Opportunity Lost?

Economic Development in Argentina (1929 – 1955)

By Rob Kevlihani

Argentina – a country that aspiring to become first tier status in economic terms, yet to date has failed in its endeavours. A country possessing a temperate climate, an integrated national territory, vast stretches of fertile soil, large deposits of petroleum, easy access to the sea and a literate and fairly homogeneous population. Yet a country that one commentator describes as holding a morbid fascination for students of development because it has apparently ‘gone backwards’ (Lewis, 1990, 1).

This paper will examine the import-substituting industrialisation (ISI) policy followed in varying degrees by successive Argentine governments from the great Depression of late 1929 to the fall of the first Peronist regime in 1955 and consider whether it contributed to a more equitable insertion of Argentina in the international system.

Up until even the 1980s, the preferred strategy for many late industrialising countries to attempt to catch up with the industrial core countries of Western Europe and North America was ISI. While the exact components of such strategies were not identical for each country, some common characteristics can be described. Tariffs, trade quotas and quantitative restrictions on imports were used to provide protection for new domestic industries. Initial ISI was frequently driven by military/strategic aims. The agricultural sector was seen as a major source of ‘surplus’ for investment in industry and finally it was commonly held that planning and policy interventions could successfully substitute for markets and could tame business cycles (Waterbury, 1999).

Argentina’s ISI strategy began in the post 1930 period, but industrial development on a small scale predates this policy. Prior to this time, Argentina relied on the export of primary commodities to western European markets and in particular, the UK. From the second half of the 19th century onwards, Argentina built a productive structure that allowed the country to use its comparative advantages in an expanding world market that incorporated the country fully as a producer of raw materials and food and a receiver of manufactured goods, capital and labour (Korol & Sabato, 1990). Investment in infrastructure such as railways and ports assisted in this process and was dominated by foreign, mostly British, capital. Post WWI, American and continental European capital began to displace British dominance. American investment flowed into light industry, especially the production of consumer

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durables. By the 1920s, Argentina had witnessed a modest degree of industrialisation outside of the traditional export sector and its related industries (Corradi, 1974, 351).

Nevertheless, Argentina’s prosperity continued to rely on the export of meat and grain, controlled by a relatively small number of large landholders. Mass migrations and urbanisation left the majority of the population in urban areas. These were overwhelmingly employed in ancillary, rather than industrial activities. The result was a lop sided society, with economic power in the hands a land owning elite and political power in the hands of the clamorous urban masses (Williamson, 1992, 460).

By the 1930s, two distinct groups within industry were forming: the large foreign-linked industries and the smaller national industries. The foreign linked firms represented 2 per cent of all industrial firms, accounted for 55 per cent of the industrial production, and employed 50 per cent of the industrial labour force. The entrepreneurs of the small and medium sized national firms controlled 90 per cent of all family firms, accounted for 40 per cent of industrial production and employed 40 per cent of the industrial labour force (Alschuler, 1988, 31).

The onset of the Depression in late 1929 / early 1930 resulted in the fall in volume and value of international trade. The failure of primary commodity products to recover in price resulted in sharply reduced terms of trade for Argentina. The result was a consequent inability to pay for required imports with foreign currency. This gap left by the reduction of imports opened up possibilities for domestic industry and Argentine production, at constant prices, increased by 9 per cent between 1929 and 1938 while exports fell by 37 per cent (Corradi, 1974, 344). Additionally, tariffs, exchange controls and devaluations both restricted imports and distorted their composition, making local producers more competitive in the local market. Throughout the 1930s, Argentine manufacturers were able to acquire second hand machinery at knock down prices from bankrupt industrial firms abroad. Labour became readily available as the shift from cereals to meat production in the countryside accelerated internal migration from rural areas to the cities (Rock, 1993, 195). The necessity to produce products domestically which were no longer possible to import reoriented the economic activity towards the domestic market. However, this process of industrialisation continued to be focussed on light industry, rather than heavy or capital intensive industries. The result was a continued pattern of economic

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dependence. By 1944 industrial production constituted a larger proportion of total production than ranching, the production of cereals and agricultural raw materials. Nevertheless, Argentina still depended on foreign currency earned from the export of primary products to pay for the import of fuel and capital goods necessary for the maintenance and expansion of this industrial base (Corradi, 1974, 344-346).

WWII acted as a further barrier to international trade, with Argentina confronted with a similar situation to the 1929/1930 period. However, industrial growth was constrained by the lack of machinery and spare parts from abroad, together with power shortages. As a result, repair work became the largest component of the new service sector, as companies sought to maintain ageing plant, equipment, vehicles and rolling stock (Rock, 1993, 210). Argentine industrialisation was spurred by US support for neighbouring Brazil. From the start of the 1940s the armed forces and the government were on alert for enemies, foreign and domestic. In 1941 President Ramon S. Castillo declared a state of siege, lifting constitutional guarantees. In the same year, the General Directorate of Military Manufacturers (DGFM or Fabricaciones Militiares) was established, as the armed forces sought to become self-sufficient in weaponry, and began to establish and run arms factories. Fabricaciones Militiares also expanded into metallurgical industries, gas piping, agricultural equipment and maintenance facilities (McSherry, 1997, 40). The military were therefore at the forefront of attempts to industrialise and expand economic activity generally, with a greatly expanded army being deployed in infrastructural developments, industrial plants and searches for raw materials in the Andean region (Rock, 1993, 231). The military coup in 1943 further reinforced the Bismarckian tendencies of the armed forces, focused on tight political control and military led economic development. The coming to power of the military also saw the steady rise of a junior officer within the military regime – Juan Domingo Peron. Using his position as Minister of Labour, he favoured trade unions in wage negotiations and brought in favourable social welfare reforms, gathering a populist support base from the urban masses that eventually led him to power in 1946.

The period up to the rise of Peron was therefore characterised by a favourable international environment for ISI. Indeed, ISI was to some extent a natural economic reaction to unusual

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international economic circumstances. Deliberate government policy was much less important in this respect than external circumstances.

The Peron administration implemented a much more proactive policy in relation to ISI. Strongly influenced by nationalism, economic independence was seen as an inherently good thing. Indeed, in the pressure cooker international atmosphere of the time, it was considered a national imperative, with both government and opposition convinced of the imminent outbreak of WWIII, which it was expected would eradicate international trade (Torre & De Riz, 1993, 249). Peron’s administration launched into its economic programme with advantages that few developing countries ever enjoy. By 1946 Argentina was a semi-industrialised society with its productive capacity comparatively untouched by the war. Moreover, it enjoyed a healthy surplus of foreign reserves, chiefly through it supply of much needed foodstuffs to the allies during the war. Argentina was therefore ideally positioned to build on its new found wealth (Lewis, 1990, 177).

However, structural problems existed. Argentina’s growing industrial sector had been built up under the protective umbrella of two extremely unusual economic impediments to international free trade – the 1929 depression and WWII. It was focussed on making up for domestic shortages that occurred due to these interruptions and not on the export market. Argentina still relied on the export of primary commodity products to earn vitally needed foreign exchange, while the very success and efficiency on the primary commodity sector kept exchange rates at levels that made it difficult for an export oriented manufacturing sector to develop, leading to what one commentator described as an unbalanced productive structure by one commentator (Diamond, 1986, 134). Developing manufacturing industries were therefore faced with a rate of exchange that made the competitive export of manufactured products impossible. In effect, the agricultural sector set a standard of exceptional productivity that was impossible for the rest of the country to reach.

This structural problem was exacerbated by the economic policies of the Peron administration. In an effort to transfer economic resources from the agricultural to the industrial sector, the Institutio Argentino de Promocion de Intercambio (IAPI) was established with power to fix prices to producers and consumers of all major primary commodities. The differential between external and internal prices

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thus traded gave the government a handsome profit to facilitate credit to national industrialists. However, most of the credit extended went to light, consumer goods industries and not to basic industrial development in heavy industry, energy and farm mechanisation. As light industry grew, it became necessary to import more capital goods (Lewis,1992, 180). Additionally, this surplus was used for other purposes – chiefly the expansion of benefits to the urban working classes. The pension system was expanded to all industrial workers and the pensionable age was reduced to 55, with pensions adjusted to wages at date of retirement, rather than payments into pension funds. Systems of benefit more appropriate to a post industrial society than a developing one (Corradi, 1974, 368). Additionally, Peronism’s extreme nationalism discouraged foreign capital, while his pro-labour and anti-capitalist rhetoric put off potential investors at home. Peron’s administration was marked by the hostility of many of the country’s leading businessmen and his inability to forge effective institutional support among the country’s leading capitalist groups who barely established a working relationship with the Peron government (Brennan, 1998, 111). Finally, the widespread nationalisations, while having tremendous propaganda value, did not essentially add to productive capital and were paid for in full from the reserve surpluses derived from trade during WWII. This reduced the amount of available capital for productive investment (Lewis, 1992, 181).

The autonomous character of this attempted industrialisation strategy fitted with Peron’s nationalist ideology. The government attempted to rely on small and medium sized national entreprises with the support of organised labour. Import and exchange controls created a protected market for the expansion of local consumer goods industries under the leadership of small and medium sized firms. This protected market was expanded for locally produced consumer goods by means of a drastic redistribution of income, especially in favour of the industrial labour classes. State banking institutions recycled the surplus from IAPI to provide credit to smaller national firms for importing essential industrial inputs and subsidies to these firms for raising worker salaries. Finally, the government nationalised German firms, public utilities and transportation, established new heavy industries and infrastructure projects under the control of the state (Alschuler, 1988, 34).

While international circumstances remained favourable, these policies worked in domestic terms – protectionism resulted in the rapid growth in the industrial production of textiles, food, household

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appliances, plastics and tanning goods. Real wages grew, with the remuneration of labour as a part of of net national income (at factor cost) increasing from 44.8% to 54.5% during the 1946 – 1951 period (Alschuler, 1988, 34).

Problems began to occur from as early as 1949 onwards. After four consecutive years of surpluses, the trade deficit reached US$160m, due largely to declining terms of trade. The government, politically reliant on the support of the urban sector, was slow to impose the required stabilisation policies that would have depressed the national economy and alienated their constituency. Initial steps included a moderate devaluation and a rationing of credit for public and private sectors. The results were ambiguous – the economic boom was interrupted but underlying relative prices and the existing distributive model were not modified. During 1951 and 1952, terms of trade continued to fall, and the resulting trade deficit worsened to US$304m in 1951 and US$455m in 1952. Inflation also accelerated, reaching a rate of 30% in 1952 (Torre & De Riz, 1993, 257).

By 1952 therefore, the Peron’s redistibutionist programme had become unsustainable. The reason? Essentially international circumstances had changed – sharp reductions in international primary commodity prices, domestic drought and disincentives to expanded agricultural production inherent in the low prices offered by the IAPI monopoly reduced foreign exchange earnings considerably. Domestic manufacturing production still fundamentally relied on imports – of capital goods and spare parts, which required foreign exchange. Theoretically, the new Argentine industries should have stepped into the breach, through export production of manufactured goods to earn additional foreign exchange. However, the structural difficulties of the unbalanced productive structure (with its consequent impact on the exchange rate maintained), together with full employment in the economy without significant improvements in productivity (through active government policy), meant that profits for self sustaining capital formation were unavailable and products produced were uncompetitive internationally.

The result was a turnaround in economic policy, with the new government strategy favouring stability over economic expansion, agriculture over industry and private initiative and foreign capital over public sector growth (Torre & De Riz, 1993, 258). By 1953 autonomous industrialisation began to

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reverse to dependent industrialisation, with foreign direct investment being encouraged. Government debt also began to increase in an effort to make up foreign exchange deficits (Alschuler, 1988, 37). The extent of the change dictated upon the Peron administration can be seen by the decision in 1954 to invite Standard Oil to develop the oilfields of Patagonia. While Peron was looking for a quick and efficient means of relieving the energy problem which was holding back Argentine industry, the oil industry had since the early years of the century, been a symbol economic sovereignty for nationalists (Williamson, 1992, 470). The degree of the turnaround provoked consternation in Perons own party, who did not in the end ratify the contracts in Congress before the military coup in 1955 which removed Peron from power (Lewis, 1990, 207).

In summary then, the first phase of ISI in Argentina, and the one most focussed on establishing an autonomous development orientation independent of foreign capital, failed, despite initially favourable external and internal circumstances. While external terms of trade could not be controlled, the extent of reliance of the economy on the proceeds of primary commodity production should have been more directly recognised. Undoubtedly, Argentina was in a position post WWII to invest significantly in its domestic industries. However, it failed to invest in the correct industries – heavy manufacturing and capital goods, which could then drive light industrial development. Additionally, it ignored the importance of orienting the new domestic industries towards the export economy. Dependent as it was for income from the state agricultural monopoly to fund improvements in social welfare and wage systems that the country could not afford, it was not in a position to devalue its currency sufficiently to place Argentine industry on a competitive footing internationally. In the East Asian economies, which are frequently cited as successful implementers of ISI strategies, the export of each type of manufactured good was preceded by production for the domestic market behind protective barriers. The size of the domestic market, and diffusion of wealth within that market have been pointed to as key factors in stimulating that initial production (Grabowski, 1994). Argentina had the domestic market to build upon. The weakness was that this domestic market derived its diffusion of wealth from unsustainable state policies rather than inherent productivity and efficiency of production that could have come from a successful export oriented sector. While this may have represented an insurmountable chicken and egg scenario, a more externally focussed approach from the government

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together with a more prudent redistribution of wealth to match growing industrial exports might have succeeded where industrialisation dependent on primary commodity export growth failed.

In the end, the initial success of the easy stage of ISI caused what Hirschman has described as ‘delusions of success’ in the Argentine government (Fitzgerald, 1997). Subsequently, the ISI policy got stuck be a ‘seemingly congenital inability to move to export markets’ (ibid). The result was an inward looking unsustainable economy that missed a golden opportunity to secure for itself a more sustainable long term equitable insertion into the international economic system.

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References

Alschuler, L.R., 1988: Multinationals and Maldevelopment: Alternative Development Strategies in Argentina, the Ivory Coast and Korea, London: The Macmillan Press. Brennan, J.P., 1998: ‘Industrialists and Bolicheros’ in J.P. Brennan (ed) Peronism and Argentina, Wilmington, Delaware: Scholarly Resources Inc. Corradi, J.E., 1974, ‘Argentina’ in Chilcote, R.H., and Edelstein, J.C., (ed.s) Latin America: The Struggle with Dependency and Beyond’, London: John Wiley & Sons. Diamond, M., 1986: ‘Overcoming Argentina’s Stop-and-Go Cycles’, in J. Hartlyn and S.A. Morley, Latin American Political Economy: Financial Crisis and Political Change, London: Westview Press. Fitzgerald, E.V.K., 1997: ‘The Theory of ISI’ in Centro Studi Luca d’Agliano Development Studies Working Papers, No. 108, May 1997.Oxford: University of Oxford. Grabowski, R.,: 1994: ‘The Failure of Import Substitution: Reality and Myth’ in Journal of Contemporary Asia, Vol. 24, No. 3, 1994. Korol, J.C. & Sabato, H., 1990: ‘Incomplete Industrialisation: An Argentine Obsession’, in Latin American Research Review, 1990, Vol. 25, Pt1, pp 7-30. Lewis, P.H., 1990: The Crisis of Argentine Capitalism, London: The University of North Carolina Press. McSherry, J.P., 1997: Incomplete Transition: Military Power and Democracy in Argentina, New York: St. Martin’s Press. Rock, D., 1993: ‘Argentina, 1930-1946’ in Bethell, L. (ed), Argentina Since Independence, Cambridge: The Cambridge University Press. Taylor, A. 1996: ‘British Capital and Argentine Growth’, in Salvucci, R.J. (ed.) Latin America and the World Economy: Dependency and Beyond, Toronto: D.C. Heath and Company. Torre, J.C. & De Riz, L.: 1993: ‘Argentina since 1946’ in Bethell, L. (ed), Argentina Since Independence, Cambridge: The Cambridge University Press. Waterbury, J. 1999: ‘The Long Gestation and Brief Triumph of Import-Substituting Industrialisation’ in World Development, Vol. 27, No. 2, Feb 1999, pp 323 – 342, Great Britain: Elsevier Science Ltd. Williamson, E., 1992: The Penguin History of Latin America, London: Penguin Books.
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The author acknowledges a heavy debt to all the references cited in pulling together the empirical background to this piece.

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