Argentine Great Depression: 1975-1990

In the period 1974-1990 Argentina´s income per capita fell by 25%. A Solow growth decomposition shows that at most one quarter of this fall can be explained by a reduction in the capital/labor ratio. A study of labor reallocation shows that between 1973 and 1993 employment expanded the most in sectors with a declining output per worker and this reallocation of labor explains 44% of the fall in output per worker. We argue that policies that increase the cost of capital may explain these observations. Consider a two sector model where capital/labor substitution is low in the tradable goods sector and high in the non-traded goods one. If the steady state capital stocks falls, labor .ows from the tradable goods sector to the non-traded goods one, leading to a reduction in income per capita, productivity and wages. Thus, policies that increase the cost of capital have a direct e.ect on output through the fall in the capital stock and an indirect e.ect that operates through a reallocation of labor induced by the fall in investment.