Exceptional Argentina Di Tella, Glaeser and Llach - Thomas Piketty

Transition Remarks
The previous two papers have both argued that Argentine trade policies led to a relatively closed
economy and a poorer country. But why did Argentina follow trade restricting policies that
eventually impoverished the country? One explanation is that it was an honest mistake. After all,
many well respected economists supported imported substitution during its heyday.
But another explanation is that political forces conspired to move Argentina from an open to a
closed economy. The next paper explores how an initially open economy can shift towards tariffs
and then get locked into protectionism. It argues that Argentina got caught on a path towards
isolation where political interests closed economic borders.
The stylized model in the chapter focuses on three economic sectors: agriculture, industry and
services. Argentina, it is assumed, has a comparative advantage in exporting agriculture. At the
start of the 20 th century, that sector was dominant and as a result there was widespread support
for free trade. Neither the large agrarian capitalists nor their humbler workers had much to gain
from tariff barriers.
During the middle decades of the 20 th century, a combination of natural technological progress,
global shocks to terms of trade and a depression-induced hike in trade barriers, caused the
industrial sector to increase substantially in size. The sector had a much stronger interest in
protection and as it grew more important, tariff barriers increased in size. Both industrial workers
and capitalists benefitted from protection from global manufacturing competition.
The important insight of the paper is that these tariffs create path dependence. By maintaining an
overly large industrial sector, the tariffs maintain a lobby for high tariffs. Since so many workers
stood to lose from free trade, there was little chance for free trade to get widespread support. The
decline in protection can only come as the non-trading service sector increases in importance.
The paper poses a critical question: why did other new world economies not fall into similar
tariff traps? The paper suggests that political institutions, which enabled welfare-enhancing
bargains, were absent in Argentina. According to this view, American industrial workers were
willing to accept openness in exchange for other social benefits, while Argentina had no means
of delivering a comparable deal. This key political insight sets the stage for the book’s emphasis
on politics.