Tuesday, January 25, 2011

The Argentinean and Soviet Collapse 2

To continue or discussion, we will turn to Argentina
Argentina gained its independence in 1824, but the country was not fully united until 1852 when the separate Buenos Aires rejoined the rest of the country.

With the reentry of Buenos Aires, the main source of revenue for the country, Argentina entered a new era of growth. As settlement of the pampas expanded, wool and cereal production replaced the old colonial commodities of hides and tallow as the nation’s principal exports.10 Good economic conditions and labor shortages led to an influx of immigrant Europeans, especially from Italy and Spain. The population grew from two million in 1869 to eight million in 1914…
Improved technology, especially the invention of refrigerated shipping in the 1870s, made Argentina a leading exporter of beef, although other commodities like corn and wheat continued to be exported on a large scale. The late 19th and early 20th centuries were the belle époque of Argentina, with the economy growing at an annual rate of 3.7 percent… Rick Lovering, An Interpretation of Argentine Economic and Political History:  Dutch Disease on the Pampas, 2007 (pdf).
Thus on paper, Argentina’s per capita income(1985 $) of $2,377 in 1913, compare well Chile’s $1,685 and Brazil’s $700, and is reasonably within the reach of  Canada’s $3,560 and the United States $4,854.  But it was all very lopsided with much of it being fueled by an export boom, along with the usual echo boom of  consumption as commodity moneys flood into the economy. 
However, the onset of World War 1, the later Great Depression, and then the trade restriction of World War 2 all led to a very choppy period for Argentina’s exports.  With very little economic basis outside of commodity export and consumption based on the trade surplus, the economy would go through continual booms and crashes.
Different leaders had various responses to inflation and to the dominance of the agricultural industry in Argentina. Gen. Juan Perón’s attempt to establish successful manufacturing industries backfired as he subsidized sectors in which Argentina did not have a comparative advantage and therefore could not compete internationally without government support. The subsidies, continued by various governments to gain support from working class unions, discouraged the movement of labor into industries associated with the commodities boom, further exacerbating the effects of Dutch Disease…
Alternating military and civilian governments proved unwilling, for reasons of nationalism, radicalism, or personal benefit, to dismantle the large state-owned apparatus of industries. Instead of long term solutions, political and military governments throughout the ‘60s, ‘70s, and ‘80s, concerned with maintaining power, tried to achieve, in the short-run, the objectives of price stability and deficit-reduction.  Rather than lower export taxes and increase agricultural exports, successive governments saw export taxes on “the products of the pampas…to be an excellent way of dealing with those two problems in the short run.  From Lovering.
Without ever having produced a balanced economy, Argentina continued to swing up and down with the vagaries of the commodities and money markets.  Commodities took off in the 1970s, and government spending increased with the revenue influx.  When the boom ended in the 1970s, rather than cut back on government spending they began to borrow money to make up the difference.
There are many twists and turns, but the Argentinean devaluation of their currency in January of 2002, and then the renegotiation of the foreign debt to 35 cents on the dollar are a direct result of an economy over-expanding during a commodity booms.  The use of borrowed money (as also seen in the case of the Soviet Union) to fund ongoing operating costs eventually becomes unsustainable.
Lessons to the United States

  • Borrowing money to fund consumption is unsustainable.

  • The efficiencies of comparative advantage import/export between countries will lead to greater wealth much of the time.  However, these systems are not sustainable.  They are vulnerable to both internal and external forces.  After a long run up of success, world trade broke down three times in 30 years in the first part of the 20th century (1914, 1932, 1939).  The current world trade system started after World War 2, but got went into overtime when the former Soviet Bloc and China joined.

  • The production efficiency allowed by modern technology, where a very few number of people can produce a very large output, has some characteristics in common with the classic commodity producing economy.   It is very likely they will crowd out development in the less leveraged portions of the economy.  The net result is not clear.

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