USA, Argentina and Alan Beattie: Wrong Starting Point. Final Act (At least on my part…)

In response to Alan Beattie’s previous post:

1. I do not think it suffices to argue that it is “surreal” to discuss the article because it had to be truncated for journalistic reasons: the story line and the quality of the reasoning and the accuracy of the facts to support (or not) the story line, are what they are.  Therefore, I believe the article (which is what most people in this time-constrained world will read anyway) is a legitimate area of discussion.  Also next year Argentina will celebrate 200 years of the first national government, and there are already several debates as to what happened since 1810, and about possible future scenarios for my country.  Therefore, Alan Beattie’s interpretation appears at the right time for that debate.  But, in my view, it does not help to understand Argentina’s history – nor that of the US, for that matter.  I do not want to bore the readers (if there are still some out there following this somewhat arcane topic).  So I will summarize agreements and differences with Alan Beattie, as I see them, and leave it at that.

2. It is clear that we both agree that Argentina has underperformed her potential, which I find extremely disappointing, and Beattie seems to consider that too.  Also, I believe, as Alan Beattie does, that policies matter, and that in the history of Argentina there is much to criticize (I have my share of academic, journalistic, and official pieces with my criticisms of Argentina’s policies at different times, and, of course, I have also written in support of actions I thought appropriate).

3. Moving to disagreements, we have clearly different opinions about the benchmark against which to measure underperformance in a realistic way.  And, second, there are also differences about the importance of policies compared to other structural factors, global economic conditions, and the like.  But more perplexing to me is the tendency of the article and two blogs to invoke “deus ex machina” type of arguments to stick to a predetermined story line.  I will cover both groups of issues next.

BENCHMARKS

4. Alan Beattie uses the US as the point of reference.  I do not think this is an adequate comparison for Argentina; unrealistic expectations are not good to understand the past or to define policies for the future.  It is far more illuminating to base the analysis on comparisons with Australia or with other Latin American countries.  The inadequate benchmark is, in my opinion, the original sin of Alan Beattie’s story, from which erroneous inferences and contrived arguments follow.

For instance, he says in his FT article “The countries were dealt quite similar hands… The similarities between the two in the second half of the 19th century, and in fact up to 1939, were neither fictional nor superficial.”  This is incorrect.

*Rainfall in the Eastern coast of the United States is about 40/60% more abundant than in the Argentina’s pampas, and therefore the northern regions had the forests and rivers the southern lands lack.  As noted by Diaz Alejandro in his “Essays on the Economic History of the ArgentineRepublic”, the lack of forests and rocks to build settlements was a serious problem in the Pampas.  At the same time, because both the Eastern US and the Pampas were not good for tropical products nor had precious metals, they did not have plantation or enclave structures which would have fostered inequality (see, for instance, Engerman and Sokoloff, NBER. Historical Paper 66, 1994).  But while the Eastern side of the US, nicely covered with forest and rivers, had strong immigration from UK during colonial times (which was larger than Spanish immigration to all Latin America), Argentina was an underdeveloped and unpopulated flat area with not much more than grass during colonial times (most of Spanish migration went to regions with minerals or tropical crops).  The low-value land (given the existent technology and structure of global markets) in Argentina was given in large tracts to the people that ventured there, mostly as a way for Spain to maintain political claims against native tribes and the eventual British or Portuguese explorer that passed by.

*Landes (“The Wealth and Poverty of Nations”) also points out (p.295) “These frontier lands abounded in natural wealth, but this wealth proved differentially useful in the context of new technologies. Here the United States came out best.” And then Landes goes on to enumerate all the variety of advantages, in climate and natural resources (not the least coal and iron, for metal production; cotton, for textiles; and rivers, for hydropower) the US enjoyed.  This was crucial for an early industrial development.

Which leads me to another quote by Alan Beattie.

* “On the face of it the economies of the two countries also looked similar: agrarian nations pushing settlement westwards into a wilderness of temperate grasslands.” (The qualification “on the face” is because Alan Beattie then argues about differences in the agrarian structures between both countries).  The problem, though, is with the wrong idea of similarly agrarian countries (even though the internal structure of the sector may differ). Alan Beattie was referring to a period broadly between 1850/1880, but the US was already a country with a relatively strong and diversified industrial base by the time of his independence (see again Landes, which points out that by the late 1770s the US already produced 30,000 tons of iron, with just Britain, France, Sweden and Russia producing more; p 298).  In contrast, only since the creation of the Vice Royalty of the River Plate in 1776 (notice the year), the port of Buenos Aires, but not yet the hinterland, started slowly to develop because Spain, still in control of the region and fearing political encroachment from Portugal and the UK, rerouted the silver trade from Bolivia, towards the south instead of using the previous northern route towards Perú.  Therefore, at about the same time the US colonies, already economically advanced and military strong, declared independence from the main Imperial power of the time, in the Pampas there was no important agricultural, or, even far less, industrial activity. Since then, the US has had a long period of endogenous growth, based on a large domestic market, with a strong industrial component, linked to a more decentralized and egalitarian agrarian structure, which also supported a more participatory political system.  On the other hand, since the early 1800s, Argentina embarked on an export-led approach (obviously dependent on external markets), based on livestock production during the first part of that century, and, only by the late 19th century, on agricultural products.  The productive development of Argentina reflected the comparative advantage of the, until then, very backward and unpopulated Pampas, based on climate, geography and available technology.  Those comparative advantages, within a specific structure and evolution of trade and demand in world markets, defined a long period of export-led development based on livestock products, and an agrarian structure of large units with low utilization of labor.   Different from the US, when Argentina started a stronger and more diversified industrialization process, it had to contend with a specific agrarian structure that was not conducive to the development of a more diversified economy and a better integrated society.  Since then Argentina has been trying find the path to such economy and society. 

STRUCTURAL FACTORS, GLOBAL CONDITIONS, AND POLICIES

5.  I think that besides policies there are very powerful determinants of a country’s development trajectory, such as structural factors linked to geography and climate, the cumulative forces of demography and institutional history, and the global external conditions (on the latter, see, for instance, several papers by John Williamson and coauthors in the NBER series on external terms of trade and volatility; see also Engerman and Sokoloff, 1994, who discuss the importance of factor endowments for long-run paths of institutional and economic development).  In fact, even policies in most cases are not exogenous events, but are greatly influenced by political economy forces within a specific setting of structural determinants.

6. Alan Beattie says that I am dangerously close to economic determinism.  Rather, in my opinion, is Beattie’s analysis that suffers from unhistorical voluntarism, suggesting unlikely courses of action, not only for government but also for economic agents, without considering the existing incentives within specific geographic, climate, technological, state of the world economy, and political conditions.  All these circumstances provide the setting for the cost benefit analysis that governments and economic agents consider in their decision making process.  In my view, when facts do not fit his narrative, some ‘deus ex machina’ is utilized to maintain the story line without considering the incentives and restrictions for the policy makers or the economic agents.  I already mentioned some of his phrases such as that the landed elite did not distribute the land to the peasants in Argentina. Of course not.  There are other examples. For instance, according to Alan Beattie “Given their cultural Anglophilia, the Argentine landowners had an obvious model to follow (AB talks about the UK landowners that invested in industry), but they ignored it.”  The problem is that, as many analysts of Argentina’s history have noticed, the structure of incentives is different if you produce food for the internal market as the UK landowners did, and were forced to reconvert because of the pressure of other internal forces, than if you are earning good profits selling food to external markets and for many years there were no strong economic or political pressures to change.  The latter only started when middle and lower income groups associated with Yrigoyen early in the XX century and, then, Perón in the 1940s and 1950s, challenged that status quo and pushed for industrialization.

7. All in all, the narrative in the article and his two answers, with anthropomorphic constructions such as “Argentina did this” or the “US did that,” evoke the image of all-powerful planners, operating outside the society, and making the right decisions with an appropriate social objective function, unconstrained by structural restrictions and political-economy considerations. It may be an interesting intellectual exercise but, in my opinion, is not real-world economic or political analysis.

8. Another example of unhistorical voluntarism is the issue of population. In his latest blog Alan Beattie says

“The Argentine population is indeed a lot smaller than that of the US, and hence it would have difficulty being a superpower with the population it has. But part of the reason it is so small is that it didn’t attract enough permanent immigration. Since its current farmland is about a third the size of that of the US, let us (crudely) say it could have three times its current population if its economic growth had been sufficient to attract migration…. Could you be a superpower with 120m people? Probably.”

First, if Argentina has a third of US land, it is a mistake to multiply Argentina’s current population (about 40 million) by 3.  The proper comparison is to divide US population (about 300 million) by 3. The reference number should be 100 (300 divided by 3) and not 120 (40 times 3).

Second, any of those numbers is, again, highly unlikely. The issue is not only immigration but also the level of population at the beginning of the US and Argentina’s histories as independent nations.  I have already mentioned the far better climate and geological conditions in the Eastern of the US compared to the Pampas, which led to larger and earlier settlements in the former but not the later.  According to Angus Maddison, in 1820 the US had already a population of some 10 million people, when Argentina had about 500.000 (a ratio of 20:1).  Since then, and until 2008, the US population grew 30 times (to 300 millions), while Argentina’s population increased by a multiple of about 80 (to 40 millions).  As a reference, the number for Australia is 62 and for Canada, 41, over the same period.  In order to get to Alan Beattie’s miscalculated 120 millions, Argentina’s population would have to have grown about 240 times (or about 200 times, properly applying Alan Beattie’s own rule of thumb of 1/3 of land and people).  This may be a challenge even for an all-powerful Soviet planner, given the constraints on the supply side of population and the absorption capacity of the recipient country.  For instance, Diaz Alejandro, in his “Essays on the Economic History of the Argentine Republic” argues that between 1857 and 1929, 60% of the population growth can be attributed to immigration, and that around 1914 about 30% of the total population and almost 50% of the labor force were foreigners, proportions far higher than in the US or other immigration countries.  The large immigration caused serious adjustment problems in political, social and economic terms, and to get to the implausible figures suggested by Alan Beattie, the problems would have been even worse (another methodological issue that is perplexing in his analysis is the lack of general equilibrium considerations).

9. There are other issues he also raises in the last blog that for the sake of brevity I will skip here (such as whether in his article he implies or not that in economic terms the US did better than Argentina, which I think he does; or some misinterpretations about the “trends” that I drew, but not calculated, just to illustrate the cointegration, which I did calculate, between Argentina’s and Australia’s ratios of GDP per capita to the same US variable; the cointegration clearly breaks down in the mid 1970s but not before).  I doubt anyone is interested, but I may expand on the comparison with Australia at another time using something more precise than the simple chart with my own eyeball drawings I presented in the previous blog.

10. In summary, I believe that Alan Beattie story line comparing US and Argentina is flawed.  It can be considered a piece of journalism in which you get a provocative story line and stick to it marshalling selective evidence.  Or it can read more like a satisfying Victorian morality tale (the sort of stories that, by the way, I enjoy very much).  But, in my opinion, it is not serious economic or political analysis.  Of course I acknowledge that he believes that the explanations are all there in his “excellent book.” Based on the FT article and his two answers in this blog, I do not agree.  So, using a formula from diplomacy that Beattie must recognize, let’s agree to disagree.

2 Responses to "USA, Argentina and Alan Beattie: Wrong Starting Point. Final Act (At least on my part…)"

  1. Alan Furth   November 6, 2009 at 5:17 pm

    Eugenio, I just wanted to draw your attention to a recent blog post at the NYT’s Economix blog in which Harvard Professor Edward E. Glaeser makes a similar comparison between the US and Argentina:http://economix.blogs.nytimes.com/2009/10/20/education-last-century-and-economic-growth-today/#comment-85985I think you will enjoy deconstructing Glaeser’s naivete as much as you did with Beattie’s :)Thank you for this illuminating debate. I think it was badly needed for intellectually arrogant people like Beattie to wake up and smell the coffee.Cheers,Alan

    • Eugenio Diaz Bonilla   November 10, 2009 at 6:02 pm

      Thank you very much Alan for your comments and suggestions. However, I am not sure if I can live up to the deconstructing standards you suggest…In any case, there is this myth in Argentina (and apparently picked up by outsiders too) that we were like the US until someone (please fill in the blanks with your favorite villain…) came and messed things up. This view impedes a realistic assessment, which we badly need, of the history of Argentina and also of its future prospects.BestEugenio