Argentina in the 20th Century: An Account of Long-Awaited Growth

The study of Argentine long-term growth makes clear the importance of economic policy in a country's development. An emerging country at the end of the 19th century, Argentina possessed exceptional comparative advantages that were efficiently developed for more than 50 years, but the economic policies adopted after World War II contributed to the end of the Argentine "miracle". These often extreme policies largely accounted for the slowdown of growth, because they contributed to the relatively low levels of saving and investment, prevented efficient allocation of the factors of production and limited private productivity. Though Argentina was practically an empty country in the 19th century, measured and targeted state economic intervention beginning in the second half of the century enabled it to take advantage of a favourable international environment. Argentina exported agricultural products, was well integrated in the world economy and received major flows of goods, labour, capital and technology. Liberal policies towards immigration and foreign capital provided the country with the resources that were indispensable for its development. At the same time, a model education policy made it possible to integrate the foreign immigrants and contributed to social cohesion. Above all, this policy clearly explains the growth in Argentine productivity. It increased labour skills and mobility, as well as contributing to the widespread and rapid diffusion of the foreign technology that was being developed at the same time. Similarly, the liberal trade policy made a noteworthy contribution to early 20th-century growth. The competitiveness of foreign trade promoted the efficiency of Argentine enterprises on the domestic and world markets, and exports had a locomotive effect on the whole economy. Moreover, openness to trade and foreign capital provided the country with the benefits of foreign technology. These factors and the improvement of the population's educational level also undoubtedly explain the effective acquisition of foreign technological progress. Nonetheless, the economy remained very sensitive to the uncertainties of the international environment. Government involvement in the infrastructure, though small compared to that of the private sector, was no less fundamental. The state developed the least profitable activities of no interest to private investors, and modern and competitive public investment introduced appreciable competition into some sectors. In addition, state participation in the economy was then minor, public finance was strictly managed and the tax structure fairly satisfactory. Finally, the vigorous development of the financial sector permitted the mobilisation of sizeable savings and their efficient allocation to investment, while the country also benefited from a stable political system and relatively democratic institutions for the time. Growth, investment and the increase in productivity were all high. The 1930s depression weakened the Argentine outward oriented growth model. The policies of the time should be understood in terms of allowing the country to adapt to the changing world situation, but the rather inappropriate policies embraced after World War II contributed to the end of the dynamic of Argentine growth. Extensive state intervention in the economy, an extremely inward-oriented development when world demand was in full expansion, a highly controlled financial policy and political instability in particular contributed to a decrease of investment and generated distortions and inefficiencies harmful to growth. The overzealous import-substitution policy led to a less efficient allocation of the factors of production and surely less investment in improving productivity. This, together with the decline in foreign direct investment, also explains the increased lag in the diffusion of foreign technology. The low productivity of Argentine industry at that time also explains the country's weakness on the world market and deprived the export sector of economies of scale. At the same time, the export sector's weaknesses contributed to macroeconomic instability and inflation. Finally, the balance-of-payments crises, which led to austerity policies, political instability and measures unfavourable to foreign capital also explain the low levels of private investment. Increasing state involvement in the production of goods and services, despite inadequate management of public enterprises, and the crowding out of capital expenditure by current expenditure affected the allocation of the factors of production. Furthermore, these weaknesses and the lack of resources resulting from a latent or actual crisis in public finance led to deterioration and lack of infrastructure, a handicap to private investment and productivity. Moreover, the chronic and increasing public deficits fuelled inflation that was already high due to an overly protective trade policy, balance-of-payments crises and generalised indexation. At the same time, the tax structure became less equitable and less efficient, producing distortions that were also harmful to growth. Finally, the government's financial and monetary policy became just as extreme. Real interest rates remained highly negative for long periods through the late 1970s, which partly explains the low saving and the financial disintermediation. Financial intermediation also suffered the consequences of ever more political and economic instability and the limited confidence in a financial system that had shown its fragility during three major financial crises. Such a lack of financial depth compromised growth by preventing a suitable allocation of savings to investment. Entire sectors of the economy suffered from credit rationing, especially small and medium-sized enterprises. Moreover, financial resources were mainly allocated to state enterprises and the import-substitution industries, often having low productivity. Furthermore, the financial sector's efficiency was affected for years by an oversized banking network. Besides having negative effects on growth, these policies did not permit the full development of the country's resources. This was true of agriculture and education which had been sources of the Argentine model's success at the beginning of this century, and whose potential later remained under exploited. Thus there was considerable waste of resources during this period. Furthermore, these policies turned out to be unsustainable and contributed to the unprecedented crisis of the 1970s and 1980s. However, this crisis paved the way for an agreement on fundamental economic reforms by drawing lessons from past "mistakes" and the failures of various attempts at liberalisation. This recognition, the magnitude of the crisis and two traumatic hyper inflationist episodes in 1989 and 1990 contributed to the emergence of a political and social consensus on the reforms needed. Financial and trade liberalisation, which began in unfavourable conditions in the late 1970s, were completed in the early 1990s. Besides the currency convertibility law, massive and rapid disinvestment by the state was essential to a successful outcome of the reforms and recovery of growth. This contributed to a renewal of confidence and economic stabilization by making possible fiscal consolidation and reduction of the public debt. These conditions were indispensable to the success of financial and trade liberalisation. At present, Argentina seems to have recovered monetary stability and some growth, and while it is too soon to make a complete assessment, this study shows that the reforms were leading to a durable improvement of the economy's efficiency. The privatisations have led to the resumption of investment in the newly privatised enterprises which in turn has relieved some production bottlenecks due to inadequate infrastructure, as well as improving the quality of the services. These improvements partly explain the recovery of investment in the rest of the economy and new productivity growth. Productivity has also benefited from the technological advances incorporated in the new capital equipment and from the improved allocation of the factors of production after rationalisation and more efficient management of the newly privatised enterprises. Trade liberalisation accelerated the industrial restructuring which began in the late 1970s, and is also partly responsible for the rise in productivity in this brief period. Moreover, Argentina's integration into Mercosur radically shifted the overall structure of Argentine exports towards petroleum products and industrial raw materials. By incorporating more technological progress and human capital than in the past, these activities also lead to growth with higher productivity. Moreover, a larger volume of exports has led to significant increases in economies of scale. Finally, financial and trade liberalisation, the privatisations, and the return of foreign investment should make it possible to achieve a better diffusion of foreign technology and greater development of human capital. Some problems remain, however, and their impact on growth should not be ignored. Adjustment of public expenditure has inflicted much pain. The infrastructure was in very poor condition and its improvement will take time. Social expenditure (health, pensions, housing) was severely affected, and this has aggravated the inequalities that had already been exacerbated by 20 years of economic crisis. The educational system has been neglected and the deterioration in the quality of teaching is jeopardising long-term growth. Higher education and to a lesser extent, secondary education, are still insufficiently suited to the "production" needs of a modern economy, and a reform of higher education would be useful. Furthermore, adjustment of the provinces is difficult, but all the more necessary because the 1978 and 1991 decentralisation laws have made them major actors in the country's development. The financial system is still fragile, as was demonstrated by the financial crisis that occurred in the spring of 1995. Similarly, insufficient financial intermediation is still an important constraint in the country's growth. Finally, high unemployment could, if it continues, have a negative effect on the social fabric, as well as on the political consensus for reform. To conclude, Argentina's economy by the latter half of the 1990s had been so revitalised that it echoed the promise it had inspired at the beginning of the century. The case of Argentina thus provides an abundance of lessons for developing and newly emerging countries, for it compares a successful takeoff which clearly shows the role played by economic policy (even though related to a specific historical context) and the experience of decline, also partly due to unadequate economic policies.