Great Britain, twinned with Argentina

BUENOS AIRES - Argentina might seem a long way from a British election campaign, and yet in a way it isn't. Even a brief visit, for a conference, has brought home several parallels between the concerns of policy-makers here and what will inevitably be the concerns of the next British government. Both countries are part of the global market for ideas - good ideas - about the future direction of government.

The flow is two-way. It is quite hard for anyone in the UK to appreciate quite the impact that the privatisation programme has had on the rest of the world, for just about everywhere, including Argentina, has copied it. But equally, anyone interested in public pension policy, from British MPs to Harvard dons, goes to neighbouring Chile to study the country's privatised pension scheme.

Now the question is what follows privatisation. Several people I have met here, including the head of a large health insurance group and the former governor of the Central Bank, are interested in the next stage of British policy (and not just because of the Falklands, although the fact that a Blair government might be more favourable to Argentinian claims is a hot topic here). They ask whether a UK Labour government will continue to innovate, perhaps finding ways of better cushioning the social impact of market economics.

The particular reason for this concern is the savage way in which market reforms have hit unemployment. Inflation, once endemic, has disappeared. But a sudden recession in 1995 led large employers to cut their labour levels, with the result that despite decent growth of around 4 per cent last year and a bit more this year, unemployment is stuck at more than 17 per cent.

There is a parallel here with Germany. Industry has been forced to become more efficient, productivity has shot up and a recovery is in place. But it is a jobless recovery, and people displaced do not have European-style social benefits to cushion them.

There is a deeper reason for this fascination with European economic policies. Argentina feels like a European nation, and I suspect sometimes thinks of itself as one. Some 80 per cent of the population is of Spanish or Italian stock. There are many third and fourth-generation Brits. Buenos Aires feels like a larger but less prosperous version of Madrid. But it is a European nation which has failed to keep up with European living standards.

At the turn of the century Argentina was, with the US and Australia, one of the three richest nations on earth. Now, while the physical evidence of that wealth remains in wide streets and grand turn-of-the-century buildings, and while the rich still live very well, average incomes are perhaps one- third of those of Europe. If one wants an prime example of how to fall behind - an uncomfortable thought for Britons - Argentina provides it.

What went wrong? Part of the answer lies in a change in the nature of comparative advantage in the world. The wealth of the turn of the century was based on natural resources: abundant, fertile land for food production, plus natural mineral resources, and a small population. Comparative advantage then shifted to mass manufacturing exports and is now probably shifting again to service sector exports. Argentina, like most of Latin America, protected its industries from foreign competition and missed out on the post-war boom.

That leads to the other part of the answer: governance. The blight of corruption is acknowledged and attacked with what seems to the visitor astonishing openness, but the problem viewed in economic terms is only partly that. The economic failure results from two or three generations of government interference in the market system. In purely economic terms the problem is much more akin to that of the former communist countries: allocation of resources by state decree rather than by market signals. The result, as in the former communist countries, has been dreadful investment decisions.

This raises a fundamental question: now that market allocation of resources has been (more or less) embraced by perhaps 90 per cent of the world's population, will countries like Argentina (or for that matter Russia) do much better in economic terms over the next century than they have in the present one?

It would be ridiculous to answer with anything more than a "maybe" as far as Argentina is concerned. The market and political reforms are far too recent and far too fragile to go any further than that. But there are fascinating parallels between the present period and the second half of the last century: rapid growth of international trade; great technical advances, particularly in communications; a single world market for capital; and a single economic ideology.

So it is a global level playing field. How, on that field, do Argentina's assets stack up? It is difficult to see its ability as a food producer being as strong an asset in the early part of the next century as it was in the latter part of the last one. World agriculture will continue to be distorted by governments for a while yet, even if those distortions are gradually whittled away. But in another 20 years we will be a world of 8 billion people, which is more than another 2 billion mouths to feed. Being an effective food producer will become more of an advantage than it is now.

Other exports? Argentina is never going to become a producer of electronic kit, for that has gone to East Asia, but the margins there are tiny anyway. Service exports such as tourism should grow, particularly if airline charges continue to fall. There is an advantage in being in the Southern Hemisphere. But the country will always be physically a long way from other population centres, which will limit the scope for mass tourism.

The really big change, surely, will come from the plunge in telecommunications costs. In a world where phone calls are becoming virtually free, there is no fringe. Being physically on the fringe is irrelevant. Straddling the European and North American time zones is much more important.

Speaking what seems to be becoming the world's second most important commercial language is more important still. The window should open not just to developing cultural Spanish-language exports for the 400 or so million Spanish-speaking people, but also more mundane but rapidly-growing telecommunications services such as call centres. Any product which can be delivered across the phone links can be produced anywhere in the world. All you need is well-educated, diligent people.

Argentina has suffered seriously from a brain drain: clever people disliked living under military dictatorships and 2,000 per cent inflation and left, mostly for the US. But brain drains can be reversed, and that perhaps is the single greatest test for Argentina. Will the top thinkers come back?

The gap between economic success and failure is often a narrow one. Large parts of the world, including Argentina, have spent half a century, maybe more, doing the wrong things. But now the world is in the early stages of a rebalancing of economic performance. There will be new winners, new losers. Argentina has been (in relative terms) a loser. Is it now a warning to other relative losers? Or is the pattern again shifting, this time slightly towards the world of the last century?

The answer to both questions is probably yes. But it matters for us as well as them.