The Tortoise, The Hare, and The Cubs: Argentina’s stalled development in comparative context

At the turn of the XX century, Argentina was one of the richest countries in the world. Argentina’s GDP per capita at the end of the Belle Époque (1870-1913) was 80 percent of the United States, 180 percent higher than Chile’s, and 238 percent higher than Italy. Argentina’s wealth was a major pull factor for European and Latin American immigrants. By 1914, 80 percent of Argentina’s population were either first, second, or third generation immigrants (Rock 1987, 166). Argentina also absorbed the world’s goods, with its per capita imports being the highest outside of the Netherlands and Belgium (Ibid, 172). As Table One shows, Argentina would sustain this relative prosperity until the Second World War.

Argentina’s relative per capita income

Year

Chile

Italy

United States

1913

180

238

80

1929

176

272

71

1950

194

231

56

1974

220

95

54

1998

144

52

37

2011

102

57

40

2016

87

53

35

Source: Author’s calculations, Maddison Project Database (MPD) 2018

Why did Argentina fail to keep up with other advanced economies? Western Europe and the United States experienced sustained growth in the post-war era. This period (1945-1975) became known as the Les Trente Glorieuses, or the ’30 glorious years.’ Argentina’s growth over that period was respectable, but it saw more economic and political crises than other rich countries. Argentina experienced a major recession in the early 1950s; in 1959, the country experienced another recession and the first of many IMF programs; in 1975, the country experienced a major economic shock with the Rodrigazo; and in 1976, the last coup d’etat occurred leading to another major negative shock to the economy.

As Table One shows, the substantial decline in Argentina’s economy occurred after 1974. Why? Argentina’s crisis prone economy became even more susceptible to crisis with economic globalization. In 1981-82 the country was negatively affected by the Mexican debt crisis. The hangover from the debt of the dictatorship led to hyperinflation by 1989. During the 1990s, Argentina opened its economy even more to global capital markets. Argentina’s vulnerabilities—foreign denominated debt and an overvalued exchange rate—became unsustainable after 1998. The financial cum political crisis of 2001 led to a near collapse of the state and ended neoliberal reform. The last crisis occurred after 2011, when the CFK administration imposed a cepo cambiario—exchange rate controls. Unlike the other crises, this was a slow motion crisis. Nevertheless, growth in Argentina between 2011-2016 was almost nil.

This very brief overview of Argentina’s crisis prone economy explains a great deal why Argentina lost its position as one of the richest countries in the world. A recent IMF working paper by Valerie Cerra and Sweta C. Saxena titled, “Booms, Crises, and Recoveries: A New Paradigm of the Business Cycle and Its Policy Implications” makes an important contribution to development studies. First, they empirically reject the notion that recessions do not present a permanent negative shock to the economy; rather, crises lead to permanently poorer societies. As they put it succinctly, “the ‘business cycle’ is not a cycle” (2017, 7). Second, they argue: “Absolute divergence during 1960-2000 derives instead from the fact that poor countries recessions have been much deeper than those of rich countries” and that “adverse shocks and crises leading to recessions obstructed poor countries’ growth, rather than difference in their gaps to steady state” (Ibid, 22). Although Argentina is not a poor country, it is a developing country were many of the same dynamics identified by Cerra and Saxena are operative. The key to catching up is to maintain growth and avoid recessions. As they argue, “economic expansions in poor countries are stronger than in rich countries, which in the absence of negative shocks could over time lead to absolute convergence in the levels of output per capita” (Ibid, 23). As Figure 12 from their paper shows, recessions in developing countries are particularly damaging to development.

Screen Shot 2018-04-01 at 19.50.33
Source: Cerra and Saxena 2017, 24

The challenge for Argentina is to create a proper policy mix to avoid falling into a deep crisis. The country should not be aiming for fast growth. Fast growth in a country with low savings rates often leads to crisis. In countries with low savings rates, the optimal strategy is steady growth. Chile and Uruguay are examples of countries that have sustained and gradual economic growth. I term these economies ‘cub’ economies. Unlike the East Asian tiger economies, they cannot depend on their own savings to supercharge growth. A cub economy is one where the overriding goal is to avoid crisis with macro-prudential policies. Will Argentina be able to stabilize growth? The Macri administration must tackle the fiscal deficit to bring down inflation and  stop crowding out investment. Though it is not advisable to shock the system with austerity, nor is it is advisable to pretend that deficits don’t matter.

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