were cut in half by the middle of 1931 and  unemployment rose.  Discontent among the population let to a series of violent changes in the government lasting until 1932.  During 1931, the government through convention to the wind, interest rates were reduced, banking loans increased and monetary circulation increased by about 100 percent. 6 The recovery was accompanied by rising inflation and the index of living cost rose to a total increase of 80 percent by the end of 1938.

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 In an effort to calm the rising discontent, the new government promised economic and social reforms. Videla’s administration deviated from fundamental principles of free trade, free enterprise, and currency convertibility.7  In the 1940 decade, Chile implemented an industrialization process based on import substitution. 9  Import tariffs and quotas were enacted to provide a high degree of protection to domestic industries.9  The protectionist policies were only planned to be a temporary measure but became a permanent feature of the Chilean economy.9

Because of excessive money creation and lax fiscal policies, inflation became a serious issue for Chile during the 1950s.  In an effort to stabilize the economy, Alessandri’s administration instituted policies with the aim of containing inflation and reducing public spending.9  These measures helped for the short term, but by 1962 inflation was back to historical levels.  During the Frei administration, attempts were made to liberalize trade and reduce the public deficit.  These reforms failed and by the end of 1970 GDP growth was down to 1.9 percent and inflation had reached 35 percent.9 In 1971 an aggressive expansionary policy was enacted and real GDP expanded by 9.4 percent and the unemployment rate dropped to 3.9 percent.  Unfortunately, the good performance could not be sustained long term and by 1972 monetary growth was at 178 percent, prices could not be contained and inflation was at 170 percent.9  Even for a small country the level of protectionism was high.  By the end of 1973 tariffs for imports was 105 percent with a maximum of 750 percent.  Large lines in front of stores were a common occurrence because of shortage of products caused by price controls. 8  The fiscal situation was chaotic, technology growth was at a standstill, no new businesses were started, and fewer and fewer jobs were created.  The deficit had reached 55 percent of expenditures and 20 percent of GDP and inflation was rising because the central bank was issuing money to finance the deficit. 8  Unemployment reached 23 percent in 1982 (Table 4) and in the face of another recession, the government began a campaign to save the economy and ushered in unprecedented privatization and other reforms. 11 Over the next 30 years, Chile’s economy grew at an average annual rate of 7.2 percent. Chile opened borders to the global economy, instituting a flat rate tariff system.  State enterprises were privatized and the banking system was restructured.11 By opening its borders to trade Chile was able to create more competition in domestic industries.  This competition led to a rise in new business growth and growth in technology and entrepreneurs.

Chile Unemployment Rate

Table 4. Chilean Unemployment, Source: retrieved from https://http://estadisticas.cepal.org


 The fiscal and monetary policies that Chile instituted helped them to weather the recession that hit a majority of Latin America in the mid-1980s.  Table 4 shows that for short time Chile’s economy was struggling in 1982, but through successful crisis management, the country was able to sustain its economy.  A decade later data from the United Nations’ Economic Commission for Latin America and the Caribbean showed that Chile experienced the strongest growth of all the countries in the region during the 1980s.11  The policies Chile had instituted had provided a sound foundation for long term stability.

In Conclusion: Chile and Argentina

 To compare Argentina and Chile provides an interesting perspective on global economics.  Both countries, once leaders in world globalization, met with the same hardships during the Great Depression.  As a reactionary measure, each country used protectionist policies to help internal struggles and economic downturns.   Long term, however, nationalistic policies weaken a countries economy.  As was the case for both Chile and Argentina.  Closed borders and high tariffs and quotas lead to not only a decline in technology and new business growth, but inflation rose to crisis levels, the strength of the peso weakened and recessions ensued.  Each has struggled from high inflation, unstable governments, undervalued currency and lack of consumer and investor confidence.  How each country responded to these difficulties creates a thought provoking view on global economics. 

 Argentina based the majority of its economic reform policies on a fixed exchange rate and a hard pegged system to another nation’s currency.  From the historical data, it is evident that this is not a viable long-term solution to national economic issues.  Long term this strategy leads to an overvalued exchange rate, an undervalued currency and a growth in debt.  Chile on the other hand after decades of high inflation, moved away from the isolationist policies, embraced trade and instituted fiscal policies to stabilize the economy and promote competition and growth.

 When discussing economics, we would be remiss to leave out the human factor.  When the people of the government care more about their own gain and power, a countries economy will suffer.  The population sensing this will lose confidence, foreign investors will pull out and growth declines.  Argentina suffered from this unstable government for many years with military rulers more interested in power than helping the people.  Chilean government leaders in the late 1970s and early 80s showed that they were more interested in the people than in their own power.  They not only opened borders but also made social reforms that provided growth for business and educational benefits to the people.  This created more jobs, more skilled workers and more consumer confidence.  The population of Chile is more content.  This creates stability in the country long term.  Table 5 shows that the GDP growth for Chile has remained pretty stable.  It has had a few downturns but because of the programs that the government has put in place they are short lived and the country can recover.

Chilean Annual GDP Growth Rate

Table 5 Chilean Annual GDP Growth Rate, Source: retrieved from https://http://estadisticas.cepal.org

 Argentina, on the other hand, continues to struggle.  The leaders of the government are more interested now in the country and its people that they were decades ago, but their policies and reforms have not created the foundation needed for long-term success.  The GDP growth rate (table 6) continues to fluctuate and the value of the peso has once again weakened, creating large debt.  In the most recent months, Argentina has once again asked for a loan from the IMF in order to make foreign interest payments. 

Argentinian Annual GDP Growth Rate

Table 6 Argentinian Annual GDP Growth Rate, Source: retrieved from https://http://estadisticas.cepal.org

 In conclusion, as evidenced by Chilean history a country needs a stable government, open borders to trade, industrial privatization for technological development and educational reforms in order to grow and advance to long-term stability and growth.  “The most important economic reform in Chile was to open trade, primarily through a flat, low tariff on imports… The strength of Chilean firms, productive sectors, and institutions grew up thanks to that fundamental change” 11   Whether Argentina’s government can learn from her neighboring country is yet to be seen.  Her government is more stable than in the past and hopefully, with new regulations from the IMF, policies can be enacted for more stable fiscal and monetary growth.



  1. Geethanjali Nataraj & Pravakar Sahoo. (2003). Argentina’s Crisis: Causes and Consequences. Economic and Political Weekly, 38(17), 1641-1644. Retrieved from http://www.jstor.org.libraryproxy.walshcollege.edu/stable/4413486
  2. Frederic F. Clairmont. (2002). Argentina: Implosion of Neo-Liberalism. Economic and Political Weekly, 37(13), 1196-1198. Retrieved from http://www.jstor.org.libraryproxy.walshcollege.edu/stable/4411921
  3. Dye, H. (1955). Development of the Banco Central in Argentina’s Economy. Southern Economic Journal, 21(3), 303-318. doi: 10.2307/1053529
  4. Gallas, D., Why Confidence in Argentina’s Economy is Dwindling, Retrieved from https://www.bbc.com
  5. Cohen, L. Argentina’s economic crisis explained in five charts, retrieved from https://www.reuters.com
  6. Triffin, R. (1945). The American Economic Review, 35(4), 689-693. Retrieved from http://www.jstor.org.libraryproxy.walshcollege.edu/stable/1809399
  7. Kofas, J. (1997). The Politics of Foreign Debt: The IMF, the World Bank, and U.S. Foreign Policy in Chile, 1946-1952. The Journal of Developing Areas, 31(2), 157-182. Retrieved from http://www.jstor.org.libraryproxy.walshcollege.edu/stable/4192654 8
  8. Buc, H.B.(September 18, 2006), How Chile Successfully Transformed Its Economy, retrieved from https://www.heritage.org
  9. Rodrigo Caputo & Diego Saravia (April 2014), Monetary and Fiscal History of Chile, Retrieved from https://bfi.uchicago.edu/research/working-paper/fiscal-and-monetary-history-chile-1960-2010
  10. Sarah Marsh & Brian Winters (July 30, 2014), Chronology: Argentina’s turbulent history of economic crisis, Retrieved from https://www.reuters.com
  11. H.C., A Decade of Division (May 28, 2013), Retrieved from https://www.economist.com
  12. CEPALSTAT, Databases and statistical Publications, Retrieved from https:// http://estadisticas.cepal.org


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