Exceptional Argentina Di Tella, Glaeser and Llach - Thomas Piketty

land-rich economy that is well integrated into world markets may embark upon an industrialization
process in response to poor terms of trade, especially if the new prices are not a transient shock.
This incipient industrialization process is possible if the economy has enough capital -i.e., if it is
rich enough- and labor; otherwise, the secondary sector will not be profitable and the economy will
not be able to cushion the negative terms-of-trade shock.
Starting from the onset of the industrialization process, capitalists and workers recently employed
in the industrial sector have incentives to lodge demands for protectionism. As the process
advances, the political power of these groups grows and, eventually, their demands may be met. As
a consequence, the industrial sector receives a new boost at the expense of the primary and tertiary
sectors, and the economy gradually becomes closed to world markets. Moreover, the political
coalition supporting protectionism gains power. As a result, anti-trade policies become entrenched
and the economy moves closer to autarky. Even if the conditions that gave rise to the endogenous
industrialization subside, the economy remains closed, since the alliance of capitalist and workers
retains its power.
However, the anti-trade alliance is not unbreakable. Secular trends in labor supply, frictions
between workers and capitalists or a strong improvement in the terms of trade can push the
economy back into a free trade equilibrium.
Under more general preferences and technology, population growth and higher productivity in the
primary sector can shift the factor allocation and lead to increased demands for free trade. In both
cases, under some conditions, a greater share of workers will be employed in the service sector.
Therefore, more workers will support liberalization.
Similarly, if services gain in importance in the consumption bundle, more workers will be
employed in the tertiary sector. As a result, there will be greater support for liberalization.
Moreover, even the owners of inputs employed in the secondary sector will have weaker
incentives to support protectionism if this shift toward services occurs at the expense of the
consumption of the exportable good.
Once the economy is near autarky, capitalists and workers will not be able to use their coalition's
political power to pursue further industrialization. Besides, they will be extremely vulnerable to
negative shocks in industrial productivity (e.g., an increase in the price of a non-modelled
importable input). Under these circumstances, unions may be tempted to use their power against
capitalists, thereby weakening their alliance. We have discussed how unions, in their zeal to keep
wages from falling in the short run, may introduce distortions that reduce their power in the long
run.
Finally, an improvement in the terms of trade or an increase in agricultural productivity increases
the incentives for landlords to intervene in the political process. The economy will be able to
escape the anti-trade trap if landlords are successful in challenging the coalition of industrial
workers and capitalists.
4 Analytical Narrative