The Advanced Stage of Industrialisation and the Argentine Pendulum: A Classical-Structuralist Approach

ABSTRACT

This article extends the recent revisions to the two-sector model of Latin American structuralism, following the classical tradition approach, to a small economy with an advanced stage of industrialisation. After considering the incorporation of a third sector, which produces capital goods and is controlled by foreign capital, the relationships between distribution and balance of payments are analysed. The extended model enables an analytical formulation of O’Donnell’s ‘Pendulum’, by putting forward various distributive configuration alternatives on the basis of different types of alliances between the classes described therein, as well as by identifying the limitations faced by each coalition.

KEYWORDS:

• O’Donnell
• Argentine industrialisation
• surplus approach
• Latin American structuralism

JEL CODES:

• B22
• B51
• E11
• E3
• F41
• O14

Acknowledgements

I am deeply indebted to Ariel Dvoskin and Germán D. Feldman for their invaluable guidance during the early phases of this work. I also wish to thank Matías Vernengo, Carlos Medeiros, Florencia Medici, Riccardo Pariboni, Gabriel Brondino, Guido Ianni, Santiago J. Gahn, André Cieplinski, Jessica Reale and Denis Melnik for their helpful comments and discussions on an earlier version of this paper. Finally, I appreciate the two anonymous referees, whose comments and suggestions contributed to conspicuously improve the quality and clarity of this article. All the remaining errors are mine.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 The model could easily be adapted to incorporate absolute rent. But this is not an aspect that is central to the distribution–balance of payments relationship for the authors referred to in this paper.

2 In summary, an economic system is said to be a price taker when the technique for minimising costs at the local level does not enable global demand to be met or global production to be controlled. In this context, the production costs of the economy in question, expressed in foreign currency, do not determine international prices, which are considered an exogenous variable (Machado 2017, p. 24). In line with structuralist literature (Ferrer 1963, p. 6; Díaz-Alejandro 1970, pp. 169–170, 178), the Argentine economy is considered to be a price-taker economy for both export and import products.

3 We assume that nominal wages are paid prior to the production process, without this substantially altering the relationships derived from the analytical formulation.

4 By technical dependency we mean the need for the manufacturing process in general to incorporate imported means of production, where the dynamic of local technological change is boosted by the technological progress in central economies. In this way, peripheral economies that initiate production diversification processes end up having to imitate these central economies, and their ongoing process of import substitution inevitably brings with it an increase in imported inputs (Vernengo 2006; Dvoskin and Feldman 2018a).

5 The exchange rate refers to the quantity of Argentine pesos needed to purchase one unit of foreign currency (e.g., US dollar).

6 As explained below, the definition of real wage in terms of demand prices is related to the key role that both international prices and the exchange rate have in the determination of domestic prices in the tradable sector in a small open economy.

7 Moreover, if one considers the case in which a non-reproducible means of production is required by the productive method in sector j, the increase in agrarian output, associated with extraordinary gains realised by the sector, will trigger competition among capitalists for the fixed input, implying the emergence of differential rent as a new distributive variable (Dvoskin, Feldman, and Ianni 2020, pp. 39–42). While some structuralist authors point to the scarcity of land and consider the role of land-owners as central in the analysis of the relationship between distribution and the balance of payments (e.g., Braun and Joy 1968), others, such as Guillermo O’Donnell, focus on the agrarian fraction of the Argentine capitalist class.

8 In our model, we determine the protectionist tariffs, i.e., ${\tau }_I^{\circ }$, as the level required by the non-competitive sector (i.e., $E{p}_I^{\ast }<p_I^s\left(\overline{w},\overline{E},r_A\right))$ in order to allow its productive survival, that is, to afford the wage in foreign currency and the normal profit rate, determined in the internationally competitive sector, such that $E{p}_I^{\ast }\left(1+{\tau }_I^{\circ }\right)=p_I^s\left(\overline{w},\overline{E},r_A\right)$. Any arbitrary value of ${\tau }_I$, higher than ${\tau }_I^{\circ }$, also avoids the displacement of domestic production by international competitors. But $E{p}_I^{\ast }\left(1+{\tau }_I\right)$ will not last. Competition among sectors will impose $p_I^s\left(\overline{w},\overline{E},r_A\right)$ as the long-term position of prices in the protected activity.

9 By way of example, once $E=\overline{E}$ has been fixed (Vernengo 2001), then $p_A^d$ is determined, as is $p_A^s$, by following equations 3 and 10. Remembering that nominal wages are determined through negotiations, $r$ would be obtained residually in equation 1, and incorporated into equation 2, together with $\overline{E}$ and $\overline{w}$, to calculate the costs of sector $I$, i.e., $p_I^s$. In equation 11, the minimum value of the protectionist tax, ${\tau }_I$, can be determined so that sector $I$ is able to pay $r$, given the wages in foreign currency, so that $p_I^s\left(r\right)=\overline{E}{p}_I^{\ast }\left(1+{\tau }_I\right)$. The same logic can be applied to solving the system of equations if the rate of profit is determined exogenously, $r=\overline{r}$ (Panico 1988; Pivetti 1991). Once we take the monetary salary determined by wage bargaining, $p_A^s$, $p_A^d$ and $E$ are residually obtained from equations 1, 3 and 10. Thus, $p_I^s$ is immediately known from equation 2, while $p_A^d$ and ${\tau }_I$ are obtained from 4 and 11.

10 In Latin American structuralist literature, the link between distribution and the balance of payments arises mainly due to the presence (direct or indirect) of imported goods in the wage basket. In this way, increases in real wages would tend to increase imports and worsen the balance of payments (Braun and Joy 1968, p. 878; O'Donnell 1978b, p. 28; Canitrot 1983, pp. 423–424). But contributions such as Monza (1976) identified the growth of autonomous domestic components (not providers of foreign exchange) of effective demand as the main drivers of the external constraint, through their expansive effects on output and employment level.

11 In 1958, Law No.14.780 was passed eliminating restrictions on foreign capital investing in and controlling activities in production sectors, granting it the same rights and faculties as capital of national origin. Moreover, the law on Guarantees for Investment was enacted, protecting foreign investors against the risk of currency inconvertibility (Azpiazu et al. 1985, p. 16).

12 Excluding foreign investment in oil production, between May 1958 and December 1961 Argentina received the equivalent of 400 million US dollars, of which 32 per cent was invested in the chemical industry, 25 per cent in the automobile industry, 13 per cent in the production of non-electrical machinery, 12 per cent in the production of nonferrous metals and 8 per cent in oil refining (Díaz-Alejandro 1970, p. 266).

13 In the 1970s, a series of analyses were carried out seeking to shed light on Argentina’s political economy drawing on the work of Antonio Gramsci. They revisited Marxist thought but argued that there was no direct correlation between the dynamics of political power and those of the predominant actors in the economy (Portantiero 1974).

14 Declining relative prices entail a relative increase in the prices of industrial goods and an increase in the purchasing power of wages due to the high share of agricultural products in the wage basket.

15 In O’Donnell’s own words, ‘[I]n each phase of the cycle the large bourgeoisie has played on the winner's side' (1978b, p. 35).

16 O'Donnell (1978b) characterises the productive processes of agricultural goods (i.e., cattle and cereals) according to the specificities of their production method, the ‘estancia’. In this respect, the author highlights: (1) the extensive use of land and (2) low labour and capital good requirements (O'Donnell 1978b, p. 22). The productive independence of the agricultural sector is attributed to its low technological development.

17 As an anonymous reviewer has noted, the e–r relationship can be analysed by taking the profit rate as an exogenous distributive variable, defined by monetary-financial determinants and a normal ‘net profit rate’. According to the monetary theory of distribution (Panico 1988; Pivetti 1991), the former is represented by the interest rate, while the latter reflects the ‘risks and trouble’ of investing in the productive sector. Under this distributive configuration it is not possible to ensure uniformity of wages in foreign currency compatible with external competition. In this sense, public intervention is required by means of protectionist tariffs and differential exchange rates to prevent the specialisation of labour forces in the sector capable of paying the highest salary in foreign currency while being internationally competitive. Nevertheless, we do not find in O'Donnell's contributions any sign that the author is thinking in terms of this distributive configuration, nor any mention of a financial faction of the capitalist class playing a relevant role in the pendular scheme described for advanced industrialisation in Argentina.

18 It is important to note that, in a context of devaluation expectations such as the one that characterises the end of the expansive pendular movement, the rate of profit required by transnational corporations increases as a consequence of the growing risk of loss of its surpluses in international currency. The latter also accelerates the rupture of its alliance with the popular sector and national-industrial capital.

19 For a detailed consideration of the emergence of differential rent during the contractive pendular movement, see Appendix.