Looking at the way major economies in recent years have managed to combine chaotic politics with decent growth, it’s tempting to wonder whether we’re all making too much fuss about the behavior of the people in power. 

In the U.S., President Donald Trump has joked about becoming president for life, toyed with overturning the constitution by executive fiat, and used emergency powers to pursue wrenching political shifts. In the U.K. the government is at war with Parliament and has thrown the residency rights of European citizens in jeopardy, while judges have been denounced as enemies of the people. In India, Prime Minister Narendra Modi has undermined the independence of the central bank, revoked the autonomy of Kashmir and embarked on 2016’s disastrous demonetization, as my colleague Andy Mukherjee has chronicled.

Yet equity markets in all three countries are only just off record highs, while unemployment in the U.S. and U.K. is the lowest it’s been in more than 40 years. The misery index – a decent rule-of-thumb for general economic distress, calculated by adding together unemployment and inflation rates – is at its lowest levels since the mid-1950s in the U.S., and around its best levels on record in the U.K., while Indian consumer price inflation is not far above record lows. Perhaps, then, a strong economy can sail through political turmoil almost unharmed?

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Events in the southern hemisphere this week would suggest otherwise.

Australia on Tuesday posted its first current account surplus since 1975, at a time when the government’s budget is already likely in the black for the first time in a decade. At the same time, Argentina is imposing capital controls to halt a balance-of-payments crisis after the peso fell 25% in a month.

What’s striking about these twin events is that the recent economic history of the two countries is in many ways the opposite of the conventional narrative. Australia, rather than Argentina, has been the bigger debtor on its current account in recent years, and on the budget front its deficits have been quite as large as those run up by Buenos Aires. While investors have remained understandably reluctant to fund Argentina’s deficits, they’ve given Australia the flexibility to run up the credit card over the past decade and see itself through a difficult patch.

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Canberra should probably take more advantage of this as the economy weakens, as my colleague Daniel Moss has written – but the credibility that it enjoys isn’t an accident. Instead, it’s the wages of a century in which the two economies have been looking-glass versions of each other.

Go back 100 years and Argentina and Australia seemed like twinned nations. Sustained by exchanging agricultural exports for British development capital and welcoming waves of European immigrants, the two countries were among the most affluent economies on the planet. (1)

Since then, their paths have diverged dramatically. While Australia is still one of the world’s wealthiest nations, Argentina has stagnated for the best part of a century, with hyperinflation and financial crises stunting growth to the extent that it’s likely soon to be poorer than China.

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The source of that divergence has long mystified economists, but politics and institutions are where the difference is most stark.(2) From its first coup in 1930, Argentina alternated between right-wing military rule and shorter spells under populist Peronist leaders for half a century, until democracy was finally restored in 1983.

Australia never experienced anything so dramatic. The dismissal of a Labor prime minister in 1975 is remembered as a nation-defining scandal, but seems a mild affair by comparison with what was happening on the other side of the globe. The mid-1970s in Argentina saw the start of the Dirty War, in which right-wing death squads killed tens of thousands.

Argentina’s grim performance in the 20th century is a global outlier, but it remains a stark warning. The country’s lurch toward authoritarianism, after all, happened with the strong support of a slice of the middle class, who thought it better than the leftist alternative.

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Citizens of wealthy, developed economies should take care they don’t play with the same dangerous ammunition as the Argentinians who supported the country’s many coups. That would include those who seek to use boundary-drawing powers to make politics less responsive to popular votes; declare their policies the embodiment of the popular will; or take the view of Trump-supporting Facebook Inc. director Peter Thiel that democracy itself stands in the way of economic freedom.

Once politicians give up on obtaining legitimacy via losers’ consent, they embark on a dangerous path from which return can be all but impossible. Paul Keating, the Australian treasurer and prime minister often seen as the embodiment of that country’s centrist streak, once warned that failure in economic reform would see the country end up like a Latin American nation. Other countries tempted to embrace homegrown populist demagogues should pay heed.

(1) In France, which was poorer than its southern hemisphere counterparts, it was common to describe gauche social climbers as“riche comme un Argentin” (“rich as an Argentine”). Buenos Aires was home to the only foreign branch of the U.K. department store Harrods, and its opera house was one of the largest in the world when it opened in 1908.

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(2) One argument is that Argentina was hobbled by its mid-century commitment to extreme protectionism; but Australia in that period wasn’t so different, with auto tariffs running as high as 57.5% as late as 1987. Another theory is that the Latin American country was too dependent on farm exports, which tend to fall in value in real terms and had already peaked around the early 20th century; but Australia, too, was largely an agricultural exporter until the coal and iron ore trade began to pick up in the 1980s.A better explanation might be that Argentina wasn’t quite as developed 100 years ago as it seemed, with inequality much higher and education levels much lower than Australia.That left it with a sharply defined rural landlord class and urban proletariat, whose conflicts were more prone to break out into violence and dictatorship.

To contact the author of this story: David Fickling at dfickling@bloomberg.net

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

©2019 Bloomberg L.P.

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