In this section, we describe the historical context and summarize four over-arching explanations of Argentina’s painful 20th century. These explanations are not mutually exclusive, and indeed, many are linked. They do, however, map out much of the intellectual terrain associated with the standard explanations of Argentine exceptionalism.
Just say no to exceptionalism: not rich then; not poor now
The first hypothesis is that, once we properly measure inputs and outputs, Argentina is not truly exceptional in any interesting economic sense. The hypothesis comes in two versions. The first is that Argentina was not truly rich at the turn of the XXth century. The second is that it is not particularly poor now.
According to the “Argentina was never really rich” view, the country did have natural resources that briefly made it rich when those resources were in high demand, but it did not share the other attributes of advanced countries before World War I. In particular, its human capital, physical capital and access to cutting edge technologies were far below those in other, poorer countries. According to this view, the decades around 1910 should be seen as a brief outlier, and Argentina post-1945 has just returned to the level of wealth implied by its core assets and competencies.
The argument, essentially, is that Argentina’s early wealth was temporary in nature, a shock which has more in common with the booms in oil-producing nations during the 1970s than with the more permanent prosperity associated with developed countries. Perhaps, the most controversial variant of this hypothesis is the literal questioning of standard income numbers, such as those from Maddison (1986). Some have argued that Maddison overstates Argentine prosperity at the beginning of the 20th century, and others have argued that he understates Argentina’s wealth since the 1960s, because he misses the role played by the expanding informal economy since the 1960s. The implied corrections, however, are significant but not dramatic: while Maddison puts Total GDP in 1900 at 12,100 (in constant pesos; basis: 300,000 in the year 2000), the revised estimate of Gerchunoff and Llach (1998) is 10,800.Footnote 9
Far more common is the view that, even if Argentina was relatively rich, those riches were narrowly concentrated in some groups of the population and were not accompanied by other common correlates of development. For example, Adelman (1994) and Engerman and Sokoloff (1997, 2000) have discussed the high level of inequality in Argentina at the turn of the century, particularly in the agricultural sector and the lack of institutional development, particularly relative to other wealthy nations like the United States or Canada (Solberg 1987). According to this view, the United States managed to share land and prosperity to a much greater degree than Argentina, where large estates where far more common. As such, Argentina should be seen as a less developed nation than the US, managing only to enrich a tiny slice of its population and without the institutional framework to tackle more complicated forms of production.
There is little doubt that Argentina had significantly less education than many other wealthy nations a century ago. For example, the rate of primary school attendance in 1910 Argentina was 48% of that in France, and 57% of that in Germany, despite the fact that Argentina was 29 and 14% richer, respectively, in terms of per capita GDP.Footnote 10 Argentina was catching up in terms of primary school enrollment, but it remained significantly below Western Europe and far below western offshoots, like the US, Australia, and Canada, throughout the pre-World War II period.
Just as pre-World War II Argentina seems to have less human capital than other wealthy nations, it also seems to have had less physical capital, at least if one excludes the great value of its land and livestock. The Campante and Glaeser paper in this special collection compares industrial output and capital stocks in Buenos Aires and Chicago at the beginning of the 20th century. They find that there is a wide gap between the two cities. Value added per worker is far lower in Buenos Aires, and capital per worker is too. In some cases, capital per worker is more than 75% lower in Buenos Aires at then-contemporary exchange rates.
The lower level of human and physical capital also seems linked to a technology gap between Argentina and many other western countries, at the turn of the last century. The Campante and Glaeser paper documents that Chicago was the home of many cutting edge industries, and the site of many significant inventions (e.g., the skyscraper). The same thing could be said of Detroit (mass produced cars), New York (alternating current), Paris (radioactivity), London (subways, vacuum cleaners), and Berlin (electric streetcars and elevators). By contrast, Argentina was primarily an importer of technologies developed elsewhere.
The Not-Rich-Then hypothesis suggests that Argentina in 1910 should not be compared to other rich countries, because it lacked the key ingredients that make development durable. According to this view, Argentina was essentially an underdeveloped economy made temporarily rich by an abundance of high quality land and better transportation technologies (which were again developed elsewhere). As such, it is not surprising that Argentina had a bad 20th century—it just reverted to form. In a sense, the other hypotheses can be understood as explaining the channels through which Argentina’s lack of the early 20th century resources resulted in less economic development.
The second version of the empirical skepticism towards Argentina’s low growth is that the country is much richer now than what GDP figures indicate. Corrections of GDP measures are not uncommon in developing countries, and Argentina is no exception, with a large upward correction in the national accounts implemented in the 1990s. A standard rationale behind such changes is a desire to incorporate the large informal sector that arises when regulations and market limitations proliferate under a relatively weak state. An adjustment of approximately 30% of GDP for Argentina is not unusual using the “monetary method” (this number comes from Ahumada et al. 2003).Footnote 11 In this spirit, it is possible to argue that the usual approach to measure GDP has to be adjusted when the economy undergoes big changes in the number or quality of available products, or when the tendency of consumers to substitute away from expensive products biases the price index. In this special collection, Gluzman and Sturzenegger explore this approach exploiting the change in trade regime that allowed for increased product variety during the 1990s. Their work suggests large upward revisions of the current levels of GDP.
A second standard hypothesis for Argentina’s decline emphasizes a dearth of good institutions, which are defined as stable and pro-growth set of rules, both in politics and in the economy. Institutionalists may not agree about the perfect political system or the exact balance of legislative and judicial authority, but they share the view that growth depends on having a system in which opportunity to invest and reap the fruits of individual effort are open to everyone; where contracts are enforced by impartial courts; where property is secure and not subject to arbitrary seizure; and where those rules, and the governments that create those rules, are reasonably stable. Typically, stability means that governments only change through tools that are defined in a widely accepted meta-rule such as a constitution. The importance of institutions to economic growth in the context of the New World has been emphasized by Sokoloff and Engerman (1997), while studies of Argentina’s institutional performance include Duncan and Fogarty (1984), Prados de la Escosura and Sanz Villarroya (2006), Alston and Gallo (2010) and Aráoz (2013). The index developed by Aráoz (2011) to measure the quality of institutions falls on average after 1930 and becomes more volatile. Acemoglu and Robinson (2008) provide a thorough analysis of the causes and consequences of institutional differences across nations.
On the political side, some dispute whether Argentina was behind other advanced countries around 1900. Argentina was a republic, albeit one with a limited franchise until 1912, and strongly empowered local landowners. The House of Lords was still empowered in the United Kingdom in 1900. Japan and Germany had emperors and strong limitations on the power of democracy.
One sizable difference between the US and the Argentine republic in 1900 was caused by immigration. Both the US and Argentina were magnets for European immigration before World War I. While the proportion of immigrants in the US never exceeded 15 of the total population, immigrants often accounted for more than 30% of Argentina’s population. In the US, urban political machines worked assiduously to turn immigrants into citizens and voters. In Argentina, the path to citizenship was far rockier. Common estimates are that less than 2% of immigrants became citizens in Argentina, in spite of their economic success. A large, disempowered population can be dangerous to the stability of a budding democracy.
Argentina’s path to institutional instability begins in 1916, with the election of Hipólito Yrigoyen. This was a dramatic political shift which replaced the conservative regime by the radical party, and brought into the country’s political life a large portion of the middle class. However, 1912 was a watershed year for the US as well, with the election of progressive Democrat Woodrow Wilson. Locally, Yrigoyen looks like a break, but globally, the rise of Argentina’s radicals looks more like an international leftward trend. The radicals held on to power until 1930, while the US and the UK moved back to the right after World War I.
However, the real watershed was in 1930 when a military coup brought down Yrigoyen’s second government. Crucially, the Supreme Court would later recognize as valid the legislation issued by the illegitimate government stemming from the 1930 coup. Unlike the United Kingdom or the western offshoots, Argentina had accepted regime change by the bayonet instead of the ballot.
Argentina returned to a democracy of sorts with the 1931 election, but the radicals were banned from participation. As the great depression impacted world trade, a more conservative regime was put in place by an elite-dominated coalition known as the “Concordancia.” Argentina’s first coup had destigmatized military takeovers, and another nationalistic military coup in 1943 ousted the conservatives.
The 1943 coup began the strange career of Juan Perón. The new government’s Secretary of Labor became popular by enacting a stream of pro-labor legislation. Perón was later voted president in open and relatively fair elections in 1946, and reelected—after changing the Constitution to allow for a second term—in 1952. Although Perón began as a member of a militarily installed regime, his government increasingly came into conflict with the Armed Forces. Perón’s policies were populist and authoritarian, and unpopular with the far more liberally (in the classical European sense) minded middle classes. The middle classes increasingly saw the Armed Forces as their best shot for regime change.
A failed attempt by part of the military to kill Perón, through an air-strike in Plaza de Mayo, resulted in more than 300 hundred deaths. The sense of instability consequently increased. Perón was deposed by Argentina’s third successful military coup in 1955.
Frequent switches from military to civilian rule marked the period from 1955 to 1983. The periods of military control were 1955–1958, 1962–1963, 1966–1973, and 1976–1983. In between, elections often banned the Peronist candidates. Terms were short and the military still exerted significant influence, often suppressing labor unions. The combination of restrictions on the labor movement, limited democracy, and burgeoning nationalism led many to question the legitimacy of the system.
An attempt to co-opt a pragmatic faction of the union leadership under the notion of “Peronism without Perón” ended with a radicalized opposition that turned to violence. In 1969, a riot in the city of Córdoba left 14 casualties and created a crisis in the military leadership. An urban guerrilla movement that reached 5000 at its zenith in 1975 became increasingly violent (see, for example, the estimates presented in Moyano 1995). Political assassinations, kidnappings of businessmen, intimidation, and chaos became common as the “dirty war” began. In 1975, one political death took place every 19 h (Goti 1996). After a military coup in 1976 (the sixth in 36 years), the military repressed the insurgents through illegal means that included torture and the forced disappearance of approximately 9000 people without trial.Footnote 12
All told, Argentina had 53 years of military coups and instability from 1930 to 1983. Yet, since then, Argentina has functioned as a democracy and transitions have been almost uniformly peaceful. Only in 2001–2002 was political change set off by widespread riots, but, after all, that has also happened in Western Democracies, like France. Four figures—Alfonsín, Ménem, and the Kirchners—dominated the first three decades of democracy. Since 1983, Argentina’s commitment to democracy has been solid. Its commitment to the rule of law or pro-growth economic policies is more debatable.
Did Argentina’s political instability generate policy outcomes that explain the country’s poor economic performance? Prior to the Ménem administration, for example, democratic governments tended to be more protectionist and to fuel wage-led inflation, while military governments were friendlier to exports and usually devalued soon after a coup. Perhaps, the see-sawing between these two types of regimes deterred investment.
Inflation was pervasive during the whole period 1946–1990, arguably for political reasons, and became a permanent feature of Argentina’s institutional scene. These rapid price changes may have undermined the confidence in contracts in general. Faith in contracts was surely reduced by Argentina’s default on its public debt in 1890 (with a constitutional government), 1982 (military government), and 2001 (democracy). That breach of the rule of (economic) law, however, seems to have been independent of the political regime in place.
Democratic stability has not necessarily meant legal protection for investors. Banking depositors had their terms forcefully changed in 1990 and 2001 by democratic governments. Waves of explicit expropriations also occurred during democratic governments, such as Perón (public services), Illia (oil), and Kirchner (both).
Diaz-Alejandro (1970) famously argued that political instability adversely affected Argentina’s economic performance during the 1970s. Four essays in this special collection, by Alan Taylor; Brambilla, Galiani and Porto; Di Tella and Dubra; and by Galiani and Somaini all explore political factors which may explain Argentina’s economic woes. They together build a case that instability led to policy choices which diverged from those selected in more advanced countries. They emphasize different aspects of instability, ranging from political beliefs to tariffs and protections, but their stories do not conflict. Many factors came together in Argentina’s political economy to cause the country’s troubled 20th century.
Bad international shocks
A third explanation for Argentina’s economic malaise is external shocks. Naturally, that view is particularly popular among many of Argentina’s own leaders. External shocks can take the form of negative shocks to the terms of trade in global markets, for goods. Shocks to the availability of global capital investment into Argentina are a second example of such a shock.
Until, the First World War global conditions in both goods and capital markets strongly favored Argentina. The world placed a high premium on Argentina’s agricultural output. International finance helped bankroll the investments in infrastructure needed to support its agricultural export business.
Over the rest of the 20th century, technological advances in agriculture reduced the value of Argentina’s fertile agricultural land. The real price of wheat, then as now a major Argentine export, in the US fell by 75% between 1920 and 2005. In a world that grew richer, Engel’s law meant that external demand for food grew less than demand for other goods.
Adverse short-term shocks accompanied these secular trends away from high agricultural prices. The world turned more inward in the 1930s and protectionist rules remained in agricultural goods, despite the postwar move towards openness. During the middle decades of the 20th century, foreign capital played a far less central role in the Argentine economy than it had during Argentina’s late 19th, early 20th century boom.
In many cases, it is hard to view the external shocks as being completely independent of internal political and economic processes. The global trend against agriculturalists did not hurt other big farm economies, like the US and Australia, because they diversified into other products. Moreover, the declining availability of global financing for Argentine development surely reflected, at least in part, political instability within the country. Finally, and particularly interestingly, “bad luck” in external shocks could have led to harmful policy choices and political instability, which in turn restricted the ability to respond well to external shocks.
Raul Prebisch famously argued that there was a long run trend in the terms of trade, between the 1870s and the 1930s, which adversely affected primary goods producers such as Argentina. Those ideas provided intellectual fodder for Perón’s state-sponsored industrialization. More recently, Hadass and Williamson (2003) confirm Prebisch’s evidence on the terms of trade, but suggest that declining terms of trade did not really adversely impact Argentina until the 1920s.
In the late 1920s, foreign markets for Argentine products stabilized, but the situation again deteriorated during the global downturn of the 1930s. During those years, Argentina was simultaneously struck by a decline in the income of their global customers and a renewed enthusiasm for tariff protection, exemplified by America’s 1930 Smoot–Hawley Tariff. The onset of the depression also meant that Argentina could no longer finance investment by running current account deficits, which, according to Taylor (1992), was a fatal blow for a country, whose savings rate was not particularly high by international standards.
World War II and its aftermath boosted demand for Argentine produce, but soon afterwards terms of trade declined once more (Cavallo and Mundlak 1982). Argentina faced continuing restrictions on trade in agriculture, which were only partially ameliorated by its signing the General Agreement on Trade and Tariffs in 1967. The fact, first postulated by Engel, that the share of income spent on food declines with income rise also implies that economies exclusively relying on agriculture should account for an ever-decreasing share of the global economy, as the world gets richer.
Moreover, technological breakthroughs, like the Green Revolution, massively increased the productivity of marginal agricultural areas. Improving productivity of marginal land may have reduced the ability of Argentina to grow by exporting to areas agriculturally less productive. There is surely some truth to the notion that global economic changes helped contribute to Argentina’s relatively slow rate of growth during the 20th century. Only recently have terms of trade recovered somewhat from the long run downward trend.
However, the impact of downward external shocks is always, at least somewhat, shaped by the policy response, which is shaped by the knowledge, incentives, and beliefs of voters and political leaders. The Di Tella and Dubra essay emphasizes the difficulty in agreeing on the interpretation given to some of these shocks when lack of trust prevails in an unequal and politically divisive society. The essay documents how these changes were interpreted by one of the main political forces (Peronism) and how this helped boost economic populism. Protectionism and the growing anti-export bias of the country interacted with initial political and economic conditions, such as the small size of Argentina’s internal market, and possibly pushed firms towards rent seeking and corruption. As external opportunities declined, the role of the state increased. Often, the best business was not the efficient production of goods for external markets, but to lobby the government for public contracts. As businesses looked inward, the pressure for inward-looking interventionism increased.
Basic trade models, such as Stolper–Samuelson, emphasize that some factors of production may be made worse off by trade, and this seems quite relevant for Argentina. The negative impact of trade on some parts of the economy can help explain why protectionist policies were so popular in sectors of the Argentine economy (see Díaz-Alejandro 1988). This process is documented in the essay by Brambilla, Galiani, and Porto. Moreover, the inward-looking policies that Argentina followed after World War II do seem to have produced a striking reduction in income inequality, as Alvaredo, Cruces, and Gasparini document in their essay in this special collection.
However, the Stolper–Samuelson logic does not explain Argentina’s bumpy process of integration into world markets, or the long persistence of Argentina’s isolation. The Galiani and Somaini essay shows that these facts can be understood by adding a non-tradable sector into the classic model and by adding frictions in the mobility of capital across sectors. Indeed, an important contribution of this paper is to show the significance of connections between external economic shocks and internal political dynamics.
Every nation was at one point dominated by agriculture, but the more successful ones, including the United States, were able to transform themselves. In spite of significant import-substituting pro-manufacturing policies after the 1940s, Argentina did not move quickly into other non-agricultural products. The country failed to develop into a significant industrial powerhouse, with little technological innovation and apparently slow progress in the development of managerial expertise. While Argentina was as rich as much of Europe as late as 1950, European countries managed to grow much more rapidly, primarily through the development of industry. Even more remarkably, East Asian economies, such as Japan and Korea, which were far poorer than Argentina through the 1960s, managed to transform themselves far more rapidly.
Why did Argentina fail to modernize along this dimension? An economic view is that Argentina’s factor endowments were not as inviting to industrial investment as elsewhere. Argentina was neither a labor-abundant country for low wage manufacturing, nor did it have, as discussed by the Campante and Glaeser paper, a particulary educated workforce compared to the industrial leaders. According to the Barro–Lee data, average years of schooling in Argentina increased from slightly under 5 years in 1960, to 6.6 years in 1980 and 8.5 years in 2000. The “advanced country” average in their data set is more than 7 years in 1960, 8.86 years in 1980, and 9.8 years in 2000. Japan had 6.8 years of schooling in 1960 when it was still considerably poorer than Argentina, 8.2 years in 1980 and 9.7 years in 2000. Given the strong connection between growth and human and physical capital accumulation (Mankiw et al. 1992; Barro 1992), perhaps Argentina’s lackluster growth performance is not that surprising.
Moreover, technological innovation also seems to have been relatively slow in Argentina during the last 40 years. For example, the United National Industrial Development Office classifies the share of manufacturing value added accounted for in medium and high technology production.Footnote 13 In 2005, 25.7% of Argentina’s manufacturing value added came from these more sophisticated operations, as opposed to 41% in Canada and 61% in Germany. The share of medium and high technology production in manufacturing exports in 2005 was 31% in Argentina, 57% in Canada, and 72% in Germany.
The fourth hypothesis emphasizes politics and blames bad economic policies and harmful intervention instituted by government after government. Different versions of this hypothesis point to different policy culprits. Some scholars emphasize unsustainable short-run macroeconomic policies pertaining to budget deficits, inflation, or exchange rates. Others note the adverse incentives that damaged growth in the long run, such as protectionism and inefficient public production. In general, these policies chosen during the second two-thirds of the 20th century in Argentina can be contrasted to the laissez-faire context prevalent until that time. Indeed, the more interventionist and highly volatile approach of economic policies after the depression is often blamed for Argentina’s relative decline.
The tide for government intervention came in Argentina in successive waves. After 1916, Yrigoyen enacted policies that some economists see as being detrimental to growth, like minimum wage laws, but there is little evidence that Argentina suffered during this period. The 1930s saw more interventionism, partially as a response to the depression and partially in response to rising population levels. Public works were started; import duties were increased; and a system of multiple exchange rates favored manufacturing activities over agriculture. The resulting industrial growth led rural workers to migrate to urban centers and helped shift the composition of labor organizations. Real wages remained stagnant, while the perception of government concessions to foreign trading partners, principally Britain, irked nationalists.
Interventionism reached its height with Perón. As a Secretary of Labor, he enacted a comprehensive set of pro-labor laws that included a scheme to establish and periodically adjust minimum wages, often leading to increases in real terms; yearly paid vacations; retirement and health insurance benefits; and an annual mandatory bonus equal to an additional month’s salary. He also instituted the Agricultural Worker Statute (Estatuto del Peón) in the late 1944, which outlined the specific rights and obligations of both rural workers and employers. This law was perceived as a defiance of the landed elite. In 1945, he enacted the Law on Professional Associations, which gave his Labor Secretariat veto power over the formation of new unions. By the end of his tenure, Argentina had advanced to a world leader in labor legislation (see, for example, the description in D’Abate 1983).
The 9 years of Perón’s presidency starting in 1946 witnessed intense political polarization. Perón enacted policies that antagonized the rich. He continued a set of pro-union policies, and between 1946 and 1954 union membership increased from 880,000 to 2.5 million, which amounted to 42.5% of all workers (Smith, 1991). He also nationalized railways and banks, took public control over the grain trade, engaged in protectionism, and chose not to join international institutions like the General Agreement on Tariffs and Trade.
In his essay, Taylor emphasizes the significant cost to Argentina of inward-looking policies, both through the increase in the prices of capital and input goods, and the decline in technological transfer from abroad. While many other developing countries followed Alexander Hamilton’s suggestion of using protectionism to nurture nascent manufacturing industries, Argentina was particularly aggressive, perhaps because of the Stolper–Samuelson-related effects discussed by the Brambilla, Galiani, and Porto essay. Moreover, the popular pressure for closing the economy will be stronger if the losing factor (land) is concentrated in a few hands, a crucial point stressed by Díaz Alejandro (1970).
While some of the most interventionist of Perón’s measures were removed by successive governments in 1955–1976, the general protectionist stance remained, and was even strengthened during the “developmentalist” attempt of Frondizi (1958–1962). State intervention, including public provision of most public services, was no free lunch, and the fiscal cost of attempting an inward-looking industrialization fueled inflation in the postwar decades.
After the 1976 coup, a pendulum in economic policies ensued: a move towards openness in trade and capital flows in the late 1970s was reversed during the 1980s. Inflation remained stubbornly high during 1975–1990, often above 100% per year, coinciding with the fastest relative decline of Argentina, as shown in Fig. 1.
Again in the 1990s Argentina moved, more decisively, towards privatization, free trade and unrestricted capital flows. The 2001 crisis, the harshest in Argentina’s history, contributed to the unpopularity of those policies, which were gradually reversed during the Kirchner administration—including some nationalizations and the return of import permits and exchange rate controls. The debate on the causes of the 2001 crisis (which included a sizable devaluation, a debt default and a confiscation of banking deposits) mimic the larger one on Argentina’s long-term decline. Again, the problem could be the laxity of economic rules or an unfortunate combination of international shocks (terms of trade, devaluation by Brazil and others, and a sudden stop of foreign funds) or institutional (with corruption playing a key role in the break up of the ruling political coalition under an exchange rate peg) or economic policies, including fiscal largesse and an unsustainably fixed exchange rate. Once more, it is hard if not impossible to precisely attribute outcomes to each of these forces.