A HUNDRED YEARS OF ECONOMIC DECLINE: New research pinpoints when it all went wrong for Argentina
- 30 Mar 2016
Economist Simon Kuznets famously singled out Argentina as the only country in the world that was developed in 1900 and developing in 2000. But although there is widespread consensus about the occurrence and uniqueness of this decline, the debate about its timing and causes remains intense.
New research by Professor Nauro Campos and colleagues, to be presented at the Economic History Society’s 2016 annual conference in Cambridge, offers a first comprehensive assessment of the timing of Argentina’s debacle. It uses an array of ‘structural break’ tests on a range of GDP series for Argentina from 1886 to 2003.
The main finding is that of support for two significant structural breaks: one in 1918 and one in 1948. Evaluating a range of explanations for the Argentine decline, the researchers find stronger backing for financial development and institutions (political instability) than for alternatives such as trade openness, public deficits and macroeconomic instability.
One way to connect findings about underlying causes with those about timing is to note that the slowdown of domestic financial development coincides with the First World War and the strength of political populism is clearly evident after 1948. The latter was a year of severe financial crisis and intense strike activity. It was also when Perón learned that the United States had decided to exclude Argentina’s exports from the Marshall Plan, thus denying access to the soon-to-be-booming European market.
One may ask why so many different tests and so many different GDP series? Regarding tests, earlier frameworks focus on structural breaks in the mean, while in many situations (like the one here), breaks in the variance may be of even more consequence. Concerning the various GDP series, recall that before the Second World War, estimates of national income were based on readily available components (such as imports, exports or government revenues). The existence of different GDP series is due, principally, to different components, methodologies and deflators.
Summarising results from various tests and multiple series is not straightforward. The researchers’ main conclusion is that there is econometric evidence for two significant structural breaks.
The first key structural break for 1918 refers to a range of Argentine GDP per capita series. The second key structural break for 1948 is more complicated because it refers to breaks in the behaviour of ratios of Argentine GDP relative to other countries. The 1918 break is for absolute per capita GDP series, not for the ratio of, say, Argentina’s and the Western Europe’s series.
Focusing on the ratio of per capita GDPs in Argentina to Western Europe, the researchers estimate two structural breaks: one in 1914 and one in 1948. While the former supports the so-called ‘early retardation hypothesis’, the latter is consistent with the claim that the Argentine debacle is a post-Second World War phenomenon. Relative to the ‘Western Offshoots’ (the United States, Canada, New Zealand and Australia), structural breaks are detected for years 1930 and 1947, with the former supporting the so-called ‘late retardation hypothesis’.
Finally, focusing on the ratio of per capita GDP in Argentina to per capita GDP in Latin America, 1948 emerges again as a key break. In short, the second key structural break occurs either in 1947 or 1948 depending on which ratio one emphasises. The first structural break is less clear-cut because based on absolute Argentina per capita GDP it is 1918, with respect to Western Europe it is 1914, and regarding the Western Offshoots it is 1930. The researchers settle on 1918 as a qualified average.
These findings shed light on the debate on Argentina’s decline because previous research offered a range of dates. Some scholars argue that the debacle started with the Great Depression, others associates its beginning with the Second World War, others argues for a turning point around the First World War, and some detect a key structural break in year 1899.
Previous research has not always presented econometric evidence in support of proposed break dates. Thus the need for a comprehensive analysis is understandable.
The new results highlight an important role for comparator groups. For the case of the Western Offshoots, the Great Crash of October 1929 looms large as the break detected is in 1930. On the other hand, with respect to Western Europe, 1918 is the detected break, suggesting roles for the disruption of finance, trade and migration surrounding WWI. Hence these results allow for a more nuanced understanding of the onset of the Argentine debacle.
The main finding is that of support for two significant structural breaks: one in year 1918 and the other in 1948. Such structural breaks are consistent with explanations for the relative decline of Argentina that have received econometric support.
Apocalypse Now, Apocalypse When? Secular Stagnation Meets Economic Growth in Argentina
Nauro F. Campos (Brunel University London, ETH Zurich and IZA-Bonn), Menelaos Karanasos (Brunel University London), Michail Karoglou (Aston University), and Panagiotis Koutroumpis (Brunel University London)
Professor Nauro Campos, Department of Economics and Finance, Brunel University
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