Wednesday, October 7, 2009

Argentina Then and Now

Buenos Aires immediately strikes the visitor as a city of great wealth and opulence whose fortunes have faded badly. The beautiful architecture of the old buildings resemble Paris at its best, the the crumbling infrastructure serves as a constant reminder of the economic reality of modern Argentina.

And Argentina was once quite wealthy in world terms and Buenos Aires was a cosmopolitan world capital. So what happened? Why has Argentina floundered while a place like the United States has prospered. Both were vast fertile countries with ample natural resources, both had large immigrant populations who came looking for work and prosperity. But the 2oth century has seen a massive divergence in the economic fortunes of the two countries.

In The Economix blog at The New York Times, Ed Glaeser givies his take:

What Happened to Argentina?

A century ago, there were only seven countries in the world that were more prosperous than Argentina (Belgium, Switzerland, Britain and four former English colonies including the United States), according to Angus Maddison’s historic incomes database. In 1909, per capita income in Argentina was 50 percent higher than in Italy, 180 percent higher than Japan, and almost five times higher than in neighboring Brazil. Over the course of the 20th century, Argentina’s relative standing in world incomes fell sharply. By 2000, Argentina’s income was less than half that of Italy or Japan.

The chart below shows the relationship between income in 1909 and income in 2000 in 1990 dollars, and Argentina is the extreme outlier. The gap between 2000 income and predicted economic success, based on 1909 income, is larger for Argentina than for any other country.

Why did that once-wealthy nation do so poorly?

In its pre-World War I heyday, Argentina thrived as a trading giant shipping beef and grain abroad. After World War II, formerly poor countries including Japan, Korea and Italy followed an export-led model to wealth. A combination of external shocks (two world wars and the Great Depression) and protectionism caused Argentina to turn inward.

Peronism was not only protectionist, but it also favored large state enterprises and significant regulation of the economy. Neither strategy has been particularly good for growth. Argentina’s inbred banking system has historically had trouble weathering severe shocks. Decades of political instability have made property rights insecure and investment unattractive.

Argentina was cursed with bad policies that bear much of the blame for the country’s problems, but why was Argentina’s public sector so problematic?

Those bad policies weren’t just bad luck. To understand Argentina’s political problems during the 20th century, we must look back to the Belle Epoque, and try to understand why, despite its wealth, Argentina was different from other wealthy countries, like the United States.

In a recent paper, Felipe Campante and I have taken an urban perspective on Argentine exceptionalism and compared Buenos Aires and Chicago in 1900.

In many ways, the two cities are strikingly similar. Chicago grew great in the 19th century as a conduit for the agricultural wealth of the American hinterland. In 1816, it cost as much to move goods 32 miles over land as to ship across the Atlantic. The enormous costs of shipping by land caused America’s population to perch on the Eastern Seaboard, dependent on an Atlantic lifeline. Over the 1800s, a great transportation network of canals and rails makes America’s rich farmland accessible. Cities like Chicago grew as the nodes of that network.

Chicago’s fortune was made by two canals, the Erie Canal and the Illinois and Michigan Canal, which turned Chicago into the linchpin on a great watery arc that runs from New York to New Orleans. Railroads complemented the waterways and enabled the rich farmland of Iowa to ships its corn, in porcine form, to eastern markets via Chicago. Chicago’s most famous 19th century industry was its stockyards, which thrived because of refrigerated rail cars that shipped slaughtered beef back east. Clothing employed even more Chicagoans, who were making garments for thousands of rural customers, supplied by Marshall Field, Montgomery Ward and Sears, Roebuck.

The story of Buenos Aires is broadly similar. Like Chicago, the city was surrounded by a vast, fertile hinterland. Buenos Aires grew as a center for transporting agricultural products east. The frigorificos, refrigerated ships, greatly increased its ability to ship beef. Clothing was also Buenos Aires’s largest industry.

But there were also major dissimilarities between the two places.

Chicago was substantially wealthier, even a century ago. Capital per worker was more than twice higher in the Windy City. Chicago was a seedbed of technological innovations, including the skyscraper, the zipper and the electric washing machine. Buenos Aires’s entrepreneurs, such as the industrious Torcuato DiTella, often succeeded by importing American technologies, as DiTella did with gas pumps and refrigerators.

The greater levels of technological innovation in Chicago probably reflected the higher levels of education in the United States. Throughout the 19th century, Chicago was almost completely literate, because the rural migrants who came to the city had been well educated in the common schools that dotted America’s farmland. By contrast, more than a fifth of Buenos Aires’s population was illiterate until 1900, reflecting the far lower levels of education in rural Argentina.

As the next figure shows, no variable from 1900 better explains success in 2000 than investment in education.

Schooling is measured by the share of the relevant populations that was enrolled in primary, secondary or tertiary schooling. Argentina may have been rich, but it was not that well-educated. In 2000, Argentina was doing about as well as would be expected based on its education levels in 1900. Long-run national success is built on human capital, both because of the link between schooling and technology and because of the link between education and well-functioning democracy.

I will return to this link, and to the puzzle of Argentine exceptionalism, in a future post.

This is why I say often these days that as a development economist the first advice we always give to developing countries is to invest in the human capital of the population and the first step is education, so it is striking to see the level of disinvestment in education, and especially higher education that is happening currently.

And as an aside, the institution that hosted the conference I just returned from was Universidad Torcuato Di Tella, which, despite its name, is brand new.

Anyway, I wonder where the US is headed in the 21st century and if in the 22nd, economists will write about the US and China and how divergent their economic growth paths became.

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