Edward Glaeser (courtesy Stephen Dodson and Ben Casnocha) asks what went wrong with 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)… 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.
It is one of the great mysteries of human development.
Glaeser focuses his analysis on a comparison of Chicago and Buenos Aires. At first, the pairing seems compelling: both were transit hubs for farm goods coming from a productive rural hinterland to be processed for export. Both rose to prominence with a few revolutions in transportation that arrived during the back half of the nineteenth century – refrigerated railcars and steam-powered vessels – and both were magnets for immigration.
Glaeser’s research goes on to examine some subtle differences between the two cities’ settings – the Great Plains were better suited for corn and led to feedlot animals, and a corresponding focus on mechanization, while the pampas was lush and thinly populated and a perfect host for vast herds of cattle whose tending is a much lower value-added activity.
It is true, but I tend to wonder if it doesn’t miss the elephant in the room: only Chicago had the cosmic fortune to be located in the United States. The US as a whole went on such a tear from 1900-2000 that the rising tide lifted all ships. Even American cities that were cast aside by the maturing economy – Buffalo, Baltimore, lately Detroit – were able to reach some sort of equilibrium by simply shedding population into the larger growth of the nation. Buenos Aires was never going to have that opportunity; at best, it would be Copenhagen or Zurich, the prosperous hub of a small prosperous country. This goal turned out to be awfully difficult.
Perhaps the better approach, at least to understand Buenos Aires or Argentina, is to begin with a more similar country. Australia, for example.
In 1900, Australia had just under 3.8mm people; Argentina 4.7mm. Both were resource-exporting nations far from any of their end markets. Both have enormous, virtually empty landmasses and large portions of the population clustered in huge cities. Glaeser makes the good point in his full paper that nations with a capital in the largest city are particularly vulnerable to urban riots that topple the government (someone should warn Britain and Japan), and Argentines have made full use of this geographic feature. But no Australian central government could survive the loss of Sydney, whether the capital was located in Melbourne or Canberra, so I’m not sure it’s a fair distinction.
Glaeser hones in on the role of education in separating Chicago from Buenos Aires:
Australia – or Victoria, as education statistics do not seem to have been combined at the time – had a higher school enrollment percentage in 1900 than any district except the US and Ontario (little unclear whether the US statistic is the US as a whole or the white population of the US). Argentina was far lower. Education drives success, QED, right?
The problem is that it’s hard to understand if education is a cause or an effect. You could as well say that a prosperous society can afford to have its youth amuse itself reading Shakespeare while a poor nation needs all hands on deck. It is difficult to find an example of a nation that has very high levels of broadly-distributed education but remains poor; China, India, and the USSR at various times managed to educate an elite to a high standard, but in the context of nations that were on the whole deprived of education. Not surprisingly, these elite few either ended up running the country of their birth or ran west.
There are, however, examples of rich countries that have atrocious education levels.
Egypt recently made its way into the global newsroom by banning the Gigmo virginity simulator, a nifty piece of Chinese engineering that leaks a “blood-like” substance on a bride’s wedding night (speaking of education and ingenuity, it’s tough to avoid being impressed with the Chinese folks who both invented it and found a way to make it, distribute it, and sell it at retail in Egypt for $29). Egypt is not a rich nation, but its fellow Arab League member Saudi Arabia is, and they recently sentenced a man to 1,000 lashes and five years in prison for boasting about his sex life on television.
It should not be terribly surprising to note that more than 13% of the Saudi population is illiterate (fifty countries have rates below 2%). Perhaps more damaging, the ones who do make it through the education system are not terribly intelligent. As Tom Friedman points out:
According to the 2003 Arab Human Development Report, between 1980 and 1999 the nine leading Arab economies registered 370 patents (in the U.S.) for new inventions…During that same 20-year period, South Korea alone registered 16,328 patents for inventions. You don’t run into a lot of South Koreans who want to be martyrs.
Australia could have sat back and extracted the wealth of its island continent. It did not have the hacienda history to motivate large landholdings, but the country was so vast and dry that massive ranches (stations) became the norm all the same. Mineral extraction remains a massive business. Australians were not too decent to avoid virtually exterminating the indigenous population:
Both Australia and Argentina spent most of the years from World War II to present fearful of being overrun. Australia was nearly invaded by Japan and was afraid of cultural and economic conquest by the United States. Argentina was afraid of Brazil and, of course, the United States. In both countries, this led to extensive state intervention in the economy and something of a focus on national champions – the giant mining company, the giant telecom company, the flag airline, etc.
The difference in all of this was that Australia was able to maintain a stable democracy and consistent levels of education and investment. Argentina lurched from coup to coup, from huge social welfare programs and shock devaluations to help the poor and exporters to sudden overvaluations and tariffs to help industries and allow the rich to get their wealth to Miami and the Cote d’Azur.
I suspect that there are many Nash equilibria in development. Had there been a coup during the Roosevelt Administration – the unlikely Smedley Butler story, for example – we would have been far more likely to have one in 1968. Once the trend begins, it’s tough to break. And once a couple of generations got used to having everything turned upside down twice in a working career, the smart ones would start emigrating, which leaves a lack of talent at home, which exacerbates the oscillations of government. Argentina may simply have had the bad luck of never quite making it long enough between coups to get rid of the meme.
Beyond the simple accident argument, there is something to be said for old Max Weber. It is clearly not the case that Protestantism is necessary for prosperity – Japan and France are plenty rich, as are Jews throughout the West, and rich northern Italy is just as Catholic as poor southern Italy. A hundred years ago the Scandinavian nations were poor and Protestant, which either proves or disproves Weber’s point, depending on how determined you believe that success to have been.
It is, however, the case that cultures value things differently – these differences are indeed how we distinguish cultures – and the interplay between risk-taking, investment, and current enjoyment is powerful. Argentina did not value invention and entrepreneurship; its rich were too busy building land empires. Australia – perhaps for no better reason than that so many of its people came from Britain, the cradle of the Industrial Revolution, at a time when industrialization was still a choice – took a different path.
Perhaps the real challenge here is understanding what defines a rich country in the first place. Argentina in 1900 was rich insofar as the total GDP divided by the total population gave a high value. But its income inequality was so great that there was no economy to put down roots. To go back to the Gulf oil states: few locals do anything for the money. The oil is drilled by Western field services companies. It goes through pipes of Western steel designed by Western engineers to either sit in the hold of Western ships or be further refined in giant facilities designed and managed by Westerners. Sure, Saudi Aramco and Sabic are run by Saudis, and sure, the total value of the exported products is high and the population modest (although growing wildly), so the per capita GDP seems high. But very, very few of the people who comprise the denominator do anything to produce the numerator. And until that changes, what chance does the society have to grow in a positive direction?
Maybe the real disconnect is that Argentina was never that rich in productive capacity. It had things that were temporarily scarce, but it did not have the human capital to grow along with the world economy. There was no multiple on that cash flow.
It makes me wonder a bit about Krugman’s repeated argument that the reason we need a second stimulus is that we are far below the potential output of our economy; that is, there is a gap between the GDP we could produce and the GDP we are producing. We are measuring the GDP we “could” produce by extrapolating from recent achievements; take 2007 GDP and roll it forward to see where we “should” be.
What if that 2007 number was something of a mirage, though? During the housing bubble, many people were involved in taking $300,000 of land and materials and turning it into $600,000 of house. This went into the books as $600,000 of output, split variously between the contractor, lumber yard, countertop guy, etc. But the only reason the house was nominally worth $600,000 was that we had a temporary loss of sanity wherein borrowing costs were tiny…and everyone was employed building someone else’s house.
Now it turns out that what really happened was that we were taking $300,000 of land and materials and turning it into $200,000 of house. There isn’t much business in it, so we have stopped doing it, which means a lot of idle contractors and lumber yards and countertop guys. The GDP figures show no output for these people in 2009, and Krugman looks at this and sees a ($600,000) change and wants the government to pick up that loss of output.
But the output valuation was a mistake all along. 2007 should have been lower, and it really should have been zero, because if those guys had known what they were doing they wouldn’t have built at all. Whatever we do, we need to avoid getting back to paying $600,000 for $250,000 of value, which is exactly what will happen if the government simply tries to put everyone back to work doing what he was last doing – essentially, if the government tries to recreate 2007.
Instead, we need to find a higher value-added activity. That might also take government investment – I have no problem with the government spending money, wouldn’t make a lot of sense to have taxes and no spending – but it needs to be investment that increases our ability to adapt. More education, less kicking money over to the UAW.
No one promised Argentina would be the last country to decline…
This post jumps around too many topics. 1) Think you miss a key point regarding Argentinia vs Australia: the former never had a sizeable middle class, and found itself captive to the entrenched interests of a small, landowning minority, eg:
http://deadcatsbouncing.blogspot.com/2009/10/fs.html
2) The state intervention you call out-this has a lot more to do with Australia’s socialist past than a ‘fear of being overrun by the United States’. In any case, the US was focused on Europe and containng the USSR after 1945-not on maximising US cultural ‘exports’.
3) ‘National champions’: Australia is a market consisting of oligopolies in most industries, eg 2 airlines, 2 grocery retailers, 4 banks, 2 P&C insurers, 2 wealth/life insurers. Suggest this is a function of a small population and local market more than a penchant for ‘national champions’. btw, QANTAS, which used to be state owned, kept its nose out of politics and policy; only recently under the departed kleptocrat Geoff Dixon, did it conspire with the Federal govt. to confine the Syd-LA route (along with London, represents 60% of profits) to two carriers-United and itself.
National champions: suggest you have much bigger targets in the USA: eg, Citi, JPMorganChase, GS, BoA, MorganStanley.
All good points. So tell me, why did Australia build a middle class and why did Argentina not build one? I have trouble assuming a middle class as an initial condition, like a natural resource or a particular neighbor. Australia was initially populated with convicts sentenced to transportation against their will, then farmers, then minerals prospectors. It has always had large landholdings, if for no better reason than the difficulty achieving a high yield/acre in much of the country. It was hardly an obvious choice to industrialize – for large parts of its history it took months merely to communicate with trading partners.
Somehow a middle class developed in Australia and asserted a series of political rights that allowed for both stable government and stable property rights. The same thing happened in the other three locations where British colonists destroyed the indigenous population: Canada, New Zealand, and the US. Indeed, of the four I would suggest that the US has had by far the least stable run; we are the only one that fought a civil war.
Meanwhile, not a single Spanish colony managed to build a middle class, despite several having excellent natural resources (Chile, Argentina) and few having any wars with external foes.
What did the Spanish do differently? Well, in Central America they did not wipe out the indigenous population, so the control falls apart; Britain failed spectacularly from Rhodesia to India. But at the tip of South America there were few people to block the Spanish advance, and the sheer numbers of immigrants soon enough overwhelmed the locals. So why didn’t a middle class emerge? Why was the ancien regime able to hold power until the country rotted, where other countries were able to adjust more positively? Why didn’t technology and industrialization create an merchant class that claimed its rights?
Glaeser suggests education. I say sure, and perhaps the decision to prioritize education comes from some other cultural value we cannot pin down. I’d like to hear your thoughts.
As for the Australian economy matters, I would hardly suggest the US ever focused on colonizing Australia. We don’t often think about other countries; that’s what makes it so tough to be our ally. Just ask Canada. It’s hard to sleep next to a hippo, even a well-intentioned one. At least since WWII – since Australia turned from orbit around Britain to orbit around the US – I think there has been a significant effort to intervene to maintain a modicum of distinctness and distance.
BHP, Telstra, QANTAS, Commbank…the national champions in each sector have both had massive levels of influence and long considered some sort of public interest mandate. To take the QANTAS example you cite, the government protects them on the Kangaroo and Pacific routes and QANTAS operates a far more dense domestic network than a self-interested near-monopoly might otherwise.
The recent emergence of a similar phenomenon in the US is the product of eight years of a Bush DoJ that refused to spell the word “a-n-t-i-t-r-u-s-t”. I fear for what this lapse will do to us; if the universal banks are any guide, we shall see the same concentration as Australia without even the fig leaf of kindness toward host and customers.
1)As far as Argentina is concerned, a big difference relative to say, the US or Australia: when ppl left Europe in the 19thC for the US, they were moving for a better life, or fleeing oppression or starvation. When the English came all the way to Australia, they knew it was for good (though a sop by the English govt at the time was to promise one return ship fare back to the old sod).
Argentina had a huge influx of Italians around the turn of the century-who were only interested in making a quick fortune and then returning to Europe. Not the kind of immigration one would select to build ‘social capital’: all the blocking and tackling around deferring gratification, fitting in to a new culture, cultivating the family, valuing education and investing in the fortunes of the next generation.
2) Australia IS ‘colonised’ by the US, at least in terms of the degree of penetration by the entertainment-industrial complex, and the influence of Wall Street and its values upon our capital markets over the last two decades (when we began to tack away from our British bearings). But this is counterbalanced by the citizenry’s innate skepticism, dating from the country’s origins, eg to authority, big business, etc
3) Aus corporates: Telstra (originally govt owned monopoly; ‘check’), Commonwealth Bank (originally govt owned dominant player; ‘check’), BHP (incorporated 1885; negative), QANTAS (originally govt owned monopoly; ‘check’)
btw, agree completely with your argument and model against Krugman’s pitch for a second stimulus
Great post with an extraordinary documentary on Argentina.
I guess that it was bound to happen here, sooner or later. However, I doubt that American’s of any stripe will allow themselves to be raped in such a fashion for so long.
It’s not by accident or coincidence that the 2nd Amendment follows the 1st….
Best regards,
Econolicious
I’m back.
One other reason I could suggest for Chicago’s success is not only its fortuity in being located in the US, but also it’s geographic location within. Rail traffic from the Pacific Northwest heading back east runs into the Great Lakes. Chicago is the pinch point. We’re a rail hub for a good reason.
[...] had an interesting exchange in the comments of my Australia/Argentina post with CrocodileChuck on the question of Australia was able to build a middle class and Argentina was not. Chuck [...]