Once upon a time, Argentina was a very rich country. There is little disagreement that this time was in the period before WWI. According to della Paolera and Taylor (2003), Argentina’s 1913 level of per capita income (USD 3,797 in 1992 US Dollars) compared favorably to that of France (USD 3,452) and Germany (USD 3,134.) Large inflows of foreign physical, human, and financial capital shored up the expansion of primary products exports (grain, meat, wool and leather) which fueled rapid economic growth.

Disagreement is seldom about whether the fall occurred and mostly about when and why. Some argue that the decline started with the Great Depression (e.g. Diaz-Alejandro 1985). Conde (2009) associates its beginning with WWII, Taylor (1992) argues for 1913, and Sanz-Villarroya (2005) estimates an even earlier structural break in 1899, while Campos et al. (2012) report Bai-Perron estimates supporting two main structural breaks (1922 and 1964). Yet by 1947 Argentina was still ranked 10th in the world in terms of per capita income and della Paolera and Taylor (2003) estimate that the ratio of Argentina’s to the OECD’s income declined to 84% in 1950, to 65% in 1973, and then to 43% in 1987. It rebounded in the 1990s but with the run-up to the 2001 crisis again reverted (Figure 1).

Figure 1. Ratio of Argentina’s GDP per capita to developed countries’ GDP per capita, 1885-2003

Note: Authors’ calculations using GDP per capita data from Maddison (2007), Western Europe is: Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Sweden, Switzerland and United Kingdom. US-CAN-NZ-AUS is Australia, Canada, New Zealand and the US.

A vast literature emerged offering various competing explanations for such extraordinary long-run relative economic decline (Taylor 2014). One reason that has received considerable attention is increased competition in international markets (especially from Australia, New Zealand, and Canada) during and after WWI and the concomitant decline in migration and foreign capital inflows. Finance has also received a great deal of attention with the Argentine decline linked to low savings rates and associated high population dependency rates (Taylor 1992). A key role has also been attributed to international financial integration as there may have been excessive dependence on one source of foreign capital (U.K.) with changes in global leadership (U.S.) contributing substantially to the Argentine decline (Taylor 1998).

Another well-researched reason is trade openness (Diaz-Alejandro 1985). The ratio of exports and imports to GDP in Argentina exceeded 50% in the pre-WWI period, declined throughout the inter-wars years (from about 45% to 20%), and practically did not exceed 25% after 1945.  It is still debated whether this was driven by the disruption of international trade during WWI and the Great Depression, or by the adoption of protectionist policies by successive Argentinean governments. These declining trade-to-GDP ratios may also reflect the failure to diversify away from agriculture and the exhaustion of the agricultural frontier (Debowicz and Segal 2014).

Many argue that macroeconomic policies in general – and their inconsistency and the resulting macroeconomic instability in particular – are also to blame. For instance, della Paolera et al. (2003) show how public deficits throughout Argentinean history play an important role in explaining the decline.

More recently emphasis has turned to institutional factors. Acemoglu and Robinson (2006, p.7) note that “The political history of Argentina reveals an extraordinary pattern where democracy was created in 1912, undermined in 1930, recreated in 1946, undermined in 1955, fully recreated in 1973, undermined in 1976, and finally reestablished in 1983”. Alston and Gallo (2010) identify the onset of widespread electoral fraud in the 1930s as a turning point and argue that this erosion of the rule of law is a main reason for the decline.

A horse race worth watching?

We use the power-GARCH framework and annual data from the 1890s onwards to provide a quantitative assessment of the relative importance of each of these competing explanations (trade openness, macroeconomic instability, institutional change, domestic financial development, and international financial integration), focusing on four different types of effects:

  • direct (on mean economic growth),
  • indirect (via growth volatility),
  • dynamic (short- and long-run),
  • and structural breaks

Regarding the direct effects on economic growth, the PGARCH multivariate analysis reveals a robust positive effect of the development of domestic financial institutions (private and savings bank deposits to GDP) as well as a negative growth effect from the instability of informal institutions (chiefly general strikes and guerilla warfare). As for the indirect effects on economic growth (through growth volatility), the results support negative roles for formal political instability (constitutional changes) and trade openness. The numerous constitutional changes and the radical changes in trade policy have significantly contributed to dampen the ‘expected’ part of growth volatility, and this in turn has a further negative effect on economic growth. In terms of the dynamic effects, the results suggest that changes in political institutions and international financial integration (U.K. interest rates) have affected Argentine growth negatively in the last hundred years or so both in the short- and in the long-run. Interestingly, the effects of political instability are larger in the short- than in the long-run, while those for financial development are negative in the short- but positive (and larger) in the long-run (Campos et al. 2014).

These combined results suggest that financial institutions and political institutions exhibited first-order effects on Argentina’s economic growth path since the 1890s. Their preponderance is justified on the basis that their effects are significant either directly or indirectly, and in both the short- and long-runs, and accounting for structural breaks. The direct growth effect of financial development is positive, but has a negative short-run effect and a larger, positive long-run effect. Hence Argentina’s fall is better explained by institutional change – informal political instability has a negative direct effect and negative short- and long-run impacts on growth, while formal political instability has equally significant and negative indirect growth effects (Campos et al. 2012 show that these results are also obtained for a much wider range of measures of political and financial institutions).

There are additional results worth mentioning. For instance, international financial integration may also contribute to the fall because both short- and long-run effects are negative, yet there are no robust direct or indirect effects. Trade openness may have contributed as well, because short-run and indirect effects are negative, yet no long-run effects were found. Accounting for structural breaks suggest that trade openness may have been important before 1930, while macroeconomic instability may have been particularly important in more recent years (after 1970.)


What lessons do we draw? One may be tempted to portray the Argentine experience as the clearest case of post-1820 stagnation over a century – that is, of secular stagnation stricto sensu. One indeed may be tempted to derive as a main lesson that Argentina ‘proves’ that secular stagnation is a real possible outcome of any forthcoming ‘lost decade(s)’ in Europe (Crafts 2014.) Yet I do not believe that this is the main lesson. Instead it is one that economic historians already knew for a while (cf. Haber et al. 2007) but that has been, to a large extent, ignored by the rest of the profession – institutions do matter but among them, political institutions and financial institutions seem fulcral. We should try to do more to understand not only how these two sets of institutions individually affect growth but also how the manner in which they interact may ultimately shape economic development.


Acemoglu, D, and J Robinson (2006), Economic Origins of Dictatorship and Democracy, Boston: Cambridge University Press.

Alston, L, and A Gallo (2010),  “Electoral Fraud, the Rise of Peron, and Demise of Checks and Balances in Argentina”, Explorations in Economic History, 47, 179-197.

Campos, N, M Karanasos, and B Tan (2012), “Two to Tangle: Finance, Instability and Growth in Argentina”, Journal of Banking and Finance, 36, 290-304.

Campos, N, M Karanasos, and B Tan (2014), “From Riches to Rags, and Back? Institutional Change, Financial Development, and Growth in Argentina since the 1890s”, Bonn: IZA DP 8654.

Crafts, N (2014), “Secular Stagnation: US hypochondria, European disease?”, in Teulings, C. & R. Baldwin (eds), Secular Stagnation: Facts, Causes and Cures, CEPR Press.

Conde, R (2009), The Political Economy of Argentina in the Twentieth Century, Cambridge: Cambridge University Press.

Debowicz, D and P. Segal (2014), “Structural Change in Argentina, 1935–1960:  The Role of Import Substitution and Factor Endowments”,  Journal of Economic History 74, 230-258.

Diaz-Alejandro, C (1985), “Argentina, Australia and Brazil Before 1929”, in D. Platt, & G. di Tella (Eds.), Argentina, Australia and Canada: Studies in Comparative Development, 1870-1965 (pp. 95-109). New York: St. Martin’s Press.

Haber, S, D North, and B Weingast (Eds.) (2007), Political Institutions and Financial Development, Palo Alto: Stanford University Press.

Sanz-Villarroya, I (2005), “The Convergence Process of Argentina with Australia and Canada: 1875-2000”, Explorations in Economic History, 42, 439-458.

Della Paolera, G and A Taylor (2003), “Introduction”, in G della Paolera and A Taylor (Eds.), A New Economic History of Argentina, Cambridge: Cambridge University Press.

Della Paolera, G, M Irigoin, and C Bózzoli (2003), “Passing the Buck: Monetary and Fiscal Policies”, in G. della Paolera and A Taylor (Eds.), A New Economic History of Argentina, Cambridge: Cambridge University Press.

Taylor, A (1992), “External Dependence, Demographic Burdens and Argentine Economic Decline after the Belle Époque”, The Journal of Economic History, 52, 907-936.

Taylor, A (1998), “Argentina and the World Capital Market: Saving, Investment, and International Capital Mobility in the Twentieth Century”, Journal of Development Economics 57: 147–84.

Taylor, A (2014), “The Argentina Paradox: Microexplanations and Macropuzzles”, NBER Working paper 19924.

This article is published in collaboration with VoxEU. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Nauro F Campos is Professor of Economics and Finance at Brunel University.

Image: A man walks in Buenos Aires’ financial district, July 31, 2014. REUTERS.