DISTANT AND CLOSE ARGENTINA

In Kazakhstan, concerns are mounting over the erosion of control over key macroeconomic indicators. The long-standing challenge of elevated inflation has now been compounded by a severely deficit-ridden budget and rising public debt. These trends are contributing to a heavier tax burden and a broad deterioration in the business climate.

Argentina has long been notorious for facing similar problems. Today, its income level is comparable to Kazakhstan’s. Yet at the end of the 18th century, Argentina was wealthier than the United States. A century ago, it ranked among the world’s top 10 economies—on par with France and ahead of most European countries.

It is clear that the cause of such long-term stagnation lies solely in institutions. But what exactly? After all, their outward appearance resembles that of the U.S. – also a federal system, separation of powers, a bicameral parliament.

However, the devil is in the details. Here's how institutional economists describe it:

1. The fiscal system is arranged in such a way that the main revenues flow to the central government, while the main expenditures are at the regional level. Since they have an electoral system, those who win are the "akims" with a specific skill – the ability to "extract rent from the common pool," that is, to draw more actively from the shared pot. How that pot gets replenished – hardly anyone is interested.

2. A proportional electoral system, where voters choose a party, and the party then decides who becomes a deputy. But the candidate lists are shaped by regional party elites, which means members of parliament often have little concern for the national budget deficit. If they accept underfunding for their region, they risk being swiftly replaced.

3. The heads of central government agencies change constantly. Civil servants are poorly paid and unmotivated, and on top of that, there is no permanent and competent leadership.

4. In this chaos, the supreme authority understandably encounters little resistance and often engages in arbitrariness – changing rules unilaterally, abandoning previous agreements and promises, and so on.

5. In the same chaos, numerous business and other groups roam about, maximizing their narrow, short-term benefits.

But, of course, that's not what the conversation is about. Argentine "tunes" are familiar – protectionism, price controls, state regulation, support for domestic producers, subsidies to the population and businesses, and so on.

Argentinians have become so "enlightened" that they elected the ultra-market advocate Javier Milei as president. However, the fact is that short-term victories in macroeconomics do not guarantee long-term sustainable development. They are important, of course. But something must be done with the institutional structure, and there are no obvious answers here ("constitution," "democracy," "parliamentary system," etc.).

Source: Menard & Shirley (2022)