American Diplomacy
Commentary and Analysis

October 2001

Highlight map


Support American Diplomacy RSS Mailing-list Subscription Email American Diplomacy Facebook

This essay consists of the introduction and conclusion of a longer study by the author. Here he briefly compares the experience of his own Argentina with that of Australia in reaching economic development. Sr. Baldinelli concludes with a prescription for further advances by the Argentine economy. —Ed.

There have always been comparisons drawn between the economies of Argentina and Australia because of the many important characteristics they share. Both were.colonized by Europeans. had very small native populations, were geographically isolated from the industrialized countries. enjoyed vast territories with abundant natural resources and a wide range of climates, and had much arable land in proportion to their populations.

From the beginning of the twentieth century, both Australia and Argentina enjoyed a high standard of living because of the high level of natural resources in relation to their populations. But at the end of the century, Australia was an industrialized country with a GDP per capita of about US$20,000, while Argentina's was less than US$8,000, Here I examine the causes of such a variance in development.

In the past, those who benefited most from the natural resources were the landowners and also, in the case of Australia, the owners of mineral deposits. After World War II, both countries adopted policies to ensure that more people benefited from these resources, The method chosen by both countries was import-substitutlng industrialization sparked by high tariffs.

However, there was a difference in the way they went about it. The tariff protection in Argentina was much higher than in Australia, and went on longer. Actually, by 1973, Australia had begun the process of reducing tariffs down to present levels, while in Argentina, that process was only begun in the '90s. And even today, the level of protection in Argentina is higher than Australia had in 1973. But in Argentina, the distribution of income from exports of agriculture and livestock did not stop with the creation of protected industries paying high wages and with public service enterprises having excessive numbers of employees. In addition, the government put taxes on exports, which resulted in more transfers of income to the population via two routes: lowering domestic prices for food and fibers, and lowering the tax burden the general Population. Such a policy was never adopted in Australia .

From 1946 to I989, Argentina experienced an intense and growing inflationary process. This brought about, among other bad effects, a reduction in the savings rate, combined with capital flight. In Australia, a moderate level of inflation, together with institutional stability, ensured that savings remained in the country.

In the decade of the '9Os, Argentina experienced a series of profound economic transformations designed to stop the inflation, end the export tariffs on agricultural products, and reduce excessive import tariffs. Nevertheless, several important problems have not been solved, especially the fiscal deficit, the persistence of which keeps interest rates far too high. The high cost of money is hindering the development of economic activities which would allow economic growth, lower unemployment, and export expansion. Meanwhile, the fixed exchange rate is impeding the process of tariff reduction and will quite probably be an obstacle to arriving at free trade agreements with developed countries.

At the beginning of the decade of the '9Os, long-range political decisions were taken which permitted the correction of some of the causes of Argentina’s low economic growth. Now, the necessary changes are being made to deal with the remaining problems, especially the fiscal deficit. It is to be hoped that these changes will be carried out without delay and not put off until conditions become more difficult.

At the beginning of the twentieth century, as noted, Australia and Argentina had similar natural resources and enjoyed similar standards of living. A century later, Australia
in contrast to Argentinais firmly ensconced among the richer nations of the world. For some, the difference in economic development in similar circumstances is the result of cultural differences. Some say the basic reason is that one country was colonized by the English and the other by Spaniards, while others seek the cause in religious differences.

It is true that Spain fell behind the rest of Europe socially, politically and economically because of 150 years of wars and coups d'etat. But that is in the past, and in recent years, Spain has undergone a rapid and positive transformation. Its market has been opened up, especially since joining the European Union in 1986. In 1975, there were seven million automobiles in Spain, compared to twenty million today. Although unemployment has been high since 1994, it is coming down. The Spanish economy is creating new jobs faster than the United States. Unemployment, which was at twenty-four percent in 1994, is down to thirteen percent in 2O01 in spite of privatization of government enterprises. The long term interest rate dropped from fifteen percent in 1990 to six percent at present, while the budget deficit, which was at seven percent of GDP in 1995, is at zero now.

To sum up, the GOP per capita in Spain is still about half that of the world's richest countries, but with annual rates of increase above three percentthe highest among the countries of the EU. The differences among these countries are decreasing. This explains the cessation of the current of immigration which previously flowed to Argentina.

Concerning the religious factor, the best known theory is that capitalism was the child of the Protestant work ethic. This was propounded at the beginning of the twentieth century by the German sociologist, Max Weber. The Church of Rome has always mistrusted traders and businessmen, and never hesitated to call usury a sin. But this attitude was modified over time as entrepreneurs became of increasing importance to society, finally becoming an integral part of the contemporary world. The Protestants, rather than recommending poverty and spiritual contemplation, preached the virtues of taking the fullest possible advantage of the Creator's gifts. Along that line, accumulated wealth became a divine recognition of virtuenot for personal use, but as an offering for the greater glory of God. Max Weber's reasoning concluded that this was the reason why some European countries were ahead of others in economic growth.

Historians have generally opposed this ingenious thesis; it is obviously false. In their time, the countries of Northern Europe simply took the place that had been occupiedfor a long time and with brilliant successby the old capitalist centers in the Mediterranean. In fact, the cities of Northern Europe, in replacing those of the South, invented nothing new, neither in techniques nor in the conduct of business. Amsterdam modeled itself on Venice, London copied Amsterdam, and New York copied London. The explanation of these moves is that, in those years, the global center of economic gravity moved from some regions to others for economic reasons having nothing to do with the nature of capitalism nor with the religious affiliation of the operators.

That is about the past. Now, moving to the present, we find that a Catholic country like Italy has a GDP per capita similar to the U.K, while France is not far behind Germany. Thus, it is not true that, thanks to the Protestant religion, the countries of Northern Europe have developed capitalist economies more successfully than those of the Catholic South.

It is clear, then, that there is no cultural disadvantage derived from ethnicity or religion that could interfere with Argentina's capabilities for taking full advantage of its potential for economic growth. The sickness which has aff licted us resulted from pushing, too strongly and too long, a policy of transfer of income from the hands of those who owned the natural resources to benefit the general population. Though there was an element of justice in these measures, since the riches of the Pampa were only in small part due to human efforts, the "redistribution" policy, carried to extremes for many years, impeded the accumulation of capital necessary to initiate new activities. In addition, it permitted the employment of many people in government offices, and in public and private enterprises, without paying attention to efficiency, nor to the degree to which these activities promoted the national interests. The breakdown of this model left us not only impoverished, but demoralized to the point of humiliation.

Nevertheless, it is evident that we are gaining ground, since many of these mistakes were corrected ten years ago. Inflation was ended, agricultural producers are no longer being gouged, protection of industry was reduced, though only partially, and state enterprises were privatized. The result was greater economic efficiency; but, because the reforms were not completed, the consequences included an upsurge in unemployment to sixteen percent, along with more poverty and less equity.

Among the transformations not carried to a conclusion, the main item is the fiscal deficit, which stems from excessive public expenditures, as well as massive tax evasion. In addition, import tariffs are still too high, to the point of' covering up inefficiencies which hinder the development of export Industries. Here, we should note a crucial difference from Australia's policies. There, exchange rate flexibility permitted strong devaluations of the currency, which helped overcome the bad effects of the East Asia economic crisis, as well as helping preserve industry from foreign competition despite tariff protection of only five percent. In addition, it permitted Australian exporters to find alternative markets in the United States and Europe to take the place of their neighbors that were in recession.

Ten years ago, Argentina confronted transformations that were painful but indispensable. There is nothing to indicate that, having had the will to initiate traumatic changes, courage to finish the task is lacking. The country's continued growth, a reduction in unemployment, and the recovery of our own self-confidence depend on concluding this task. It may be that all the changes will not happen this year, but will take more time. It may be that, instead of doing them all at once, they may be accomplished step by step. However, they must be completed, since this is the only way to keep us from falling into decadence.

During the year 2000, research was carried out by two British universities, Badson College and the London Business School, to try to measure the importance of new business start-ups in twenty-one countries, including the United Kingdom, the United States, Germany, Brazil, and Argentina. The study measured the proportion of young entrepreneurs ("young'" being defined as under forty) who at that time were beginning their own enterprises. The finished study showed Argentina in seventh place a very respectable showing. It was demonstrated that in Argentina one out of every sixteen people under forty was beginning his own enterprise. The majority were between twenty-five and thirty-four years old. Forty-five percent were starting businesses, thirty-one percent were initiating services, mostly tourism-related, and the other twenty-four percent were beginning industrial operations, especially in metallurgy and food products.

This strong propensity of young Argentines to start their own enterprises grew out of the difficulties of the beginning of the '9Os, that is, when unemployment increased due to the collapse of the "redistribution'' policy. The growing difficulty of obtaining employment, private or public, led more and more young people to strike out for themselves as independent workers in the liberal professions or by starting a small or medium-sized business.

Another aspect covered by the research was the support which these young people found in their respective countries in starting up their own activities, especially assistance given by governments including access to credit and educational programs designed to help them. Since in these aspects Argentina was near the bottom of the list, it is clear that better governmental support would result in many more small enterprises being initiated,

It does not appear difficult for the State to facilitate the setting-up of new enterprises, nor for the educational establishment to offer appropriate courses. But what would not be so easy is providing credit at interest rates which would be practicable for legal enterprises.

Half a century ago some young Argentines started small enterprises which have grown into large companies. One example is the firm ARCOR, which was started by four friends and which today has thirty industrial plants, sales of more than US$1.1 billion, and exports of more than US$ 200 million. Of course, not many businesses attain such figures, but not many big, successful companies are required for the country to start solving its economic problems. What is indispensable is the development of tens of thousands of individual enterprises, especially small and medium businesses. Only by the formation of a large number of private enterprises can the Argentine economy grow, unemployment shrink, and exports expand.

The main reason why the cost of money is so high in Argentina, despite the absence of inflation, is the small amount of savings deposited in local banks. Savings continue to flow out of the country because of lack of confidence in the State, always desperate to find money to meet its obligations, and the inability of the government to control tax evasion, since those who do not pay have to conceal their assets.

In January 2001, FIEL presented to the president a study showing that, if tax evasion were reduced, the resulting increase in revenues would not only eliminate the budget deficit, but would actually create a surplus. The same study showed that the rate of evasion of the tax on profits is fifty percent, while the evasion rate is thirty percent of the Value Added Tax.

As previously noted, among the biggest failures of the transformations begun in Argentina during the decade of the '90s was the failure to eliminate the fiscal deficit. In 1998, because of the Mexican crisis, it was difficult for the government to obtain financing in international markets to cover its obligations, so it had to look for domestic sources, resulting in a reduction of credit to the private sector. This not only limited the possibilities for development of new enterprises, but initiated a recessionary process from which we have not yet escaped.

If the government were able to bring down its expenditures and thereby eliminate the fiscal deficit, and if tax evasion could be controlled, savers would no longer fear that the State, in its urgent need to meet its obligations, would transform their savings deposits into government bonds. In addition, less tax evasion would mean that fewer savers would feel obliged to hide their holdings outside the country. If this happened, the banks would have more money to lend, and the principal reason for high interest rates would disappear.

As the Spanish economy fell behind the rest of Europe for 150 years, that of Argentina lost ground compared to Australia for half of that time. But we can also catch up in a few years, as Spain did. This is conditional on completing the necessary transformations to allow us to fulfill the demands of the beginning of the twenty-first century.

The author teaches at the Argentine Foreign Service Institute and is director of the Argentine School for Exports. He was Argentina’s secretary of foreign commerce, secretary of industry and mining, and ambassador to the European Communities. His most recent book is La Argentina en el Comercio Mundial (1997).

white starAmerican Diplomacy white star
Copyright © 2012 American Diplomacy Publishers Chapel Hill NC