Research Project, “The Socio-Political Analysis of Argentina’s Economic Decline”

1. Topic: “The Socio-Political Analysis of Argentina’s EconomicDecline”
2. Researchers: Hyun Go, Silvia Montoya, Jorge Vasconcelos and German Antequero
3. Period: Friday-Monday, April 15-August 15, 2011 (4 months)
4. Final Product: Research paper of 300 pages (both in Korean & English)

1.Objective

The evolution of the Argentinean economy in the 20th century is disconcerting. In the first decades of the 20th century, Argentina was in an outstanding position among the most promising economies of the world. The economy was growing at a sustained rate; overseas investment in the railroad transportation system was linking the whole country; immigrants were arriving from all over the globe providing the necessary labor force to explode a rich soil; the educational system, under the impulse of the “80s generation”, expanded and translated to a huge reduction in illiteracy rate, placing the country among the most educated nations in the world. In summary, the perspectives for the country in the long run were favorable. If someone had affirmed at that time that the situation of Argentina was going to be exactly the opposite at the beginning of the 21st century, this could have been considered delusional.

Nevertheless, the results during the second half of the 20th century were disappointing. Economic growth stopped while a reverse process started. As a consequence, the medium and long term perspectives fell apart. The combination of bad circumstances and bad decisions translated to persistently high inflation rate,  growing government debt, an oversized -and most of the time, very ineffective- government, a weak and poorly regulated financial system, and a non-competitive economy which progressively lost relevance in the international market. Short expansive processes followed by crisis and devaluation of the currency, the so-called stop-and-go cycles deteriorated the living condition of the low income population.

The goal of this project is to study the factors that led Argentina to its current situation. We will explore the political economy during the period that goes from the end of the 19th century to the beginning of the 21st century. The study will address both economic and political aspects that are, more so than in any other country, intimately intertwined in the case of Argentina.

2.Specific Aims

We will answer the following research questions:

1-Economic structure:

1.1.Why was Argentina not able to diversify the economy towards an advanced industrial base?

2-      Welfare State:

2.1. Which were the historical approaches taken towards the welfare state in Argentina: France, Italy or the Nordic countries?

2.2.The failure of the welfare state why and how?

2.3.Why was the welfare state in Argentina involved in the production of goods and services beyond the distributional aspects? Was ideology involved in such choices? Why did the society disregard the inefficiencies in the Argentinean welfare state?

2.4.The vicious circle: Did the Welfare State create social classes that depended on Gov’t monies. Did the Gov’t crowd-out private initiative?

2.5. Which was the role of labor unions in the evolution of the welfare state? Was the labor union a winner in the income pie? Did it have consequences on labor market and the competitiveness of the economy?

3-      Political Story:

3.1. How was Peronism born? Which was the underlying ideology? Which was the Peronist role in the welfare state? Is there any parallel with other populist movements in Latin America?

4-      Economic growth and redistribution:

4.1. Are income growth and income redistribution incompatible or does some variant of populism have the chance to succeed?

3. Background and Motivation

Throughout its history, Argentina’s economy varied due to successive changes and crises. Though Argentina was always referred to as an agricultural country its economics history could be characterized by the permanent search for alternatives to the agricultural-based economy; the conflicts between the federal and the state’s government regarding the distribution of economic resources; and the close ties between economic models and political ideology.

In general terms, the economic history of Argentina of the 20th century could be divided into 3 periods. 1880 to 1930 known as the agriculture exporter period; 1930 to 1976 or the import-substitution period; and 1976 to 2010 usually referred as the openness phase.

1880 to 1930: the conquest of the desert facilitated the integration of large extensions of land to productive activities, land that previously belonged to almost exterminated indigenous population. The economic model was characterized by the ranch system that produced commodities such as grains and meat. The country established strong commercial ties to England, a country that was the main lender and investor in Argentina, especially in the railroad industry. Rosario and Buenos Aires were the ports. Most industrial products were imported, but the substitution began in some light industries, especially in areas such as refrigeration, food, beverages, construction materials, soap, and some textiles. The economic expansion caused a labor shortage which was filled with the large influx of European immigrants, mostly Spanish and Italian who concentrated in the coastal areas. This economic model had ups and downs, generally linked to the terms of trade. In the 1920 the first labor unions were born, influenced by anarchist ideologies that came with the European immigrants, but these movements were often suppressed in a bloody fashion. During the First World War there was a period of industry growth favored to the decrease in imports from Europe due to the War. In 1929 the produced the stock market crash on Wall Street led to a large economic downturn in the country. The economic crisis caused the overthrow of democratic government that had failed to respond to the crises and raised the need for a new economic model.

Import substitution period: Due to the economic crisis of 1929 to 1930 the country closed the main exports and sources of foreign exchange. A complete change in focus was taken: now the objective was the domestic market and the state switch from a passive to a more active role in the economy, intervening in currency and financial markets, setting higher tariffs and quotas on imports, and acting as a driver of demand by the expansion on public spending. Many State Owned Enterprises (SOEs) were established in this period as a legal form for the new activities of the State, the production of good and services. With all those stimuli the private sector channeled the effort to the production of industrial goods and away from the agricultural investment.

The victory of Peronism in the 1946 elections implied a boon for industrialization and the integration of the lower classes to consumption thanks to the redistributive policy of the government of Peron. However, the economic model chosen had a weakness: the lack of heavy industries as well as sufficient energy resources. The characteristic of this period were cycles of growth with increasing purchasing power of wages, greater demand for imported inputs by the industry expansion that, later on, led to exchange rate adjustment which caused inflation and a fall in the real wage. When a new equilibrium was reached a new loop of expansion-crisis (or a “stop and go” cycle) started over again.

In this period the main purveyor of capital was the United States. The new industries concentrated in the coastal areas (Buenos Aires and Rosario) thus the state intervened actively to develop other areas such as Cordoba by giving incentives to the automotive and armed forces-related industries. The labor union activity was absorbed in this period by Peronism, when most collective bargaining agreements that persist –with minimum change- to these days were signed. After the coup d’Etat of 1955 the Peronism was banned as a political movement and some intents to open up the economy were tried. These years were of intense political conflict as Peronism tried to return to government, which finally happened in 1973. This was an era marked by political violence with the unfavorable external situation (mainly due to the oil crisis) that led in 1976 to a new coup d’état.

Period of economic opening: With the arrival of the military government there was a change in the economic paradigm. The economy opened to imports. The state increasingly relied on foreign borrowing to finance its activities, and fixed exchange rate management which facilitated speculative capital inflows which instead of investing in productive activities searched only searched for the high rate of returns in the financial sector. This caused a decline in the industry employment and lowered the purchasing power of wages. The economy concentrated in export commodities and the country was exposed to the ups and downs of international financial markets that caused periodic crises and devaluations (and high inflation).

The return of democracy in 1983 did not change dramatically the scenario and later on, in 1989 a Peronist President (Carlos Menem) decided to turn to a more liberal approach by selling SOEs enterprises and introduce some flexibility in the labor-firm relationship with new “forms” of contracts modeled after the Spanish experience. In 1998 it began a series of balance of payment crises that led to financial crisis, recession and unemployment. This ended in 2001 with the worst crisis in the history of the country: deposits were frozen and the financial systems and the economy collapsed. As the popular discontent erupted the government of radical President De la Rua was overthrown and the country declared default on its external debt few days later.

Looking back at the economic performance of Argentina in the 20th century leaves a sensation of frustration. There were times of growth as well as crisis and recoveries, though in none of the cases the growth was sustained for more than 5 years. There were many mistakes, bad decisions and adverse external circumstances. The country scarcely grew and is lagging well behind the advanced countries. Which were the causes? Whether the country will be able to recover and retake the path of growth is some of the questions we will explore in this project.