Maria Soledad Figueroa International Political Economy Professor Gregory Fuller American University, November 2013

Nobel Prize laureate Paul Samuelson once said four economic systems exists 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 20th century; the second part will look into what happened to

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Argentina: What went wrong? Collin M. Maclachlan th 20 Century 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 finance3 industrialization 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
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The 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 agency who 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 nontraditional 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
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Anlisis comparado del desarrollo de Argentina y Brasil en el siglo XX: algunas observaciones preliminares. Ramn Garca Fernndez and Ricardo Beltramino. 5 Garca 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

URV 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 antiAmericanism 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

Also 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 20th century. 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. Bibliography AGUINIS, Marcos. El pais necesita cambiar de partitura. Published by La Nacion, November, 2013. [Available on: http://www.lanacion.com.ar/1638310-el-pais-necesita-cambiar-de-partitura ]

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BEINSTEIN, Jorge. Argentina: la instalacin de la economa de penuria.Editorial GRAFF-Buenos Aires, 2002. BELTRAMINO, Ricardo and GARCA FERNNDEZ, Ramn. Anlisis comparado del desarrollo de Argentina y Brasil en el siglo XX: algunas observaciones preliminares. Publisher Unknown. CALVIO, Luis Fernando and RATLIFF, William. 20TH Century Argentina in the Hoover Institution Archive. Published by the Hoover Institution Archive. CHAFUEN, Alejandro. Don't Cry For Me, America: Comparing Argentina And The United States. Published by Forbes Magazine, May 2013. [Available on: http://www.forbes.com/sites/alejandrochafuen/2013/05/15/dont-cry-for-me-america-comparingargentina-and-the-united-states/] GLAESER, Edward L. Education Last Century, and Economic Growth Today. Published by the New York Times, October 2009. [Available on: http://economix.blogs.nytimes.com/2009/10/20/educationlast-century-and-economic-growth-today/] GLAESER, Edward L. What happened to Argentina?. Published by the New York Times, October 2009. [Available on: http://economix.blogs.nytimes.com/2009/10/06/what-happened-to-argentina/?_r=2] MACLACHLAN, Colin M. Argentina: what went wrong. Greenwood Publishing Group, 2006. MGUEZ, Eduardo. El fracaso argentino". Interpretando la evolucin econmica en el" corto siglo XX. Desarrollo econmico, 2005, p. 483-514. PINHEIRO, Armando Castelar, et al. Brazilian economic growth, 1900-2000: lessons and policy implications. Inter-American Development Bank, 2004. STANISLAW, Joseph and YERGIN, Daniel. The Paradox of Argentina. Publishing the Commanding Heights, 2002 ed., pp. 240-244.

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