Javier Milei has embarked on a mission to combat poverty in Argentina. The success of Poland, which was transformed from one of the poorest countries in Europe into the continent’s growth champion by the capitalist shock therapy of Leszek Balcerowicz (Deputy Prime Minister and Finance Minister in Poland from 1989), serves as a shining example that what Milei has set out to do in Argentina is possible and can lead Argentina to a bright future – on one condition.
But first, some historical background: There is probably no country in the world that has descended so dramatically in the last 100 years as Argentina. In the early twentieth century, the average per capita income of the population was among the highest in the world. The expression “riche comme un argentin” – rich as an Argentinean – was a commonly heard expression at the time.
Argentina’s decline began with Juan Domingo Perón. He was elected president in February 1945. His political agenda: big government. Argentina’s telephone company was nationalized, its railways, its energy supply, its private radio. Between 1946 and 1949 alone, government spending tripled. The number of public sector employees rose from 243,000 in 1943 to 540,000 in 1955 – many new jobs were created in government agencies and in the civil service to provide for the supporters of Perón’s Workers’ Party. Economic policy was socialist: although passenger and freight volumes for the railways stagnated, the number of employees increased by more than 50 percent between 1945 and 1955. The Perónist trade unions became the most powerful organizations in Argentina alongside the military.
Economically, Argentina’s history is one of inflation, hyperinflation, state bankruptcies and impoverishment. Since its independence in 1816, the country has experienced nine sovereign bankruptcies, the most recent of which was in 2020 – a tragic story for such a proud country that was once one of the richest in the world. With the exception of the 1990s, Argentina has suffered from double-digit inflation every year since 1945. When Milei was elected, the country was grappling with hyperinflation and a sharp increase in poverty rates.
The situation was similar when Leszek Balcerowicz initiated a series of free-market reforms in Poland. In the 1980s, Poland was one of the poorest countries in Europe.
Poland’s debt burden to Western creditors had grown larger and larger and, by 1984, Poland was the third largest debtor in the world. Poland’s gross foreign debt ballooned from USD 1.1 billion in 1971 to USD 40 billion in 1989, more than in any other socialist country. In 1989, annualized inflation was 640 percent in Poland.
Like Milei, Balcerowicz was an economist who adhered to the principles of the Austrian School of economics, drawing inspiration from the works of Ludwig von Mises and Friedrich August von Hayek. And, like Milei in Argentina, he implemented “shock therapy” in Poland.
Balcerowicz’s reforms were instrumental in laying the foundation for Poland to emerge as one of the most economically prosperous countries in Europe today. In 2017, the economist Marcin Piatkowski published a book, Europe’s Growth Champion, in which he takes stock after 25 years: “Yet, twenty-five years later it is Poland that has become the unrivalled leader of transition and Europe’s and the world’s growth champion. Since the beginning of post-communist transition in 1989, Poland’s economy has grown more than in any other country of Europe. Poland’s GDP per capita increased almost two-and-a-half times, beating all other post-communist states as well as the euro-zone.”
According to data from the World Bank, GDP per capita in 1989 was 30 percent of the corresponding figure in the U.S. and had risen to 48 percent of the U.S. level by 2016. The income of Poles grew from about USD 10,300 in 1990, adjusted for purchasing power, to almost USD 27,000 in 2017. In comparison with the EU-15, the income of Poles was less than one-third in 1989 and had risen to almost two-thirds in 2015.
The case of Poland shows that capitalist reforms and shock therapy work! But Poland also offers a second lesson that is at least as important for Argentinians today: Before things got better, Poland endured a period of hardship lasting two years.
A predictable negative consequence of economic reforms was that GDP slumped for a few years before returning to growth. In Poland, the decline was 11.6 percent in 1990 and 7.6 percent in 1991. The unemployment rates rose from zero to 12 percent in 1991 and then again to 14 percent in 1992. Of course, it is important to bear in mind that Poland, like Argentina, had a high rate of hidden unemployment. The Communists were very creative in the methods they employed to hide unemployment. After the end of socialism, hidden unemployment became official unemployment. It was inevitable that people who worked in state-owned enterprises, which were nowhere near competitive enough for global markets and had not been allowed to go bankrupt thanks to state subsidies, would now lose their jobs and that their hidden unemployment would be added to the official unemployment figures. The state-owned enterprises shrank. But at the same time numerous new enterprises were created.
The example of Poland thus highlights two key lessons:
- Capitalist shock therapy works. Milei is following the same economic doctrines and principles as Balcerowizc. Both were confronted with the same problems: Extreme national debt, extreme inflation, poverty and a state that was strangling the economy.
- Before things get better, many things will have to get worse. It is totally unrealistic to expect decades of damage to be undone in a year.
Argentina now stands at a crossroads: either they understand the above and have the necessary patience to weather the storm and get through two difficult years. Or they don’t have the patience and succumb to the allure of quick fixes promised by the Peronists, who want to return to power. If they have patience, Argentina will have a prosperous future. If not, Argentina will sink back into a maelstrom of debt, inflation, and poverty.
