Daron Acemoglu and James Robinson chip in to this evergreen topic in their latest post. In their style, they link it all to Argentina’s institutions.
As most of us know Argentina was one of the richest countries in the world in the beginning of the 20th century. Since then it has been one decline after the other. This leads to two qs?
- How did Arg decline?
- How did Arg rise to one of the richest econs in the first place?
A/R say Argentina’s political instis were extractive and had some bit of inclusive econ instis. The latter helped deliver growth for sometime but former took over soon:
One hundred years ago Argentina was one of the richest countries in the world. For fifty years it rode a wave of favorable market opportunities and experienced one of the most successful periods of extractive growth in world history (sharing these honors with the Soviet Union and contemporary China or Sinagpore).
But extractive growth can’t last and in Argentina it didn’t. When you have a combination of extractive political institutions but somewhat inclusive economic institutions as Argentina did (and China does now) there are two ways to go, but only one leads to sustained economic growth. You can open the political system and try to move towards an inclusive society, or you can go in reverse and clamp down on the inclusivity in economic institutions giving up prosperity for power.
Argentina did the latter. Around the time of the First World War the traditional elites in Argentina made hesitant steps towards opening the political system, but they quickly decided they did not want to run the risk of losing power. In 1930 came the first military coup…
Since then, it has been just one issue after the other. The one on how Arg reports lower inflation numbers and threatens those who report higher numbers is just so scary. Rogoff points this is to ensure the government does not have to pay higher interest on its indexed bonds
The latest is:
Latest evidence: this week the Peronist government under Cristina Fernández de Kirchner seized a 51% share in the oil company YPF, previously majority owned by the Spanish energy company, Repsol YPF. The government immediately ousted the Chairman Sebastián Eskenazi and replaced him with the Peronist Minister of Planning. A tribunal will be formed to decide on the level of compensation!
Insecure property rights are actually a well known phenomenon in Argentina. Grabbing the oil company is actually small potatoes compared to “El Corralito” in 2001 when the government effectively expropriated 75% of people’s savings in banks (as we discuss in Chapter 13 of Why Nations Fail).
The failure to make the transition towards inclusive economic institutions condemned Argentina to a century of economic stagnation.
Finally a q worth pondering on:
Will the same thing happen in China? Singapore?
I will post in a while on Acemoglu’s recent paper on why China grows despite having extractive political instis..
Mostly Economics 
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