Alan M. Taylor
Harvard University


For the economic historian, the development economist, and even the international economist, the case of Argentine economic failure constitutes one of most puzzling case-studies of national development, and though all can agree on the extent of Argentine economic decline, few can agree on its nature and causes. In this paper, I will try make some sense of the long-run deterioration of Argentinaユs economic position over the last century. A central element in the analysis will be the fluctuating conditions in capital markets, which, for a country such as Argentina, so scarce in capital and so dependent on external finance, have played a crucial r冤e in the countryユs economic fortunes.

I will first try to make clear the timing of the decline and its magnitude, a topic in itself subject to much contentious debate. This discussion will shed light on the various phases of Argentine economic growth, and clarify the often opposing viewpoints found in the historical literature. Secondly, I will examine, on a case-by-case basis, each of the three principal phases in Argentine economic growth from 1900 to the 1950s. Here, the discussion focuses on conditions in the Argentine capital market, on international linkages and capital inflows, on domestic constraints and national saving, and on government intervention and distortionムall of these being influences that played a significant r冤e in at least one the different phases. Thirdly, I will draw together the observations on the timing and nature of Argentine economic decline and the changing capital market conditions over the course of half a century to conclude with a few insights into the underlying causes of Argentine retardation within the capital market and, thus, a partial explanation for Argentine economic failure after the Belle パoque.


The record of Argentine growth since the turn of the century has been one of a brief unprecedented boom followed by successive retardation. Yet the precise timing of the decline remains subject to a variety of interpretations, each of which may be used to support or undermine any number of social, political and historical analyses. As the long-run trends in GDP per capita indicate, Argentina falls further and further behind the OECD group after 1913. A continued retardation is evident after 1913, and this retardation even accelerates after 1929, and again after 1950. Furthermore, whereas the other settler economies staged a recovery from their poor inter-war performance, Argentina managed no such feat.

The story of Argentine economic decline, then, is one of continued secular retardation after 1913 relative to the club of developed countries in the OECDムthe very club which Argentina aspired to join. Viewed in this light, the monotonic divergence of Argentine and OECD per capita income levels after 1913 suggests that the early retardation hypothesis must be taken seriously by scholars of Argentine economic history, and that the view that the Belle パoque lasted until 1929 is very questionable. Nonetheless, after 1929, and even more so after 1950, the relative retardation of the Argentine economy is seen to become even more severe, suggesting a deterioration in the pace economic development that gets even more pronounced over time.

The Belle パoque: Global Integration and Growth

Factor accumulation is central to our understanding of Argentine growth in this period, and is relatively easy to interpret in a simple economy of little diversity, focussed on primary export and with little industrial capacity. Like all settler economies, Argentinaユs initial conditions were characterized by dual scarcity of labor and capital relative to an abundant third factor, resources. Given the plentiful influx of the mobile factors, in the shape of foreign capital and large immigrations, not to mention high rates of fertility and natural increase among the native population, Argentina accumulated scarce capital and labor very rapidly, and so was able to intensify the application of capital and labor in the exploitation of her resources.

Foreign capital inflows were needed simply because the domestic saving capacity was so low: Argentina saved around 5% of her national income in the years 1900ミ13, compared to figures of around 15% in Canada and Australia. I have shown that this depressed saving capacity can in large part be identified with a much higher dependency rate burden in Argentina. The Argentine dependency rate (the share of children age 0ミ14 in the population) was around 36% in 1913, compared with 31% in Australia, 31% in England & Wales, 33% in Canada, 32% in the United States. The roughly four-percentage-point-gap in dependency rates could account for about one-half of the gap between Australian and Argentine savings rates.1

These calculations aside, the qualitative point to be made here is one of external dependance arising from a high dependency rate. Argentina was a victim of path-dependence, in that her growth strategy had encouraged rapid population expansion via mass immigration, and high rates of natural increase amongst the native born. To sustain capital-deepening, low Argentine savings rates made the countryユs continued economic growth a matter of external dependence on foreign capital, a precarious situation which may explain the onset of Argentine retardation at the time of the First World War.

The Early Inter-war Years: Enforced Autarky and Retardation

The great boom of the Belle パoque was brought to end by the severe dislocations in international economic relations generated by the First World War and its aftermath. The immediate effect of the war in international markets was a sudden decline in foreign trade volumes and a equally pronounced downturn in the terms-of-trade, not least due to the virtual shutdown of shipping in the Atlantic. The Argentine terms-of-trade fell about 50% from 1910ミ11 to 1920ミ21.

The disruption was also evident in international factor markets. Perhaps the most dramatic change was in the operation of international capital markets. With the outbreak of hostilities, Britain suspended the operation of the Gold Standard, and it was ten years before she was able to reinstate it. This brought to a close the age of high imperialism, when British capital, acting from its power base in the London capital markets, was able to spread its influence all around the globe. The hegemonic power off Britain in capital markets was effectively broken by enormous war debts, and the new メbankers to the worldモ were the Americans, emerging into net creditor status as they stepped in to bale out the British.

Yet the Americans were less than enthusiastic about assuming this new responsibility as an international center for finance, and the rise of New York as a truly international capital market was somewhat slow and reluctant. This was certainly the case from the Argentine perspective, and accounts of contemporary observers confirm the difficulties faced by Argentina in trying to raise capital abroad after the onset of war, and adjusting to the shift from an established link with experienced lenders in London to forging new borrowing relationships with the bankers in New York. Before the mid-twenties practically no new capital emerges from war-torn Europe, and such loans as are forthcoming in New York take long negotiation, are limited in quantity, of short-term duration, and at much higher interest rates than formerly prevailed.

Could low saving capacity be to blame for low rates of Argentine accumulation, capital deepening and economic growth? If so, what was the origin of this low savings capacity? I have sought to show elsewhere that Argentine savings were low in the early part of this century, at least when compared with savings rates in Australia and Canada, the other two settler economies so frequently used as a benchmark in comparative assessments of Argentine performance. Whereas both Australia and Canada saved around 15% of GDP between 1900 and 1929, Argentina could only save around 5% (Table 3). In terms of underlying causes a good deal of this relatively low saving capacity, perhaps half the gap, could be ascribed to higher dependency rates in Argentina.

The first phase of Argentine retardation can therefore to be viewed as a form of crisis which confronts an isolated small, open economy previously dependent on external finance for its development. In this case, the virtual disappearance of foreign capital inflows from Britain in 1913, and the slow emergence of New York as a major player in world finance, left Argentina to finance her own capital accumulation. This was a task for which she was less than adequately prepared given a historical record of low rates of domestic saving, a corollary of a demographic legacy of rapid population growth, large immigrations and attendant high dependency rates. Consequently, rates of accumulation and capital deepening slowed dramatically in the late teens and early twenties.

Peronism and the Legacy of the Great Depression:

Reactive Policy, Codification and Distortions

Just as the Depression years brought economic disruption to Argentina, they also brought political turmoil. The military regimes which followed the overthrow of the Radical government of Hip様ito Yrigoyen in 1930 determined to take Argentina on a different course, politically and economically. The new order they established placed nationalistic and military interests in the forefront of political discussion, where they were to stay, even to this day. In economic terms, widespread intervention transformed the economy from outward orientation as a small, open economy, to an infant industrializer, seeking to escape its dependence on the vicissitudes of world trade. The striving for self-sufficiency was, arguably, a modest success for Argentina and most other Latin American countries. Their economies suffered relatively mild shocks during the Depression, and it is often thought that this escape from the grave hardships seen in North America and Europe was precisely because of the de-linking policies adopted.

World War Two followed on the heels of the Depression and served only to heighten the isolationist position of Argentina in the world economy. Trade patterns, already shrunk by Depression, practically disappeared with the return of shipping blockades. The return to autarky, however, suited the new Argentine economic strategy perfectly: more scope for inward orientation, protection from overseas competition and the chance to advance industrial development yet further. By the late forties, Argentina had seen almost twenty years of inward-looking development, and by this stage there stood in place a vast array of tariffs, protections and other elements of government intervention in the economy.

Interventions in the capital market, in particular, pose a grave threat to efficient accumulation and continued economic growth. Measures such a rationing of foreign exchange tend to have deleterious effects in this regard. High priorities, and hence plentiful foreign exchange, are typically allocated to imported consumption goods and imported raw materialsムthe former because bread-and-circuses must be maintained to assure popular support, the latter because without vital inputs production in many industries would have to cease. In this way dynamic efficiency is sacrificed to perpetuate an inefficient static allocation: the rationing of the remaining foreign exchange, used for imported capital goods, leads to a disadvantageous exchange rate for goods in these categories. Thus, a rise in the relative price of capital goods is a common corollary of a multiple exchange-rate scheme. The impact of such a price distortion is entirely predictable: costlier machinery and equipment prompts a decline in capital formation in these goods.

Quantitative evidence confirms this pattern of price twists in the capital market in Argentina during the 1950s. The relative price distortions were so bad, in fact, that they seriously bias ECLAユs estimates of capital formation earlier in the twentieth century by a factor of two or three, a point noted by D誕z-Alejandro. In fact, compared to the relative price structure prevailing in 1935, when the reactive policies had yet to take firm hold of the Argentine economy, the 1950s price structure shows severe distortions. Econometric analysis of investment patterns and relative price structures across countries suggests that Argentinaユs peculiar position as a weak investor could be explained by these distortions.

Policy choices more than anything else contributed to Argentinaユs distorted price structure: as I show using counterfactual analysis, with a fully open economy, and no import restrictions, the relative price of capital goods in Argentina would have more than halved, and the rate of capital formation more than doubled. Such changes might have erased about half of Argentinaユs retardation relative to the OECD. With this quantitative supportムalbeit derived on the back of an envelope or twoムthe argument that Argentinaユs retreat into import-substitution policies cost her dearly in terms of slow growth remains as cogent as ever.


The study of economic retardation in Latin America in general, and Argentina in particular, has long exercised the analytic skills of economic historians and development economists, the great puzzle being to discover why a region so abundant in resource wealth was unable to achieve the rapid growth and expansion which late nineteenth-century development had promised. The debate has often been couched in qualitative rather than quantitative terms, but at each level the conventional wisdom has proven somewhat malleable over the last forty years.

This modest work seeks to follow in the D誕z-Alejandro tradition, and, indeed, builds on his very substantial foundation in the study of Argentine economic history. As well as expanding on his thesis of an economy hobbled by intervention and inward-looking strategies after the Great Depression, I have sought to show how Argentina was in trouble even from the First World War, and that retardation has been with Argentina for the greater part of this century. The story I offer is not a mono-causal explanation of Argentine failure. However, it seeks to identify one central element: capital accumulation.

To recapitulate, it only need be recalled how very differently the capital market in Argentina fared from 1900 to the 1970s, whereby a flourishing capital market generously supplied by external finance gave way to two successive regimes, each with crippling obstacles to capital accumulation: the first constrained by low savings capacity in an environment of disintegrating world capital markets; the second constrained by expensive machinery in an environment of policy intervention.

In the first phase (1900ミ13), the flourishing success of the Argentine Belle パoque was in no small part due to the spectacular rates of capital formation, which, in turn, were a facet of the massive capital export from Britain between 1900 and 1913. The foreign savings were needed simply because Argentina could not save sufficient income herself to finance growth at such a pace. This was external dependence to a very high degree, and continued growth was predicated on a continued capacity to borrow from abroad. Such conditions were not to persist beyond 1913, when the disruption of the First World War first destroyed the Gold Standard, and then left Argentinaユs principal source of finance, the British, bankrupted by war debts and unable to export much more than a trickle of capital after the war.

In the second phase (1913 to the 1930s), low domestic savings rates effectively constrained the attainable rate of capital accumulation: recall that all net real additions to the capital stock were domestically financed during this period. One of the key determinants of this low saving capacity was a high dependency rate. Counterfactual analysis shows how large a demographic burden Argentina had to bear: if instead she had had Australian or Canadian dependency rates in 1913, her retardation would have be reduced to one third the actual level, not much different from the world average. In actual fact, Argentina was one of the worst performers in the transition to the inter-war economy, having a degree of retardation that placed her, with the other settler economies, in the group of worst outliers in a large international sample.

In the third phase (the 1930s to the 1950s) savings constraints abated whilst Argentina retreated into inward-looking import-substitution policy with all the tariff, quota, exchange rate and other distortions that entailed. As a consequence the relative price of key imported capital goods, especially equipment and machinery, rose sharply enough to deter capital accumulation. Investment was depressed now not so much by a quantity constraint (dependency burdens on the savings-supply side) as by a price twist (restrictions on the capital-goods-supply side).

I conclude, therefore, that much of Argentinaユs precipitous decline in relative economic performance can be attributed to deleterious conditions for capital accumulation after 1913. The Belle パoque was underwritten by British finance, but when this tap was turned off the Argentines could not sustain the heady pace of development seen at the turn of the century: firstly, because they couldnユt save enough; secondly, because, even when they could, price disincentives channeled funds away from, rather than toward, those investment activities which are the precursor of growth.

1 Norway is included in sub-sample estimation but could not be included in full sample estimates because of a gap in the data arising out of missing observations for World War II.

1 Taylor, A. M. 1992. External Dependence, Demographic Burdens and Argentine Economic Decline after the Belle パoque. Journal of Economic History 52 (December).