Learning economic history via business history: Case of how Ernesto Tornquist managed his empire in Argentina

Fascinating interview of Geoffrey Jones who is a business history professor at HBS. He has developed a case on Ernesto Tornquist who built an empire in Argentina. Apart from business history, the case also gives us insights into Argentina economy and political economy:

Professor Geoffrey Jones examines the career of Ernesto Tornquist, a cosmopolitan financier considered to be the most significant entrepreneur in Argentina at the end of the 19th century. He created a diversified business group, linked to the political elite, integrating Argentina into the trading and financial networks of the first global economy. The case, Ernesto Tornquist: Making a Fortune on the Pampas, provides an opportunity to understand why Argentina was such a successful economy at this time, and to debate whether its very success laid the basis for the country’s subsequent poor economic performance.

The case will resonate with quite a few similar empires in other emerging economies.

For instance, the case discusses that Argentina had a vibrant agri sector. But the problem was how to build a manufacturing sector?:

Kenny: And you talk about the growth of the manufacturing sector, the growth of the agricultural sector. These things didn’t come without their own set of challenges. What are some of the things that they encountered that could have stymied some of that growth along the way?

Jones: Growing and exporting commodities was quite a straightforward process because they’re bulk commodities. As long as you build the infrastructure, there {are} markets; people are anxious for food in Europe and the United States. The more tricky area was trying to develop any kind of manufacturing sector. And that’s tricky for reasons that continue to be a problem for Argentina. First of all, the market is rather small. It’s like eight million, I think, in 1914, so it’s a small market. Then there’s geography. Argentina was a very long way away from any other market, and it’s surrounded by countries like Brazil and Chile, which are far poorer, so they’re not a good market.

Then, it has no energy. It has no coal deposits. So in the 19th century, Europe and the US grew their industries on the basis of steam power generated by coal, and a bit later on, oil. Argentina doesn’t have it.

Finally, there’s the problem of human capital. So by the 1900s, Argentina was by far the most educated part of Latin America, but its literacy rate is 50 percent. By then, the literacy rate in the United States is 92 percent.

So, that’s not a great basis to build any kind of sophisticated industry. It’s fine for commodities, it’s progressively less fine for anything involving any kind of technological sophistication.

Kenny: How did they address a problem like that?

Jones: They address it the way that Tornquist addresses it. And that is, he and other people like him diversified across sectors rather than investing in depth. So, like in the United States, you get the emergence of steel companies, or consumer goods companies, and they focus on one industry, and they build a lot of technological expertise about that one industry. Tornquist doesn’t really go there. He has scarce managerial capabilities, scarce human capital, so he diversifies across a very wide range of industries, without going into depth in any of them. So there’s no brand building, for example, like we see in the United States. He’s handling scarce resources like that. Breadth rather than depth.

Kenny: And he was like into everything. In the case, it describes that he was in agriculture, into manufacturing, into sugar refineries and into whaling. Was there anything that he wasn’t involved in?

Jones: Actually, I don’t think there was anything he was involved in. What he did was build up a core set of skills, core set of political contacts, and he used those to leverage across sectors. And he had core business in finance and another core business in real estate. So that’s giving him the kind of financial resources to diversify and buy. He bought a lot of companies, too. He diversifies across sectors.

Kenny: How was he perceived in the community? Obviously, he had strong political connections … but was he liked by people in the community?

Jones: He deliberately keeps, and chooses to keep, a very low profile, probably because he has so much power. He is, however, influential in various decisions which raise controversy.

In particular, he’s very important in influencing government to set exchange rates in such a way that they favor commodity exports, of which he’s one of the biggest. He’s kind of portrayed by critics as carrying bags of money [and people are] kind of suspicious that he’s in it for the money.

Kenny: He was sort of a robber baron type of guy.

Jones: Absolutely. A robber baron and a kind of foreign robber baron. Although, that made little sense, because Argentina was a country of immigrants anyway, so most of them were from somewhere else.

Reading India’s business history we see similar patterns. The British used similar practices to build their own firms/agencies here. There was no involvement but building political contacts and then leveraging across sectors was the way most British form operated here. This led to the system of Managing Agencies which was eventually adopted by quite a few Indians as well. This practice of Managing Agencies created its own sets of conflicts and trade-offs with a few houses controlling most parts of the economy. The system had to be dismantled but its impact remained for a long long time.

Lots of things in the interview. Do read…

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