Learning as little as possible from Argentina
The South American country’s slow decline is an object lesson for other states, including one in the Middle East, on the perils of prosperity.
As Argentina yet again careened into an economic crisis, The Economist asked last week how a country with such a wealth of human and natural resources could have made such a hash of things over the past decades.
A century ago, Argentina was among the world’s wealthiest countries. In the years before World War I its economy grew faster than that of the United States, immigrants (including not a few Jews) poured in and Buenos Aires was a boomtown and showcase of Belle Époque architecture. It’s been downhill ever since. The country, which was jolted by six coups d’état between 1930 and 1976, has lurched from one crisis to another, defaulting three times on its debt (in 1982, 1989 and 2001, and it seems headed for a fourth this year).
What The Economist points out is the extent to which Argentina’s condition is the result of a long history of self-inflicted wounds. Argentina was never devastated by a major war, nor has it suffered any environmental disasters. And that is why what the magazine calls “The Parable of Argentina” has such a worrying moral for the rest of the world’s developed economies. “The real danger is inadvertently becoming the Argentina of the 21st century. Slipping casually into steady decline would not be hard,” the newspaper (as The Economist insists on calling itself despite its size, shape and glossy paper) warns.
Could Israel also be unknowingly peaking now, as Argentina was a century ago? We have also enjoyed a decade of enviable growth in spite of war, terrorism and regional isolation, making it seem all but inevitable that we will eventually take our place beside northern Europe and North America in the global wealth rankings. Our high-tech industry looks like the same kind of gold mine that Argentina’s farms and ranches seemed to be 100 years ago – a firm foundation for national prosperity for years to come.
Argentina’s happy equilibrium was disrupted by World War I and the Great Depression, which administered lethal blows to an economy based on farm exports and the primacy of Britain as a world economic power. But instead of dealing with the realities of a changed world, Argentina – as The Economist sees it – buried its head into the ground. Wrenching battles were fought between wealthy landowners and the urban proletariat over how to share the wealth they all assumed would always be there. When political reality butted heads with economic fantasy, the latter prevailed.
Looking around the world today, you can see plenty of instances where fantasy, or more precisely nostalgia for a system that once worked, is hindering economies: France and Italy’s reluctance to compromise on the social welfare economies they created after World War II, Greece’s stubborn insistence that everything would be fine if Germany wasn’t so nasty or the fixation in America with heroic entrepreneurs and low taxes as an elixir for all economic woes.
Israel has so far done a pretty good job of grasping economic realities and adjusting to them. After dillydallying through the 1970s and ‘80s, the government jettisoned the statist economy and adopted a model of more free enterprise. Our business sector seized on the information technology revolution of the 1980s and ‘90s to create a high-tech industry. More recently, the government has sought to tackle the problem of Haredim not working or getting a proper education, and the grip of big holding groups on the economy. It has begun to expand commercial ties with China rather than assume that the United States will always be the prevailing economic power.
Much of Israel’s success in redirecting its economy was due to the fact that economic policy was pretty much in the hands of a few policy makers and powerful business people. Since the 2011 social justice protests, however, economic decision-making has come under far more severe scrutiny from the media, social activists and politicians. This isn’t necessarily a bad thing, but once you open the populist door, it’s hard to know who will come through it.
In Israel’s case there are plenty of people who deal in economic fantasy or nostalgia ready to push their way in. One is Haredim, who think the system of shunning work and living off the state can work forever even though their share of the population and the burden they impose on the rest is constantly growing. Another is the settlers and their allies, who insist that a bifurcated state of wealthy Startup Nation Jews and poor, disenfranchised Palestinians doesn’t come with any economic or political costs. The third are the populists, who look at economics solely through a moral prism in which social problems must be solved at any price and business by its very nature is a greedy hoarder of wealth rather than responsible for its creation. The populist vision of a painless prosperity enjoyed by all will grow more alluring if the government fails to narrow the country’s gaping income gaps and the growing distress of the middle class.
Israel faces no shortage of challenges for which the fantasists can lead us astray. One has to do with the future of high-tech. It is easy to lose perspective as multimillion-dollar mergers and acquisitions deals fly by one after the other, but the fact is that Israel’s Startup Nation is far more rickety than Argentina’s agriculture. It is based on a delicate mix of technological, creative and entrepreneurial skills that have proved hard to replicate in other countries and might not be passed on to the next generation. Technology by its nature changes rapidly, so Israel may find itself without the proper skill sets or resources if suddenly the focus shifted from information technology to, say, new materials, space exploration or alternative energy.
Israel’s aging population will force us to make the same difficult choice much of Europe is going through now without much success as economic growth slows. As the ratio of working Israelis to retirees shrinks, the interests of the older population in generous pension benefits and healthcare spending clash with those of the young. The growing populations of Haredim and Israeli Arabs will require more social integration and access – most importantly via army service – than many will want. The natural-gas bonanza will make it a tempting target for those who want to paper over the problems by exploiting the profits.
When he was at the World Economic Forum conference in Davis this month, Prime Minister Benjamin Netanyahu extolled the Jews’ capacity for change and innovation. In fact, the Jews have had a good record through the centuries of the Diaspora and the last decades as a nation state. But Israel’s current prosperity, like Argentina’s a hundred years ago, risks discouraging both those qualities. After all, why tinker with something that has worked so well until now.