On Argentina's secular decline: why The Economist is wrong

The Economist had a few weeks ago an issue on Argentina (here; subscription required), which I wanted to address, but had no time before today. The argument implies that the current Argentine woes (discussed here before) are part of a pattern which is associated to the long decline in income per capita from the late 19th century and early 20th century until now.

The Economist suggests that:

"In 1914 Argentina stood out as the country of the future. Its economy had grown faster than America’s over the previous four decades. Its GDP per head was higher than Germany’s, France’s or Italy’s. It boasted wonderfully fertile agricultural land, a sunny climate, a new democracy (universal male suffrage was introduced in 1912), an educated population and the world’s most erotic dance. Immigrants tangoed in from everywhere. For the young and ambitious, the choice between Argentina and California was a hard one."

In a sense that's true. According to Maddison's data in 1913 Argentina per capita GDP (in 1990s dollars) was 3,797 while France and Germany had respectively 3,485 and 3,648 (data available here). However, the reasons for the decline in the 20th century are based on simplistic notions, typical of the so-called New Institutionalism of North and more recently Acemoglu and Robinson (for a critique go here). In their words:

"Building institutions is a dull, slow business. Argentine leaders prefer the quick fix—of charismatic leaders, miracle tariffs and currency pegs, rather than, say, a thorough reform of the country’s schools."

They blame corruption and populism (mind you currency pegs were actually typical of liberal governments, both the ones that adopted the Gold Standard, an international institution, back when the economy was fine according to The Economist, and during the 1990s during the Neoliberal experiment, that The Economist fully supported; but I'm glad that now they admit that currency pegs might be sometimes dangerous. The Economist is not for the Gold Standard anymore, it seems. Any day now they will abandon their beliefs on free trade).

On a different note they also suggest that commodity production might be a problematic path to development (yes, The Economist again has a positive take on Prebisch-Singer; see before here). They say:

"Commodities, Argentina’s great strength in 1914, became a curse. A century ago the country was an early adopter of new technology—refrigeration of meat exports was the killer app of its day—but it never tried to add value to its food (even today, its cooking is based on taking the world’s best meat and burning it). The Peróns built a closed economy that protected its inefficient industries; Chile’s generals opened up in the 1970s and pulled ahead. Argentina’s protectionism has undermined Mercosur, the local trade pact. Ms Fernández’s government does not just impose tariffs on imports; it taxes farm exports."

In other words, Pinochet was great (Chile is developed it seems; again according to Maddison's data the Chilean GDP per capita in 1990 dollars in 2008 was 13,185 while the Argentine was 10,995. Not much of a difference; back in 1913 Chile's was 2,968 and like Argentina's high for Latin America's standards. In other words, while France and Germany had in 2008 22,223 and 20,801 respectively in 2008, both Chile and Argentina had fallen behind), and redistribution towards the poor (read Perón and the Kirchners) is bad. That's why the lesson is "that good government matters."

Don't get me wrong, the State matters, and a developmental state matters a lot. However, when and how you connect with global markets also matters. While France and Germany might have had a slightly smaller GDP per capita in 1913 than Argentina, they were quite ahead in the second Industrial Revolution, with firms that were leaders in steel production, in the chemical and pharmaceutical sectors, and with a developed network of firms and universities producing first rate scientists and technological innovations. Meanwhile, Argentina (but also Chile) produced mostly commodities (and only adopted imported technology) and the vast majority of their exports were concentrated in one or two commodities exported to a limited number of countries. Hence, only someone with the limited understanding of The Economist would have thought that Argentina and Chile were in 1913 as developed as France and Germany.

The lesson is more complex than The Economist's 'the state matters' (interestingly enough if markets did matter, which is their traditional motto, specialization in commodities due to comparative advantage should pose no problems). The state matters, but so does your colonial past (being an exploitation colony rather than a settlement one is a problem), what you export matters, and the access to international capital markets also matters (France and Germany got a Marshall Plan to reconstruct, since the US was afraid of Uncle Joe, but in Argentina we weren't that lucky). The parable of Argentina is a rich one, from which many should learn, but The Economist still has no clue.

PS: Don't get me wrong, building schools is nice, and Argentina actually produced three Nobel prizes in sciences (the last one in the 1980s), but schools alone do NOT produce development.

PS': Also, why is Messi a symbol of Argentina's secular decline?