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

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Argentina, the Ivory Coast and Korea, London: The Macmillan Press.

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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,
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Fitzgerald, E.V.K., 1997: ‘The Theory of ISI’ in Centro Studi Luca d’Agliano Development Studies
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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:
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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’
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i
The author acknowledges a heavy debt to all the references cited in pulling together the empirical
background to this piece.

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