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Maria Soledad Figueroa

International Political Economy

Professor Gregory FullerAmerican University, November 2013

Nobel Prize laureate Paul Samuelson once said four economic systemsexists capitalism, communism, Japan without resources but everything

works, and Argentina with resources and nothing works.1

In the early 1900 Argentina was the 11th largest exporting nation in the world and one of the

richest countries anywhere in terms of reserves and per capita imports. By 1909 Argentinas income was

50 % higher than Italy and 5 times higher than its neighbor Brazil. By 1914 was one of the most

urbanized countries of the world with half of the population living in cities, and during the 20s decade

industries installed and grew quickly letting the country to be worlds leader of frozen meat exporters

and one the of the biggest sellers of agriculture goods (maize, oats, linseed, wheat and flour) by 1930. 2

For academics of the moment, Argentina was thought to be one of the great powers of the new

world. However, todays situation of the country shows that this is far to be the reality; instead Brazil

who was an average colonial country developed in one big influential power of todays world, and

definitely the hegemon of the region. Therefore, this paper will enquire and investigate when these two

countries separate their road in economic development, and what happened to Argentina? To sort these

questions out the paper will be divided into two parts; the first one will be focused on Argentinian and

Brazilian economic policies during the 20 th century; the second part will look into what happened to

1Argentina: What went wrong? Collin M. Maclachlan

220

thCentury Argentina in the Hoover Institution Archives. William Ratliff and Luis Fernando Calvio

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Argentina or what aspects of their internal society could have been responsible of the different periods

of economic stalemate that evolved into the Brazilian overtake as regional economic power.

Economic Policies of Argentina and Brazil during the 20th

century

Before 1930 both countries had similar economic policies, they were primary good exporters,

and had slight industrialization. But the main difference between them was that on the one hand

Argentina had a tight relation with Britain playing as a competitor of the US; while on the contrary

Brazil traded with the US producing complementary goods to the market.

Thanks to particular atmosphere in each country 1930 will mark the first moment where both

countries take different directions, although the two suffered irruptions of their democratic governments.

After Wall Street crash, Brazil with its new imposed government which particularly had the support of

the industrial class, change its course in that direction. Oppositely, Argentina who had encouraged

industrial development during the 20s returned to its previous era of agriculture elites on the

government, and so did its economic policies.

Later on after World War II ended both countries had suffered a tremendous deterioration of the

terms of trade, what pursue governments to support and finance3industrialization in their countries. In

Brazil, this actually worked (although it had its flaws) and in the first 6 years the participation of

industries in GDP was 4 points higher than in 1947. On the other hand, in Argentina there was a lot of

antagonism between Peronisim and anti-Peronisim, this permanent political confrontation plus the

populism implemented by the former government generated a stop in all economic activities especially

3The money would come from the exports of agriculture goods. In Argentina this worked by the IAPI (Instituto Argentino de

Promocion de Intercambio -Argentine Institute of Promotion of Trade)a governmental agencywho would centralize all

exports. Therefore all land owners would sell their goods to the agency and the government was the only actual exporter.

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in the industrial sector which in the same period of time decreased by 3 points in terms of participation

in GDP.4

This tendency in Argentina continued till mid 60s, and any substantial growth was unthinkable

due to political confrontation which involved political doing and undoing from one party to the other. In

opposite direction, this was the big jump of Brazilians. Kubitschek (president from 1956 to 1961)

implemented 5 year plans promoting car and energy industries, redirecting the industrial sector to non-

traditional products which would lower the dependency of Brazil on imported goods. During military

governments in Latin America there was a general economic slow-down in all countries. In Argentina

orthodox liberals took the government and deregulate everything, eliminating all incentives to industrial

development which cost the economy a lot of growth and even the GDP shrunk by the end of this period

about 0.9. Brazil on the other hand, went through the economic miracle (1968-1973) where they enjoyed

exceptional growth due to previous reforms on the financial system and tributary system. 5

Thanks to all this changes Brazil was much more prepared to receive the impacts of the

petroleum crisis, and even though it decelerated their industrial development it could still manage it, and

it was almost independent in terms of petroleum imports thanks to its national oil extractions. Whereas

Argentina was suffering an economic standoff produced by the dirty war. Therefore, the 1973 crisis

created and enormous debt and hyperinflation by 1983. When democracy returned in both countries all

they wanted to do is to contain inflation with heterodox economic policies but although they had some

partial success there where a lot of significant flaws and inflation kept going on and on. Both countries

entered into an intense financial crisis that can be explain in three dimensions: first, the need to get

resources; second, enormous international debt produced by the petroleum embargo and an unfavorable

4Anlisis comparado del desarrollo de Argentina y Brasil en el siglo XX: algunas observaciones preliminares. Ramn Garca

Fernndez and Ricardo Beltramino.5Garca Fernndez and Ricardo Beltramino.

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global context; and finally there was no international credibility in the new governments, so rolling the

debts became incredibly expensive.

The 90s was a decade marked by the Washington Consensus and neoliberal policies. Under this

paradigm, both countries resorted to privatization of the vast number of inefficient public businesses and

subsidies to the industrial private sector which was consider artificial aiming to reduce the state

intervention. At the same time they both opened their markets and fueled the entrance of foreign capital.

This period was an era of economic growth for the south cone, producing an overvaluation of the

currency and a significant commercial deficit which meant the need of permanent flow of capital

coming in.

In Brazil this was implemented by the Real Plan which aimed economic stability. The plan

consisted of 3 phases, the first was the reduction of the state, the second one they wanted to fixed the

dollar to the URV6(Unit of Real Value) which was supposed to adjust wages, tariffs and prices, and the

third phase implemented on July of 1994 was to convert this URV into actual money, the Real who

replaces the Cruzeiro Real (2750 Cruzeiros / 1 Real). These changes were supposed to be finished with a

fixed exchange rate as Argentina did but they could never achieve it. In the meantime, they promoted

industry development and modernization in the administration of companies.

At the same time in Argentina during Menemism era, after three economic ministers in 19

months, Cavallo a new and good image of the countrys economic thinkers took the job. Soon after he

took office decided that the only way to recover trust in argentine currency was to arrange a fix currency

rate and so in 1991 he established with Congress approval the Convertibility Law which meant that 1

peso equaled 1 dollar, and restricted the money supply to the level of hard-currency reserves in the

6URV served as non-monetary currency during this period.

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country. The idea was that the society get used to the new currency and trusted it. It worked, for most of

the part, dollars and pesos came and went in the formal economy every day, and it was a moment of

prosperity for most of Argentinians. The problem began all again when they run out reserves and

maintaining the peg of the peso to the dollar was so expensive that it became unsustainable in early

2000. Ever since, even though the crisis was overtaken and it presented a good real GDP growth during

the last 10 years, the economic and political instability plus, the permanent inflation and devaluation

made sure that Argentina stood in the place of developing without taking a new major role in the

international panel.

What or Who is to blame?

There are many ideas of could have happened to Argentina in the last hundred years, to change

so dramatically in their direction. Exploring the arguments you can find from political and institutional

to race and colonial legacy came opinions, although some of them (frequently the political) are the most

repeated.

Starting with race and historical reasons, we have to back in time. In the early 1850s before

Argentina had a National Constitution, Juan Bautista Alberdi a jurist and politician from Argentina

living in exile in Chile wrote the book Bases y puntos de partida para la organizacin poltica de la

Repblica de Argentina (Bases and starting points for the political organization of the Argentine

Republic). Among the recommendations he had for the upcoming Constitution of Argentina, he firmly

suggested that the new nation needed of upcoming migration from countries with practical skills, people

from Britain and the United States, or Germany for that reason he designs and defends a set of norms so

it would attract migrants. The interesting and important part for this, is that as many people of the

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moment he believed that; first, the gauchos originally from Argentina were vandals and those few that

were not, they were extremely lazy so those people could not lead the country to a good place; secondly,

Argentina was a place of what he calls the pen and paper, what meant that it is a country of humanistic

brains, history, sociology, law, politics, those were the topics that everyone developed, and what

everybody wanted, so there was no industry, no infrastructure nothing coming from within. The bad part

of this is that instead of the English, the Germans or even northern Italian, Spanish and southern Italians

came, who did not have the skills needed.

Another argument coming from the colonial legacy is the land-based organization that came

from this time. Power was distributed in an oligarch elite of caudillos, which in modern eras this will

return in forms of authoritarian populism. This network of power created around the concentration of

land did not stimulate individual development and anyone who tried to bring industries to the country

was discouraged by several very powerful landowners. Against this line of thoughts, it is said that there

is no one only way to success; The United States developed with Jefferson democratic model, but you

cant say the same for Germany or the countries of south Asia.

Appealing to history, it can be said that there was a global asymmetry that did not favor the

agricultural Argentina. The country relied its internal growth mostly to external variables, what made it

highly vulnerable. In the period between post World War I and the Wall Street clash, Argentina enjoyed

of a trinity of trade with the US and the United Kingdom, but after 1929 the United States of America

went back to the extreme isolationism that it was known for, the British closed their trade to their own

colonies and Argentina in a moment of internal political crisis, and inflation begged the English to

continue their economic relations and they sign one of the worst commercial treaties in the economic

history of Argentina, the Roca-Runciman Treaty. That is why it is said that the extensive dependency

on the British market was the cause of Argentine future fall.

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Now, going to more political reasons. One not that big of an argument, states that there were only

erroneous economic policies since 1930 due to a bad diagnose of the problem which led only to bad

solutions. The statement of this argument is that Argentina did not know how to adapt to the new

modern world. There was an industrial economy not fully integrated. There was not development of

basic industries like energy of capital goods that could cut the dependency on international supply. After

that, during Peron multiple governments even though there was overinvestment, these were deficient,

also there was a lot of subsiding complex industries that would have not sustained if it wasnt for the

governments help, also most of the services were national or party national companies. It was an era of

big interventionism and redistribution of wealth.

Peronisim era was a period of fascist ideas that turned the country into a corporatist country.

There was an increasing number of powerful organized interest groups dedicated to rent seeking. Peron

itself was a part of the military group with strong nationalist ideas; and once in power seed anti-

Americanism in the society, and nationalized great amounts of the economy and implemented various

tariff barriers. At the same time he was widely supported by the society thanks to his charisma and the

sense of paternalism he inflicted.

The next 32 years of Argentine history kept going worse and worse. First, while Peron was in

exhile, there was a big confrontation between those who supported Peron and those who did not, leaving

the economy to the chaos, devaluation and recession. After 18 years of peronism prohibition he returned

to govern again with his new wife Isabel7(who was previously a nightclub dancer in Panama) but after

only one year he died, and Isabel was in charge although she was not prepared for the job. By 1975 the

economy was in the peak of inflation, public spending and international debt due to the petroleum

7Also known as Isabelita or Maria Estela de Peron, she was his third wife. Different from Evita, his second wife who was

also involved in his politics in the 40s.

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embargo. So she resigned and called for elections, but before that happened a new military coup

happened in March of 1976. The next years of Argentine was all about political confrontation and dirty

war, trying to eliminate communism from then country. Therefore, even the different economic

ministers tried to do something with the country the truth is that nothing would work, this period was a

period of economic stalemate and increasing inflation.

The following years were no bright for Argentine economy, Alfonsin (former president from

1983 till 1989) left a chaos behind him. He tried to stop inflation but left the office with an inflation of 5

digits. Menem his successor defined himself as Peron with sideburns changed his politics and

implemented neoliberal economic policies to try to save the country from inflation. Together with

Cavallo (economic minister) implemented a new set of economic policies that stopped inflation and

pegged the peso to the dollar. However, the reserves run out in 2001 and since then some would argue

that we have an economy of penury, based on an increasing unemployment, a bigger poverty, and once

again chronic inflation.

Conclusions

Ezequiel Martinez Estrada, a famous thinker and writer of Argentina once said that the problem

was the elites failure to consider Argentina as a whole. This is a big truth, if you look at a map of

Argentina and you analyze the demographic distribution, you can see a clear that the 75% of the

population live in less than a 10% of the territory. This happen because of many reasons and one of the

is the continuous discontent of the rural areas with the cities; in Argentina you can drive for hours

without seeing not one person in some areas, some even are inaccessible without a car. How can be

implemented good integral economic policies when some people is isolated in remotes parts of the

country, or even worse that their only solution is to move from there to the big center. There is a terrible

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communication problem within the country that its only to blame to the dominant elites that understand

Argentina to the rich agriculture epicenter.

The other big problem to understand the situation of Argentina is that 1930 clash was a hit that

they could never recover. Argentine people were not prepared to the industrial tendency that was ruling

the new world. The economic change came with the speed of technology, leaving viable politics

dangerously behind. Even though they implemented ISI during some years, it was in a second level

because of the fear of jeopardize the export market. Brazil on the other hand when they started with

industrialization they engaged with the progress building infrastructure and getting basic capital goods

that cut their dependency on the international market. This will make the difference in the long term

during the fragile world of the 20thcentury.

Many things could be said about why Argentina got lost in the way to be the great economic

power that is was supposed to be, and instead how Brazil took its place. But the truth is that

internationally was not a good place for anybody, and internally because of the race, or the social

organization or even the foreign ideologies that were coming and incredibly big amount of bad decisions

were made led to years of confrontations. Divide and rule said Cesar. Argentina was ruled by anarchy

the second half of the century and this could not lead nowhere but to economic chaos. In the meantime

Brazil was building a State, industrialization took over the society and more important infrastructure of

the modern era.

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