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Scary lessons from Argentina

By David Frum, CNN Contributor
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STORY HIGHLIGHTS
  • Argentina is a resource-rich country that ranks low in economic strength
  • David Frum says there are lessons for left and right in Argentina's troubles
  • He says arbitrary government action against industry causes a flight out of the country
  • Frum: Huge inequality in wealth breeds rebellion and repression
RELATED TOPICS
  • Argentina
  • Taxes
  • Civil Unrest

Editor's note: David Frum writes a weekly column for CNN.com. A resident fellow at the American Enterprise Institute, he was special assistant to President George W. Bush in 2001-2. He is the author of six books, including "Comeback: Conservatism That Can Win Again" and the editor of FrumForum.

(CNN) -- I spent the Christmas holidays in two very similar nations, with two radically different histories.

Country 1 is my native Canada: a resource-rich nation of 33 million people that has grown from an exporter of the products of forest, mine and farm into one of the world's most advanced economies. Gross Domestic Product per capita in 2008, according to the World Bank: $42,031 U.S., just behind the United Kingdom, just ahead of Japan.

Country 2 is sunny Argentina: a resource-rich nation of 39 million people that started as an exporter of agricultural products. A century ago, Argentina was probably a richer country than Canada. Argentina's GDP per capita in 2008: $8,236 -- just behind Brazil, just ahead of Montenegro.

The Argentine experience is one of tragic falling away from a once glorious promise. It's a story often told, even the subject of a musical, and I'm not proposing to retell it. Instead, in this season of intense debate over the future of American capitalism, let me just draw two morals, one for the political left, one for the political right.

For the left:

Here's a story I heard last week from a onetime foreign investor in Argentina. The thing that drove him out of the country was a 5 percent tax on his company. Five percent may not sound like much, but what mattered was not the amount of the tax. It was the way it was imposed. The tax was not enacted by Congress. It was not even ordered by the president.

One fine day, one of his operations received a letter from a government ministry with a sudden demand for payment. As far as he could tell, the demand was ungrounded in any law. He litigated the matter and (eventually) prevailed. But a country where the government could remake the rules at any time was no country for him.

Think it could not happen here? It is happening here. It happened in the Chrysler bankruptcy, when the government muscled bondholders to surrender their legal rights in favor of politically preferred creditors. It happened to AIG bonus-holders, intimidated by Congress into surrendering their contractual earnings.

It is on the verge of happening to the pharmaceutical industry, where one preferred idea of health care reformers is informal government pressure on drug prices.

A modern economy can bear the load of even quite high government spending -- see Denmark, Sweden, Germany, etc. What it cannot bear is arbitrary power. Deals are deals, contracts are contracts, laws are laws, and they must be respected by the government as well as by the governed.

For the right:

Latin American politics has been savage on a scale hardly imaginable north of the Rio Grande: at least 9,000 -- and perhaps as many as 30,000 -- murdered in Argentina's 1976-83 "dirty war" against suspected left-wing radicals, to cite just one example.

The extreme concentration of wealth for which the continent is notorious has tended to frustrate reformists and galvanize radicals, including violent radicals. Latin American "haves" have felt threatened by attack from below since independence two centuries ago -- and they have repeatedly defended their possessions with murderous repression.

While some parts of the continent seem to be settling into stability (especially Chile and Brazil), other parts seem to be heading toward yet another round of chaos (notably Venezuela).

Latin America is a marvelous place to be rich. A decade ago, I lived in Peru for a month on an assignment. My hosts assigned me an apartment tended by a housekeeper and butler.

Every morning, the butler silently appeared at breakfast time bearing a toaster, which he rested atop a magnificent sideboard in the great dining room overlooking the Pacific Ocean. With a pair of tongs, he dropped bread into the appliance, depressed the switch, and then stood motionless in place as he waited for the slices to pop. He then presented them to me with a slight bow. I felt like a character out of "The Remains of the Day."

Yet this luxury can never be secure, and often ends very badly for the luxuriating -- either because a revolution eventually comes or, more often, because the strongmen who promise to avert the revolution prove almost as rapacious and merciless as the revolutionaries.

A little more social equality would buy a lot more social peace. Making the toast yourself will help you to keep the sideboard.

The opinions expressed in this commentary are solely those of David Frum.