At the end of the nineteenth century, Argentina was one of the great economic powers in the world—capitalizing on exports of beef and wheat to be a leader in the first wave of globalization. Neighboring Chile was poised for tremendous growth as well, based on its exports of nitrate. In the twentieth century, neither country would see such glory again.
“Before 1914, [Argentina] was one of the most dynamic nations in the first global economy, attracting a record amount of foreign investment and massive inflows of immigrants,” write the authors of a new book on the two countries. “In 1914, half of Buenos Aires’s population was foreign born, and it could be regarded as one of the world’s greatest global cities.”
Today, the city is a decaying shadow of itself and Argentina as a whole has fallen prey to ineffective institutions, inconsistent government policymaking, and a fragmented business community. Chile is in better shape, but has also undergone traumatic ups and down and is now challenged to grow as its major trading partner, China, slows its growth.
What went wrong?
A new edited volume by Geoffrey Jones and Andrea Lluch is the first to compare the business histories of both countries side-by-side, exploring them from the 1850s up until the present day, when Chile’s economic strength seems to have surpassed Argentina’s—a reversal of fortune.
The Impact of Globalization on Argentina and Chile explores the impact of two waves of globalization on those countries through a unique perspective: the eyes of entrepreneurs and business firms. Jones and Lluch contribute a final chapter, “Argentine and Chilean Business in the Second Global Economy.”
We asked Jones, the Isidor Straus Professor of Business History, and Faculty Chair of the School's Business History Initiative, to discuss the making of the book and to bring us up to date on the current situations in Argentina and Chile.
The book demonstrates both the opportunities, and the vulnerability, of many developing countries in a globalized world.
Sean Silverthorne: The “Argentina Paradox”—how such a rich country and economic powerhouse could fall so quickly—has been much studied, but little research has been done comparing Argentina with its immediate neighbor to the west, Chile. What was the motivation for the book?
Geoffrey Jones: The book had its origins at Harvard Business School some years ago through a fortuitous combination of circumstances. A prominent Chilean shipping entrepreneur and alum, Sven von Appen, heard me speak about my ambition to encourage global course development and research in business history, and the importance of an informed and rigorous historical understanding for practitioners. He visited my office later to say that he felt Chilean policymakers and business leaders lacked such an understanding, and he would like to do something about it.
Coincidently, our postdoctoral fellow in business history that year was Dr. Andrea Lluch, from Argentina. This was the origins of a research program and conference series which led to this collaborative volume, and the Creating Emerging Markets oral history project, which began with interviews of business leaders in Chile and Argentina.
We concluded that we could add real value by seeking to develop a comparative perspective on the two countries around the theme of how they had been impacted by globalization over the last 100 years. Both countries had rich historiographies, but they had largely proceeded on national lines, with few attempts to compare each other, both the similarities and differences, especially of their business systems. So we set about using the convening power of the School to bring together the best scholars in business and economic history in both countries, and to generate compelling new empirical data through interviews.
Q: What are the main findings from the research reported in the book, and what do they tell us about economic development and globalization in developing countries in general?
A: I think the book demonstrates both the opportunities, and the vulnerability, of many developing countries in a globalized world. During the late nineteenth century both countries flourished as major exporters of commodities to the industrialized nations in North America and Europe. Argentina did so well that it became one of the richest countries in the world. You can still see the richness in the old buildings and streets of Buenos Aires.
Yet this kind of globalized economy also created distortions, as it was the owners of land and commodities who became rich. When globalization came to a shuddering halt with the Great Depression, there was a crisis. Chile passed through an existential crisis as its economy went into a downward spiral as nitrate prices collapsed. It became highly inward looking and had one of the slowest rates of growth in Latin America for decades.
Argentina’s fall from grace was less immediate, but more prolonged. Populist and often value-destroying policies resulted in repeated cycles of growth followed by downturns. Policy instability grew as civilian-led governments alternated with de facto military governments.
Eventually Chile, and to some extent Argentina, opened their economies to new wave of globalization which began in the late twentieth century, but once more the experience has been a mixed blessing.
In Argentina, liberalization and opening to the world in the 1990s first produced growth, and then instability as the Asian financial crisis impacted the country. At the turn of the century a wholesale banking crisis resulted in the country’s GDP falling one-fifth between 1998 and 2002. Chile did better in this era of globalization, and boomed supplying copper to China. Chile produced one-tenth of the world’s copper, but once more was badly affected when Chinese and world demand declined in the last three years.
The commodity boom was accompanied once more by high levels of inequality. While closing the borders of small markets to globalization has been a recipe for slow growth and low productivity, opening them all too often is a recipe for instability and shocks. Effective institutions, consistent policy making, and innovative businesses are the way to maximize the gains and minimize the risks, but all three have been in short supply in Argentina, especially, for decades.
Q: What role did the Business History Initiative interviews done with Latin American business leaders for the Creating Emerging Markets project contribute to this study of Argentina and Chile? These leaders had an inside-looking-out view during this much of this time—what do we learn from them?
A: These interviews supplied both contextual and personal information simply not available elsewhere. Unlike the United States and Europe, the business sectors of both countries are far less open about revealing information about their activities. In many cases, it is extraordinarily difficult to find information about firms which are opaque to outsiders. In both countries, there is a particular distrust between the business sector and local educational institutions, with many business leaders more confident and willing to talk to Harvard.
They talked surprisingly openly to us, about their businesses and about politics. A number of the Chileans, for example, talked of their admiration for General Augusto Pinochet, the notorious ruler who came to power in a US-supported coup against President Allende in 1973, and who is noted equally for structural reforms and human rights abuses.
The informational void is by no means unique to these two countries, and this is why Harvard Business School Dean Nitin Nohria in 2012 sanctioned the extension of the project to elsewhere in Latin America, Africa, and Asia. We see the interviews and the associated resources collected with them as helping to provide the resources to enable future scholars to write the business history of this era.
The interviews are particularly revealing on the business consequences of volatility. In Argentina, multiple business leaders explained how they were obliged to adopt a short-term decision horizon in response to policy fluctuations, macroeconomic instability and high inflation rates. “Volatility,” one business leader noted, “is the reason why Argentina lacks a business sector.” “The notion of strategy was put away,” another said. “In the most critical times, it was just next month.”
Inflation was a particular problem. Argentina’s annual inflation rate reached 438 per cent in 1976, and 3058 per cent in 1989. “I started working in 1962, and, for 30 years, until 1992, my entire experience revolved around a high inflation setting,” another Argentinean interviewee said. “I focused strictly on the short term, adjusting to short-term conditions. I thought, I just have to get through today.”
In Chile, policy continuities and institutional stability encouraged business to invest and grow. “Chile is different,” one interviewee observed. “Its stability allows you to plan into the future with reasonable certainty.” Chile has been identified as the best country to do business in Latin America by the World Bank, an accolade which Argentina has never come near to being given.
Q: On a related note, how do the business classes differ in each country in terms of power, agreement around issues, etc., and has that state of affairs helped or hindered economic recovery efforts?
A: The book shows that stock ownership has become increasingly concentrated in Chilean companies since the late 1980s. The business class is relatively cohesive and very inter-connected, and again increasingly so since the 1980s. This concentration was assisted by privatization of state assets which involved the transfer of a considerable amount of assets and from the public to the private sector, spurring the growth of some powerful business groups, and raising the self-confidence of the business class who began to think of themselves as capable of competing globally.
In contrast, our book reports that many Argentinean business leaders interviewed for the Creating Emerging Market project expressing frustration about their country’s recurring crises, and describing a business class lacking cohesion. While Chilean business leaders have secured legitimacy for their role in Chilean economic success over the last three decades, in Argentina their role has remained much more contested by both the media and the public.
Q: Historians continue to debate the relationships between institutional strength and business performance, but the Argentina/Chile stories would seem able to provide some insights, given each country’s tumultuous institutional histories. Have we learned much in this regard?
A: I think one thing we have learned is to be careful when we try to generalize about the importance of institutions.
Since the work of Nobel Prize winning economic historian Douglass North, the importance of institutions in providing the incentive structure of economies, and of firms, has been recognized. But the nature of these institutions has been very crudely defined. A whole body of research has unfavorably compared Latin American institutions with those in North America. The law and finance literature, for example, has suggested that countries lucky enough to get a common law system inherited from Britain had better investment protection than countries which inherited civil law systems from Spain. This literature points to a major effect on financial development, which in turn impacted the nature and speed of economic development.
When you compare Argentina and Chile, you see such generalizations are misleading. The two countries are neighbors who share a common Spanish colonial legacy. However their institutions differ in important ways and this affects the process of decision-making. Historically Chile developed in a centralized fashion, while Argentina had a federal system. In Argentina, provinces had considerable autonomy, including over spending, and policies were designed and executed by the President interacting with both the legislature and provincial governors. Chile functioned as a unity state with no fiscal decentralization. The President is much more powerful, able even to submit and veto bills from the legislature.Argentina has the potential for pleasant surprises, simply because it has performed so poorly in recent years
This provides one explanation for the remarkable stability in Chile’s policies since the 1980s, despite major political shifts. In contrast, the policy-making process in Argentina has been dysfunctional and volatile, as different stakeholders argued and competed for resources.
Q: Looking a bit to the future of these areas, much of Chile’s recent growth has come from helping satisfy China’s demand for copper. With China now easing off the growth accelerator, can Chile overcome this loss?
A: Not easily. Chilean copper output has fallen over 14 per cent in one year. While Chileans got used to nearly 5 per cent annual growth during the 2000s, the economy hasn’t managed 3 per cent since 2013. Government revenues have tumbled at a time when there are many social protests calling for more spending on education and health care.
However one needs to keep things in perspective. The unemployment rate, for example, is 6 per cent. Compare that to 7.5 per cent in Argentina, let alone the catastrophic situation in the EU, where unemployment has reached 23 per cent in Spain and 25 per cent in Greece. There is every indication that policymakers in Chile continue to understand the importance of macroeconomic and financial stability. Inflation was 5 per cent in Chile in 2015. It was at least 30 per cent and more likely 40 per cent in Argentina. Chile retains the highest credit rating in Latin America, based on the low 20 per cent ratio of public debt to GDP. In Argentina that ratio is 45 per cent. There remains also a solid institutional foundation for business in Chile. The 2015 Transparency Corruption Perceptions Index ranked Chile at 23, the second least corrupt country in Latin America just behind Uruguay. The United States itself is 16. In contrast, Argentina comes in as 107, far worse than even such corruption stalwarts as Brazil, China, India, and Thailand.
The Chilean business sector remains robust. The country is home to a range of internationally competitive firms, from Falabella, the largest department store chain in Latin America, to LATAM, the largest airline group and a member of the One World Alliance.
Q: Do you foresee any better news for an Argentina recovery?
A: Argentina has the potential for pleasant surprises, simply because it has performed so poorly in recent years. The surprise election as President of the center-right opposition candidate Mauricio Macri last December resulted in significant policy shifts. He abolished the controversial taxes on commodity exports which had crippled the country’s agricultural sector. He has begun to address the disastrous situation of the country’s national statistical bureau, which after the previous government intervened in its affairs in 2007, has produced data so unrelated to reality that in 2013 Argentina became the first country ever to be censored by the IMF for not supplying accurate data. Macri also signed an agreement with US hedge funds to settle a protracted dispute over the country’s failure to repay billions of dollars’ worth of bonds acquired at heavily discounted prices after the country's economy collapsed in 2001. The dispute had restricted access to world credit markets for fifteen years. However it remained unclear if he could secure the approval of the legislature for this deal, while it is seems even less clear if the new government can bring inflation under control.
Yet, as this book demonstrates in gory detail, Argentina has demonstrated over the last 50 years a unique ability to disappoint optimistic expectations. A particular concern now is the educational system, once upon a time one of Latin America’s best, but which some indexes now suggest has fallen behind even countries like Brazil let alone Chile in global rankings for quality. The country appears ill-equipped to compete globally, even if it could achieve policy stability.