Exceptional Argentina Di Tella, Glaeser and Llach - Thomas Piketty

sector to give rise to a protectionist coalition.
Suppose now that, once the economy is industrialized and the import-substitution strategy has
driven the economy close to autarky, the terms of trade improve. In the short run, this harms all the
agents who have switched to the secondary sector. However, if these agents hold political power,
they will not allow capital to flow back to the primary sector; instead, they will increase the export
tax. If the tax is increased to levels that ensure autarky the improvement in the terms of trade will
not have any real effect. The economy will be trapped in a situation where every improvement in
the terms of trade will be neutralized and nobody will gain (or lose) from it.
If the terms of trade improve the distributional conflict becomes more intense. Workers may
benefit from a reduction in the tax rate in the long run. Moreover, landlords' incentive to exert
influence in the political arena will increase, because the benefit of reducing the level of
protectionism increases with the terms of trade. They will be opposed by industrial capitalists and
short-sighted workers who benefit from protectionism. This distributional conflict may grow in
intensity, destabilizing the political equilibrium and, depending on how the conflict is resolved,
spurring liberalization. Similarly, the distributional conflict will also become more severe if the
productivity in the primary sector increases.
The next subsection deals with other forces that may give rise to trade liberalization, not through
increased distributional conflict, but by weakening the protectionist political coalition of
workers-capitalists.
3.4 Forces Leading to Trade Liberalization
Events that reduce the proportion of workers and capital in the manufacturing sector will weaken
the coalition that supports protectionist policies. We have discussed how an increase in the price or
productivity of the agricultural sector may generate enough distributional conflict to prompt the
formation of a coalition of landlords and long-sighted workers that support liberalization. In this
subsection, we will show what other kinds of events can shift employment and capital allocation
when the economy has traveled far enough down the road of protectionism.
In our basic model, protectionism will lead the economy somewhere near autarky. The
assumptions of Cobb-Douglas preferences and technology imply that the shares of labor and
capital ( λ and κ ) in autarky depend only on the Cobb-Douglas shares ( α , β,
φm
and φ
a
) and not
on factor endowments or productivity (see Section 7.1.1 in Appendix A). This will not be the case
if we relax the Cobb-Douglas assumption. We can first relax the assumption of unitary elasticity of
substitution in preferences and technology. We can go even further and relax the homotheticity
assumption. We note that, if preferences are elastic but technologies are not, the share of workers
employed in the secondary sector decreases with both population growth and productivity in the
primary sector.
Finally, we conjecture that labor unions that were created or empowered to maintain and support
protectionist policies also generated frictions in the labor market that ended up depriving them of
their most vital input: unionized workers.