The Political Economy of Productivity in Argentina : Interpretation and Illustration

IDB-WP-102
IDB WORKING PAPER SERIES No.
The Political Economy
of Productivity in
Argentina
Interpretation and Illustration
Santiago Urbiztondo (Coordinator)
Marcela Cristini
Cynthia Moskovits
Sebastián Saiegh
October 2009
Inter-American Development Bank
Department of Research and Chief Economist

---

The Political Economy
of Productivity in Argentina
Interpretation and Illustration
Santiago Urbiztondo (Coordinator)
Marcela Cristini
Cynthia Moskovits
Sebastián Saiegh
Inter-American Development Bank
2009

---

Cataloging-in-Publication data provided by the
Inter-American Development Bank
Felipe Herrera Library

The political economy of productivity in Argentina : interpretation and illustration /
Santiago Urbiztondo, coordinator

p. cm. (IDB Working Papers ; 102)
Includes bibliographical references
1. Policy sciences—Economic aspects—Argentina. 2. Industrial productivity—Argentina. 3. Productivity
accounting—Argentina I. Urbiztondo, Santiago. II. Inter-American Development Bank. III. Series

H97 .P65 2009
320.6 P762----dc22
© Inter-American Development Bank, 2009
www.iadb.org


Documents published in the IDB working paper series are of the highest academic and editorial quality.
All have been peer reviewed by recognized experts in their field and professionally edited. The
information and opinions presented in these publications are entirely those of the author(s), and no
endorsement by the Inter-American Development Bank, its Board of Executive Directors, or the countries
they represent is expressed or implied.

This paper may be freely reproduced provided credit is given to the Inter-American Development Bank.

---

Abstract*

This paper examines how the main characteristics of Argentina’s policymaking
process (PMP) affect the productivity of its economy using the conceptual
framework presented in Murillo, Scartascini and Tommasi (2008), Stein et al.
(2008), Spiller and Tommasi (2007), and IDB (2005). First, the paper
complements existing descriptions of the PMP by considering private agents and
elaborating on structural characteristics possibly conducive to policymaking
instability. Second, the paper illustrates the (negative) impact of Argentina’s low-
quality and myopic PMP equilibrium on productivity by examining two key
areas: provision of infrastructure services and agricultural policy. Finally, the
paper explores the PMP at the local level of government (municipalities and local
communities), finding that it mimics the flaws observed at the federal level.

JEL Classifications: P16, O43
Keywords: Political economy, Productivity, Argentina





* This paper was prepared by Santiago Urbiztondo (coordinator), Marcela Cristini, Cynthia Moskovits, economists at
FIEL (Latin American Economic Research Foundation) and Sebastián Saiegh (Assistant Professor of Political Science,
University of from UCSD). The opinions contained here are uniquely attributable to the authors, and do not involve their
respective institutions. The authors gratefully acknowledge Alejandro Villar, Professor at the Universidad Nacional de
Quilmes and specialist in local economic development, for the exchange of ideas and his support, as well as the excellent
research assistance from Diego Focanti. This paper was undertaken as part of the IDB Latin American and Caribbean
Research Network project “The Political Economy of Productivity.”

---

1.
Summary and Main Conclusions

A key feature of economic development in Argentina has been its high economic volatility,
which encompasses periods of high economic growth and high productivity gains followed by
periods of persistent underperformance ending in severe crisis, damaging overall productivity.
Considering the last four decades, the overall balance of economic growth and social progress
has been highly disappointing.
Exploring the reasons for this outcome is a complex task. In this study we highlight
several key economic and institutional features that may represent an important part of the
problem. Our approach to identifying those features is threefold. First, we review the literature
on the policymaking process in Argentina, which provides a solid starting point for
understanding the connections of public institutions, politics and the workings of the economic
system. Second, we focus on productivity issues at the overall and sector level. Two case studies
on the infrastructure and the agricultural sectors allow us to illustrate the outcomes of the sector
activity under the associated policymaking process (PMP) and their feedback in the field. At this
point we were able to make a first inference on the relation between the cyclical dynamics of the
economic process and the key features of the PMP. Third, we discuss the role of non-
governmental actors in the PMP and augmented the previous PMP description in an attempt to
account for feedback mechanisms.
Our point of departure is that Argentina’s “historical” social and economic structure
shaped the way in which social groups formed and interacted in the Argentine PMP. Moreover,
the imprint of the “closed-import substituting-cyclical economy” has remained intertwined in the
current functioning of the PMP, amplifying the economic cycles through political and fiscal
institutions. This feature prevails in spite of several important changes both regarding the
economic and institutional base after the 1980s and new social actors entering the scenario since
the 1990s.
In brief, the dynamics of this process can be described in the following terms: the
inherited structural characteristics of Argentina’s PMP, along with its institutions and
underpinnings, has fostered a political-economic equilibrium in which the interactions between
the public sector and private agents are dominated by short-term considerations. In the event of a
shock, governments (guided by a strong presidency) tend to adopt reactive, short-term policies,
redistributing assets (through the exchange rate, subsidies, public expenditures, etc.) rather than

2

---

taking a longer-term outlook. In this context, agents in the private sector react to these policies
with a somewhat similar short-term perspective. This equilibrium is quite stable and is supported
by a belief system dominated by short-term considerations (corto-placismo) and ideological
volatility.
Our case studies have also contributed to the identification of two major negative
consequences of this behavior. On the one hand, economic opportunism and (subtle) confiscation
of private assets by public authorities have spread as a crisis remedy mechanism over time,
reducing investment particularly in infrastructure sectors where projects require a longer term to
develop. In particular, it becomes clear why economic agents would avoid investing in activities
that are too specific and entail sunk costs, as their quasi-rents would most likely be confiscated
when needed to address short-run pressures.
On the other hand, recurrent crises have caused the misuse of resources, reallocating them
from productive sectors to unproductive activities through fiscal mechanisms, constraining the
growth of very competitive sectors like the agro-industry. No feature of the operation of the
agricultural sector seems to contribute directly to the pattern of short-term policy decisions. On
the contrary, business cycles of agricultural production and exports are smoother than those of
manufacturing. Nonetheless, governments have repeatedly collected revenues from the
agricultural sector through extraordinary taxes such as export duties and they have usually done
so without facing strong opposition. Past success in duty collection may have encouraged
politicians in office to consider the sector a secure source of financing for their objectives and
even their mistakes. The negative effects of such policies, nevertheless, might have had more
global manifestations than in the case of technology or primary goods production, inhibiting
agro-industrial growth.
Moreover, the importance of provincial political powers makes fiscal bargains
particularly difficult to strike, with consequent implications for the quality of fiscal and
macroeconomic policy. This situation allows the executive to “purchase” policies through
distorted fiscal federalism and other political channels. In “normal” times, exchanging votes for
fiscal funds is the most common strategy. A third case study is thus devoted to illustrating that
this inability to reach long-term agreements, which induces short-term oriented policies and
agents’ behavior, is reproduced in the local policy arena. We show that the coordination among
small local municipalities needed to provide key local and regional public goods demanded by

3

---

SMEs is subject to top-down initiatives, depends on discretional decisions, and is often unstable
in the long run due to decisions on fiscal resources. Such coordination is more likely to succeed,
however, when it is linked to strong personal commitment by leaders.
Based on our evidence and on the available literature on non-governmental actors in
Argentina we focus our analysis of the augmented PMP on three actors: the entrepreneurial
associations, the labor unions, and the recently emergent piqueteros. These groups, rather than
atomistic individuals, constitute the actual winners and losers from a given set of policies. In
particular, ideological compatibilities, ingrained party loyalties, and/or patron-client networks
often characterize their relationship with the PMP.
Manufacturing and agricultural business associations influence the PMP with rather
formal and open demands expressed by their leaders. Although lobbying is widespread, their
main channel of action is networking and the appointment of representatives in key government
positions. Nevertheless, due to the internal heterogeneity of these associations, each sector has
strong incentives to negotiate separately with the government and seek its own benefits.
Therefore, individual reasoning precedes any collective approach. Indeed, economy-wide
associations are ephemeral (responding to a common threat) and their participation in the PMP is
extremely informal. In this context, more concentrated and organized sectors, capable of
minimizing collective action problems, are able to obtain specific benefits through political
action. Without establishing any causality, the instability seen in the political and business cycles
goes together with the instability and fragmentation in businesses’ representation. The phase of
the economic cycle, the proximity to elections and the predominance of the Executive Power
also alter the participation of businesses in the PMP.
In contrast, labor unions have been decisive actors in Argentina’s PMP, even though in
different times their unrest has noticeably varied and different unions have been more or less
belligerent. Partisan loyalty to the Partido Justicialista (PJ) and union relations PJ leaders are the
main factor determining their political activity. Furthermore, unions operate beyond their link to
the PJ in order to obtain benefits in exchange of political support. In this process, it is
fundamental for labor unions to hold on to the pillars of their political power: health care funds,
sectoral monopoly for representation with compulsory affiliation, and collective bargaining at the
industry level. Compared with the business sector, labor unions have a stronger, more
homogeneous, collective and open participation in the PMP.

4

---

Since the mid-1990s, the situation created by decreasing labor activism and rising
unemployment has prompted various changes in social forces. Among the new socially
meaningful groups, the movimiento piquetero became particularly relevant. The piqueteros’
visibility and influence rested on their particular form of protest: first blocking country roads and
city streets, and subsequently negotiating their withdrawal with political authorities. The
immediate objectives of this tactic were to secure new jobs and new or increased government
subsidies. With the decline of piquetero activity, and following the economic recovery that took
place after 2003, some of the old dynamics involving the unions and PJ administrations were
restored.
Finally, our augmented PMP considers the role of political parties and the influence
exerted by the public opinion. In most contemporary democracies, including Argentina, political
parties are key players in the policymaking process. However, the ability of Argentine parties to
articulate and aggregate the interests of distinct groups in society is somewhat limited. As
observed in the heterogeneous composition inside each business association, this is characteristic
of the political parties, each representing a wide spectrum of individuals and politicians. An
important consequence of the tendency of Argentine parties (and particularly the PJ) to portray
themselves as sole representatives of the “national interest”—and their unwillingness to adhere
to distinct ideological perspectives, is that political competition is usually reduced to a
competitive struggle for office. More importantly, the parties’ deliberate disavowal of any
concrete policy aims or even links with broad socioeconomic groups tends to create difficulties
for them once they assume power. The main problem with this pattern of political competition is
that alternation in office tends to be highly correlated with economic cycles.
Moreover, because incumbent politicians can anticipate when economic conditions are
likely to become sour, they tend to create political business cycles. As a result, instead of
creating a “buffer” between economic and political conditions, the Argentine party system
creates a “feedback” effect that frequently amplifies the consequences of economic downturns.
Regarding public opinion, our study underscores the swings in political and economic
matters that would suggest the presence of “ideological entrapment,” where the average voter
still believes that the government can solve the country’s problems, even though he/she does not
have much trust in the government currently in office.

5

---

In synthesis, the augmented PMP provides a more complete vision of the workings
behind the economic and political system dominated almost exclusively by short-term
considerations and characterized by economic cycles that severely undermine productivity and
growth.

2. Productivity and Growth in Argentina: Recent Evolution

In spite of spasmodic economic behavior, Argentina is still recognized as a medium-income,
intermediate developing country in the international arena. In the early 1900s the country was
one of the most promising economies in the world, distinguished by its agricultural endowment
and an educated population enjoying equality of opportunities in the context of continuous
economic growth and social promotion. In contrast, over the last 40 years Argentina has been
characterized by sizable economic fluctuations and recurrent macroeconomic crises that hindered
its growth capacity and productivity (see Figure 1 below). The whole system evolved towards
very poor welfare results and, over time, each crisis took a toll on basic social promotion
institutions: public education deteriorated severely; infrastructure services and public
expenditures were biased to benefit middle-income households in central cities; health and social
housing services failed their targets; informality spread out in the labor market and urban poverty
grew in peripheral areas of larger cities, following internal migrations from the interior of the
country to the Greater Buenos Aires area (GBA). Recurrent efforts to restore growth have not
been accompanied by any special attention to the productivity issue.
This pattern coexisted with public policies of different sign. In the 1990s Argentina set in
motion a wide-ranging program of structural reforms involving privatization, deregulation of the
economy and external trade liberalization. Achievements on macroeconomic stability and rather
sophisticated reforms were strong enough to stimulate economic activity and new investment.
From 1991 until 1998, GDP grew at 5.7 percent each year, total investment as a percentage of
GDP grew from 19 percent in 1993 to 21 percent in 1998, and total foreign direct investment
(FDI) grew by 30 percent. Tradable sectors increased their labor productivity by 6 per year, and
non-tradable sectors also increased their labor productivity by 2.1 percent annually over the same
period.



6

---

Figure 1. Argentina’s Business Cycle

Argentina:
Business Cycle
1980 - 2007
15.0
8.00E-01
7.00E-01
10.0
6.00E-01
5.0
)
5.00E-01
i
n %
(
d 0.0
n
r
e
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
t
4.00E-01
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
f
r
om
-5.0
3.00E-01
t
i
on
i
a
v
e-10.0
D
2.00E-01
-15.0
1.00E-01
-20.0
0.00E+00
Recessions

Note: The figure shows the cyclical component of GDP, using the Hodrick-Prescott (HP)
filter. Percentages in the chart show the deviation from the long-run trend of the series.
Source: Authors’ estimates based on data from National Accounts of Ministry of the
Economy (MECON).


As of late 1998, the country started a period characterized by GDP stagnation and
difficulties in sustaining economic reform efforts. External shocks (mainly Brazil’s devaluation
in 1999 and lower commodity prices since 1999), along with serious errors in domestic policies,
led to increasing dissatisfaction among businesses and brought about a discussion of the
country’s competitiveness in both the short and long run. Lack of productivity was identified as
the major problem. Moreover, the public discussion unveiled a deep controversy on the kind of
instruments that would be adequate and feasible to promote competitiveness and the roles of the
private and public sectors in growth. The macroeconomic crisis ended the discussion abruptly:
the major devaluation of the peso in 2002 created a new scenario where the real exchange rate
once again became the key issue in defining productivity and competitiveness.
Since 2003 Argentina’s economy has been growing very fast (between 8 and 9 percent
annually on average until 2008). At the same time, the unemployment rate, which remained at
distressingly high levels throughout the 1990s, plunged from 23 percent in 2003 to 8 percent in
2008. The level of investment, as a percentage of GDP, also recovered over the period. Yet, FDI

7

---