Economic History Association

External Dependence, Demographic Burdens, and Argentine Economic Decline After the Belle
Époque
Author(s): Alan M. Taylor
Source: The Journal of Economic History, Vol. 52, No. 4 (Dec., 1992), pp. 907-936
Published by: Cambridge University Press on behalf of the Economic History Association
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 External Dependence, Demographic
Burdens, and Argentine Economic
Decline After the Belle Epoque
ALAN M. TAYLOR

Once one of the richest countries in the world, Argentina has been in relative
economic decline for most of the twentieth century. The quantitative records of
income growth and accumulation date the onset of the retardation to around the
time of the Great War, and patterns of aggregate saving and foreign borrowing
show that scarcity of investable resources significantly frustrated interwar devel-
opment. A demographic model of national saving demonstrates that the burdens
of rapid population growth and substantial immigration depressed Argentine
saving, contributing significantly to the demise of the Belle Apoque following the
wartime collapse of international financial markets.
It is common nowadays to lump the Argentine economy
in the same category with the economies of other Latin
American nations. Some opinion even puts it among such
less developed nations as India and Nigeria. Yet, most
economists writing during the first three decades of this
century would have placed Argentina among the most
advanced countries-with Western Europe, the United
States, Canada, and Australia. To have called Argentina
"underdeveloped" in the sense that word has today
would have been considered laughable. Not only was per
capita income high, but its growth was one of the highest
in the world.'
-Carlos Diaz-Alejandro

THE MYSTERY OF ARGENTINE ECONOMIC DECLINE

T he record of Argentine economic performance tells a story of

decline unparalleledin modem times. The country has endured a
The Journal of Economic History, Vol. 52, No. 4 (Dec. 1992). ? The Economic History
Association. All rightsreserved. ISSN 0022-0507.
The authoris an AcademyScholarand MellonFellow at the HarvardAcademyfor International
and Area Studies and the Departmentof Economics, HarvardUniversity, Cambridge,MA 02138.
This is a muchrevised version of a paperI presentedat the InstitutoTorcuatoDi Tella, Buenos
Aires, in June 1991 (Taylor, "Birds of Passage"). I thank the Tinker Foundation,the Harvard
Centerfor Latin Americanand IberianStudies, the HarvardCenterfor InternationalAffairs,and
the HarvardAcademy for Internationaland Area Studies for financial support and research
resources.Ian McLeanand JeffreyWilliamsonhave offeredgenerousguidanceduringthis project.
For their many helpful comments, suggestions,and data hints I am indebtedto Roberto Cortds
Conde, GerardoDella Paolera, Ezdquiel Gallo, Marcela Harriague,Tim Hatton, Juan Carlos
Korol, MarkThomas, MalcolmUrquhart,ClaireWaters, and John Womack,Jr., and to seminar
participantsat StanfordUniversity, the University of Californiaat Berkeley, and the East-West
Center at the University of Hawaii. This work has also benefitedfrom the comments of three
anonymousrefereesand an editorof this JOURNAL. None of the above bearsresponsibilityfor any
shortcomingsin the article.
' Dfaz-Alejandro,Essays, p. 1.

907
908 Taylor

painfuladjustmentto the end of the Belle Epoque, a glitteringperiod in

its history that reached its peak early this century. A visitor to Buenos
Aires then would have marveled at the splendors of the city: the
impressive opera house, the graceful architecture, the sophisticated
railway system. Today the city presents the same elegant facade, only
frayed and decaying at the edges-and the visitor marvels that the city
can function at all, given its dilapidatedinfrastructure.The satisfaction
of living in one of the richest countries in the world is now a distant
memory for the Argentines, who have struggledto come to terms with
their sinking status. The downfall of this once developed country is as
much of an enigma for students of economic history, and the contra-
dictions between her past success and currentfailureconstitute "one of
the most puzzling and misunderstoodnational stories in the develop-
ment literature."2
Even the timing of the decline is a topic of long-standing and
contentious debate. Carlos Diaz-Alejandrohas dated the end of the
Belle Epoque as late as the onset of the GreatDepression in 1929, noting
that Argentine per capita income continued to converge upward on
Australianlevels into the 1920s. Elsewhere, he used similarevidence on
respectable growth performance relative to Australia and Canada to
dismiss Guido Di Tella and Manuel Zymelman's thesis that Argentina
experienced a "Great Delay" between 1914 and 1933, a delay they
attributed to misguided policies.3 In defense of the early-retardation
hypothesis, Di Tella cited the precipitous decline in growth rates
observed during World War I-a retardationthat has persisted to the
present day. By way of explanation, he invoked the closing of the
frontier, as the Pampashad become fully occupied aroundthat time. He
concluded that the extensive growth strategy had run its course:
The rate of growth of the economy, after the closing of the frontier, averaged
about 3 per cent per year in the inter-warperiod, and about the same from the
Second World War. But when the actual development is compared with the
pre-1914 performance,or even more so with the expectations nurturedat the
beginning of this century, Argentine performancelooks dismal. It is this false
comparisonbetween a wronglybased projectionand the actual performancethat
has contributedto the sense of failurewhich permeatesthe Argentines' view of
themselves as a Nation.4

The national sense of failure alluded to makes any debate on such a

sensitive question politically charged. The Great Depression encour-
aged Argentina and other Latin American countries to subscribe to
2Dfaz-Alejandro,"One HundredYears," p. 230.
3Ibid., p. 232; Diaz-Alejandro,Essays, pp. 51-55; and Di Tella and Zymelman,Las etapas,
chaps. 2-4. The latter used a Rostovian frameworkto characterizeArgentinegrowth, adding a
"great delay" between what they see as Rostovian "preconditions"(1880-1914)and "takeoff"
(1933-1952).
4 Di Tella, "Economic Controversies," p. 122; and Dfaz-Alejandro,Essays, p. 53. Dfaz-
Alejandroalso acknowledgedthat the Pampaswere fully utilizedby this time.
 Argentine Economic Decline 909

inward-looking economic policies and import substitution-policies

later to be codified and applied by the Economic Commissionfor Latin
America (ECLA) through the efforts of Rautl Prebisch and other
structuralists.Diaz-Alejandrohas distinguishedbetween the efficacy of
those "reactive" policies in the Depression years and their persistence
afterWorldWarII, which inhibitedexport-ledgrowthand placed a drag
on Argentine development.5Clearly, if economic failure can be said to
predate the adoption of import-substitutiondoctrines, the structuralist
camp can evade responsibility for decline and implicate the liberal,
export-orientedpolicy regime prevailinguntil 1929. This is a point lost
on neither Diaz-Alejandro,one of the harshest critics of structuralism,
nor Di Tella, a sometime apologist for import substitution.
What, then, markedthe end of the Belle Epoque: the GreatWaror the
Great Depression? Few of the protagonistsin the debate can agree on
the timing, let alone the mechanisms of Argentine economic growth-
but all agree that the countryin some sense failed. For the development
economist it is enlightening, even uplifting, to study national success
cases: to try to figureout what went rightand how those lessons can be
applied elsewhere. Yet the study of economic failure, though depress-
ing, can be a revealing exercise. More compelling and mysterious
examples of failure than the ruinationof Argentinaare hardto imagine.
An array of intriguingquestions presents itself: When did the tables
turn?How dramaticwas the decline? Whatwas the basis of the previous
success? Why did it disappear?
To answer these questions we must firstassess the quantitativerecord
of Argentine growth in an international perspective. The issue of
long-runeconomic development and the relative performanceof differ-
ent countries has recently come under close scrutiny. In the historical
arena, the work of Angus Maddison, William Baumol, Bradford De
Long, and other investigators has offered us a detailed perspective on
trends in growth performanceover the last 100 years or more.6 In this
spiritI will now review the irregularrecord of Argentineperformancein
a comparativesetting. Of particularinterest is the common comparison
of Argentina with the other settler economies, Australia and Canada,
and the measure of Argentineperformancerelative to the largerOECD
group of now developed countries.
The relative economic performance of Argentina in the twentieth
century is summarizedin Table 1. The picture presented there imme-
diately begins to unravel the confusion in the debate over Argentine
failure:one's view of relative Argentineretardationdepends entirely on
5 Prebisch, "Recollections"and "Five Stages"; and Diaz-Alejandro,Essays, "Latin America
in the 1930s," "The 1940sin LatinAmerica,""Some Characteristics,"and "DelinkingNorth and
South."
6 Maddison,Phases and The WorldEconomy;Baumol, "ProductivityGrowth, Convergence
and Welfare";and De Long, "ProductivityGrowth,Convergenceand Welfare:Comment."
910 Taylor

TABLE 1
COMPARATIVE ECONOMIC GROWTH

1900 1913 1929 1950 1973 1987

A. GDP per Capita (international dollars, 1980 prices)

Argentina 1,284 1,770 2,036 2,324 3,713 3,302

Australia 2,923 3,390 3,146 4,389 7,696 9,533
Canada 1,808 2,773 3,286 4,822 9,350 12,702
OECD 1,817 2,224 2,727 3,553 7,852 10,205

B. GDP per Capita (relative to OECD = 1.00)

Argentina 0.71 0.80 0.75 0.65 0.47 0.32

Australia 1.61 1.52 1.15 1.24 0.98 0.93
Canada 1.00 1.25 1.20 1.36 1.19 1.24

C. Growth Rates of GDP per Capita (%)

1900-1913 1913-1929 Retardation

(1) (2) (1) - (2)
Argentina 2.47 0.88 1.59
Australia 1.14 -0.47 1.61
Canada 3.29 1.06 2.23
OECD sample 1.55 1.27 0.25 [0.95]a
28-country sample 1.34 1.02 0.33 [0.98]a
aThis denotes a sample average, with the standard deviation shown in brackets.
Note: Panel B is derived from Panel A.
Sources: Maddison, The WorldEconomy, p. 19.

the basis of the comparison. Australiaand Canadaperformeddismally

in the interwar period, undergoing retardationrelative to the OECD
group as a whole (their ratio of income per capita relative to the OECD
average fell from 1913 to 1929);in that context, Argentineperformance
looks respectable. Furthermore,the table illustrates that the post-1913
retardationwas much more serious in the settler economies (ranging
from 1.59 to 2.23 percentagepoints) than in the OECD (0.25). In a sense,
Diaz-Alejandrois right to praise Argentina for keeping pace with the
other settler economies; but keeping pace with stragglers is no great
feat. In fact, the settler economies were hit much harderthan almost any
other country by the economic shocks associated with the GreatWar, as
seen in Maddison's full sample of 28 countries (see panel C). It is
striking that among the five hardest hit countries, three were settler
economies.7
Thus a comparisonofjust the settler economies is misleading,tending
to mutual flattery among a group of poor performers.Table 1 provides
the more reliable large-sample comparison we seek with the OECD.
' The other countrieswere Mexico (embroiledin a revolution)and the Philippines,and all five
experienceda decline in growthrates of at least 1.59 percentagepoints; the next worst case was
Italy, with 1.11 percentagepoints. Only these five lay more thanone standarddeviationbelow the
mean retardation.
 Argentine Economic Decline 911

Australia and Canada have generally been leaders in the group, with
income per capita above the OECD average. Australia has tended to
converge down toward the OECD average, and Canada, if anything, to
diverge upward. Since 1913the ratio of Argentineper capita income to
the OECD average has diverged monotonically downward and away
from parity; based on this evidence, the early-retardationhypothesis
gains credence. Argentina, after all, aspired to membershipin the club
of developed countries-yet, when compared over the long run with
levels of OECD performance,the closest it came was in 1913.

FACTORACCUMULATIONIN SEITLER ECONOMIES

The GreatWaremerges, then, as a turningpoint in the relativegrowth

performanceof Argentina;yet this bringsus no closer to an explanation
of the slowdown itself. Numerous competing hypotheses remain: for
example, should the interwar period be classified as la demora (the
"great delay") and attributedto policy failure? Or was there a natural
slowdown in growth associated with the closing of the frontier? In
preference to either of these theories, I will argue that the Argentine
Belle tpoque is best understoodin terms of conventionalgrowth theory
and an analysis of factor accumulation.This approachis central to an
understanding of economic growth in resource-rich regions of new
settlement, as has been reiteratedin the recent work of Ian McLean and
Boris Schedvin.
The settler economies were characterizedby resource abundancebut
a dualscarcityof laborand capital;the relativelyhighreturnsto the mobile
factors promptedimmigrationand foreign investment when conditions
permitted.Well integratedinto world markets,these economies utilized
their export capacity in a small range of foods and raw materials,often
referredto as "staples." The canonicalexamples are Australiawith its
outbackterritories,Argentinaand its productivehinterlandin the Pampas,
and Canada with mile after mile of open prairie. Their rich resource
endowments,in the shape of abundantsavannahland and mineraldepos-
its, could support relatively high per capita incomes given the sparse
populations.A completely capitalistform of economic organizationen-
couragedforeigninvestmentin a stablebusinessclimatethat was partand
parcel of the Pax Britannica.8
Thus the economics of resource-richregions is intimately bound up
with an analysis of factor accumulation. That the approach has great
potential for explaining patterns of Argentine growth prior to 1930 is
well known: Dfaz-Alejandroestimated that "the two classic inputs,
physical capital and unadjusted labor, 'explain' most of the 1900-29
growth taken as a whole.... [T]he unexplained 'residual' would be
8 McLean, "Notes on Growth";and Schedvin, "Staples."
912 Taylor

limited to between 14 and 20 percent of the growth rate."9 In what

follows I apply the approachto the common comparison of two settler
economies, Australia and Argentina. The same analysis could be
pursuedwith Canadaadded to the sample, of course, but scholars focus
on the two SouthernHemisphereregions because they have the richest
traditionof comparativeanalysis in economic history, being similar in
terms of geographicposition and size.10(Canada,on the other hand, has
certain distinctive features, notably its proximity to the United States,
that make comparisons slightly more difficult.) It will be seen that
although broadly similar factor accumulation patterns characterized
Australia and Argentina, compositional differences stand out, and the
size of the flows differedgreatly before and after 1913. This breakpoint,
I argue, offers insights into the onset of Argentine decline.

Population Growth,Path Dependence, and the Demographic Burden

The patternsof populationgrowth and immigrationfor Argentinaand
Australiabetween 1890 and 1939 are summarizedin Table 2, panel A.
As expected, population growth was rapid in both prior to 1929.
Although the general tendency was for population growth rates to be
higher in Argentina than Australia, it is striking that the rate of
population growth declined over time in Argentina, from a very rapid
3.5 percent priorto the Great War to a mere 1.8 percent in the thirties.
However, even this latter figurewas commensuratewith the most rapid
rates of populationgrowth observed in Australia (which peaked at 1.9
percent between 1890 and 1913).
These contrasts reflect in part the differentroles played by immigra-
tion in the two countries and the demographiccharacteristicsof the two
populations. As the final column of the table indicates, migrationwas
particularlyimportantin Argentinafrom 1890to 1913, when it contrib-
uted nearly half of the net increase in population. Following the Great
War, the importance of migration diminished, and natural increase
made a greater contributionto population growth. The same was not
true, however, for Australia, whose immigrant share of population
growth remainedmore or less unchangedat 18 to 19 percent from 1890
until 1929. One common factor in the Depression years was the marked
slowdown of populationgrowth and the virtual disappearanceof immi-
gration as a contributorto populationgrowth: the latter accounted for
less than 1 percent of the net increase in both countries.
Priorto 1913the contrasts in demographicburdensbetween Australia
and Argentina could in part be ascribed to the tighter regulation of
9 Dfaz-Alejandro,Essays, pp. 8-9.
10 Duncan and Fogarty, Argentinaand Australia;Fogarty, Gallo, and Didguez, "Argentinay
Australia";Gerardi,"Australia,Argentinaand WorldCapitalism";Di Tella and Platt,Argentina,
Australiaand Canada;Schedvin, "Staples";and Denoon, Settler Capitalism.For a recent survey
see Korol, "ArgentineDevelopment."
 Argentine Economic Decline 913

TABLE 2
FACTORACCUMULATION:ARGENTINAAND AUSTRALIA, 1890-1939
A. Population

Population Share Due to

Initial GrowthRate Net Natural Immigration
Population (%) Immigration Increase (%)
Argentina
1890-1913 3.377 3.5 1.922 2.183 47
1913-1929 7.482 2.8 0.630 3.633 15
1929-1939 11.745 1.8 0.014 2.295 0.6
Australia
1890-1913 3.107 1.9 0.319 1.395 19
1913-1929 4.821 1.8 0.282 1.293 18
1929-1939 6.396 0.9 0.001 0.574 0.2
B. Capital
InitialCapital CapitalStock InitialForeign- InitialShare
Stock GrowthRate (%) Owned Capital ForeignOwned(%)
Argentina
1890-1913 478 4.8
1913-1929 1,450 2.2 704 48
1929-1939 2,059 1.1 659 32
Australia
1890-1913 1,099 1.9
1913-1929 1,713 2.3 344 20
1929-1939 2,470 1.2 545 22
Notes: Populationis given in millions, capital in ? millions, at 1910 prices. Growth rates were
derived from stocks. The natural increase of population is population increase minus net
immigration.The share due to immigrationis net immigrationdivided by populationincrease.
Foreign-ownedcapital stock was derivedfrom the shareforeignowned using total stock, or vice
versa.
Sources: For population and capital stock, see the Appendix. Immigrationwas taken from
Mitchell,InternationalHistorical Statistics, table B7. Argentina'sshare of capital stock foreign
owned is from Lewis, Crisis, p. 49. Australia'sforeign-ownedcapital is equal to the cumulated
capitalinflow deflatedby the GDP deflator,from M. Butlin, "PreliminaryDatabase," pp. 81-82,
111. The monetaryconversion is ?1 equals A$2.

immigration in Australia. There the authorities operated a de facto

"white Australia" policy and were careful to admit a fairly homoge-
neous stream of predominantlyBritish migrants.11There is still some
debate over whether this policy placed a floor under Australianwages
by generatinglabor scarcity, but such a theory is consistent with our
observations. We can at least be sure that capital widening was less of
a problemfor Australia, as a result of lower migrationrates and slower
population growth.'2 Argentina, on the other hand, received a more
heterogeneous streamof migrants,principallyfrom Italy and Spain. The
supply of immigrantstended to be extremely plentiful, and at times the
incentives were so great as to prompteven temporarymigrationacross
" Offer, The First World War, chap. 12.
12
Dfaz-Alejandro,"Argentina,Australiaand Brazil," p. 103.
914 Taylor

the Atlantic. Laborers would leave southern Europe for Argentina in

the northernwinter, engage as seasonal labor on the Pampas, and return
after the southern harvest in time for the start of the northernsummer.
Cheappassage encouragedthis unparalleledseasonal migration,and the
hardy souls who made these formidablevoyages earned the sobriquet
"birds of passage.",13
The implicationsof these differentmigratoryenvironmentsare appar-
ent from the compositionof the resultingmigrantstreams. It is clear that
the internationallabor markets for Argentina and Australia were seg-
mented along regional and nationallines: over 80 percent of Australian
immigrantshailed from Britain, whereas about the same proportionof
Argentine immigrantscame from Italy or Spain.'4 Can such segmenta-
tion explain the contrast in rates of migrationand populationgrowth? It
is possible that differencesin composition may help explain differences
in vital statistics, to the extent that migrantsembody such demographic
characteristicswhen they move. According to this view, faster Argen-
tine populationgrowthfollowed, in part,from a segmentedlabor market
that broughtin a relatively fecund Latin immigrantstream.'5
A persuasive explanationcan also be made by comparingthe patterns
of migrationwith observed wage gaps between sending and receiving
regions, a technique commonly used in migration studies.16 Recent
attemptsby JeffreyWilliamsonand myself to compute relative levels of
real wages in an internationallycommensuratefashion for a group of
countries including the settler economies are consistent with the evi-
dence sketched out here. The principalsendingregion for Australiawas
Britain.Australianwages were high relative to Britishlevels, yet tended
to converge downward over time. Starting with an 87 percent gap in
1870,the Australianwage premiumwas almost eliminatedby 1910(a 17
percent gap) and hovered around30 to 40 percentfrom 1900to 1939(see
Figure 1). The Argentine premium over Italy and Spain-its main
sendingregions-was over 100percentfor almost the entire period from
1890 to 1939, if we ignore a brief convergent episode duringthe Great
War (when migrationwas almost impossible anyway). Argentina had
much larger and more persistent wage gaps relative to her principal
sending regions than did Australia;thus, it is no surprisethat immigra-
tion was so potent a force in Argentina.17
Another of the most distinctive dynamics driven by population
growth was the changing age structure. A vast economic-demographic
13 Bunge and GarciaMata, "Argentina";and Dfaz-Alejandro,Essays, pp. 21-28.
"1 Bunge and GarciaMata, "Argentina,"p. 153;and McPhee, "Australia,"p. 173.
ISSpain and Italy had birth rates much higherthan Britain.The rates (per thousand)between
1910and 1914were Argentina,37.9; Italy, 32.0; Spain, 31.3; Australia,27.8; Englandand Wales,
24.2. Mitchell,InternationalHistorical Statistics, table B5.
16 Kelley, "InternationalMigration";Pope, "The Peopling of Australia"; and Richardson,
"BritishEmigration."
17 Williamson,"Evolution."
 Argentine Economic Decline 915

250

Argentina-ItalyGap
200 -

150 -

I I ;X.4 h~~~~~~~~~~~~~~~~~~~~.,.W
100 /Ia
/ Argentina-SpainGap

50
* U -'a' AsAustralia-Britain
Gap *

1890 1900 1910 1920 1930

FIGURE I

WAGE GAPS BETWEENARGENTINAAND AUSTRALIAAND THEIR PRINCIPAL

SENDING REGIONS, 1890-1939
Notes: Figuresare based on Williamson'sdatabase,which consisted of nationalreal-wageindices
and internationalreal-wagebenchmarks,calculatedusingpurchasingpower parities.The pre-1913
benchmarksare used throughout.The wage gap is definedas (WRI Ws - 1), where WRis the wage
in the receiving region and Ws the wage in the sendingregion. Three-yearmoving averages are
displayed.
Source: Williamson,"Evolution."

literaturehas explored these mechanisms in great detail, usually in the

context of the contemporaryThird World.'8 It is obvious that rapid
populationgrowth will tend to swell the share of the young in the age
distribution. Depending on the vital statistics of the population (espe-
cially birth rates), the young cohorts may further increase population
growth rates via reproductionon reaching adulthood. Furthermore,,to
18
For a survey see Kelley, "Economic Consequences."
916 Taylor

* Canada
0.5
Argentina

a Ad ?

*
- 3 101

0.2 o3 = Australia UK 0
= United States

0.1 I I I I I. I I I
1860 1880 1900 1920 1940 1960 1980
FIGURE 2
DEPENDENCY RATES FOR A SAMPLE OF COUNTRIES, 1850-1990

Note: The dependencyrate is the share of the populationunder 15 years of age.

Sources: See the Appendix.

the extent that migrantsself-select from young adult age-groups(which

they do), the populationof reproductiveage may be furtherenlarged.19
A convenient measure of shifts in the age structureis the dependency
rate (defined here as the share of the population under 15). Figure 2
traces the evolution of the dependency rate in five economies: four in
the New World (the three settler economies and the United States) plus
the United Kingdom. The figurereveals that the New World group had
much higher dependency rates in general, an observation consistent
with the theory I've outlined. The Australian and North American
dependency rates exhibited only a small percentagepoint gap relative to
the British level in the 1890 to 1929 period, but the Argentine depen-
dency rate gap was about twice as large. Furthermore,the dependency
rate followed a pattern of secular decline in all countries: essentially a
demographictransitionassociated with a shift to lower fertilityrates and
the eventual long-rundynamic equilibriumof the age structure. Given
the dependency rate gap, Argentinalags behind the other New World
economies in the demographictransitionby a decade or two.
The foregoing is, in effect, a characterizationof Argentinaas a "late
starter," an economy whose developmentalprocess did not get started
until very late in the nineteenth century, relative to others. Conse-
quently her heavy migrationscame later, and her demographictransi-
tion took longer to engage. This sluggish start, I claim, left Argentina
more vulnerableto the economic shocks associated with the Great War
than were the other settler economies-the demographic burden de-
19 Hall, "Long Period Effects."
 Argentine Economic Decline 917

pressed Argentine savings and inhibited capital deepening, stalled

capital formation, and retardedeconomic growth.
Accumulation, Capital Deepening, and External Finance
It is well known that in the age of high imperialism,under the classic
gold standard, Britain acted as banker to the rest of the world. In the
two decades before the Great War, an unprecedentedoverseas export
of capital established British financial interests in all corners of the
globe, both withinand outside of the empire. The outflowrepresentedas
much as one-thirdof all capital accumulationby Britons between 1870
and 1914, and duringthe great surgejust prior to the war it peaked at
over 10 percent of Britishgross nationalproduct(GNP).20The land-rich
and capital-poorsettler economies were prime targets for this flood of
overseas investment
That high rates of capital accumulation should be observed in
resource-richregions is not surprising:their development is dependent
on their ability not only to people the country but to establish an
infrastructureto exploit the resources available. Typically this would
require large expenditures on ports, railroads, and communicationsto
facilitate the shipment of the export good, whether beef, wheat, or
wool-for example, the fanning out of the Argentine railroad system
across the Pampas.22In addition, rapid population expansion would
tend to swell capital requirementsfor two reasons. First, to limit capital
widening, accumulation would have to keep pace with population
growth. Second, capital would be needed in population-sensitivecate-
gories such as residentialconstruction.23Thus, despite their ruralbase
for export expansion, the settler economies often saw urbanizationon a
large scale.24
The general pattern of capital accumulationin Australia and Argen-
tina is shown in Table 2, panel B. In all periods rates of capital
accumulationwere respectable, but the secular decline in Argentinais
striking. From the turn of the century up to 1913 the Argentine capital
stock grew at a remarkable4.8 percent per annum, but the rate was cut
to just 2.2 percent between 1913 and 1929, a figure more comparable
with Australianperformance(accumulationrates of 1.9 percent in 1900
to 1913and 2.3 percent in 1913to 1929).Both countries shared a slump
in investment in the Depression years as capital stock growth rates
20 Edelstein, "ForeignInvestmentand Empire," pp. 70-74.
21
Paishestimatedthat between 1907and 1913a total of ?1,127millionof new Britishinvestment
was directed abroad, with ?254 million (23 percent) going to Canada,?65 million (6 percent) to
Australia,and ?118 million(10 percent)to Argentina.Kennedy, IndustrialStructure,p. 184.
22 CortdsConde, El progreso argentino,pp. 78-89; and Scobie, Revolution,pp. 40, 171.
23 Green and Urquhart,"Factor and CommodityFlows."
24 The city of Buenos Aires grew from a populationof 300,000in the 1880sto 1,500,000by 1914,
and similarpatternsof urbanizationwere seen in the Australianprovincialcapitalsover the same
period. Scobie, Argentina,pp. 131-33;and Sinclair,EconomicDevelopment,pp. 106-109.
918 Taylor

plummeted to the 1.1 to 1.2 percent range. Thus Argentina almost

exactly paralleledAustraliaafter 1913 in terms of capital accumulation
rates. The early-retardationhypothesis, originallyposed in terms of the
growth of income per capita, is seen to apply here to the remarkable
slowdown in Argentine accumulationrates after the Great War. This
can surely be no coincidence; we'll returnto this issue after clarifying
the role of foreign capital in the two countries.
High rates of capital accumulation do not, of course, necessarily
imply foreigncapitalinflows. After all, in a closed economy, savings and
investment must necessarily balance; yet current-accountsurpluses or
deficits may bridgethe gap in an open economy. Furthermore,in a small
open economy, with a given world interest rate and internationally
mobile capital, savings and investment decisions may be completely
delinked. MartinFeldstein and CharlesHorioka questioned the validity
of such assumptionsof capital mobility, based on their observation that
investment rates and savings rates were highly correlatedin a post-1960
developed-country sample. On the other hand, Larry Neal, Robert
Zevin, and other authors studyingthe operationof capital marketsover
the longer run have emphasized that in the past internationalcapital
markets may have been much better integratedthan now, and that the
gold-standard years of 1890 to 1914 offer a unique insight into an
internationalcapital marketcharacterizedby high mobility and integra-
tion.25
In this context we may view capital flows as a response to the
imbalance of domestic savings supply and investment demand. It
follows that, whereas we know the outflows from Britain were a
significantshare of total Britishsavings, the capitalinflows may differin
importancein the various receiving regions, dependingon their contri-
bution to total investment.
In fact, viewed from the perspective of the borrower country, the
financialflows received by the settler economies look quite dissimilar.
In the 1880s Australianinvestment amounted to 19.9 percent of GNP,
almost one-half of which was fundedby capitalinflows. In the 1890sthe
investment rate fell to 13.8 percent of GNP, less than a third of which
came from abroad. Between 1900 and 1910 investment accounted for
14.2 percent of GNP, and net foreign investment actually turned
negative: - 1.0 percent of GNP.26 Australia gradually reduced its
dependence on foreign savings in the decades before the Great War,
savings and investment requirementshaving fallen closely into line by
the start of this century. Significantly,the same characterizationcannot
be applied to Argentina, where foreign control of the capital stock
expandedimmediatelybefore 1913.In 1900foreignersowned 32 percent
25 Feldstein and Horioka, "Domestic Saving"; Neal, "Integration";and Zevin, "Are World
FinancialMarketsMore Open?"
26 Edelstein, Overseas Investment, p. 251.
 Argentine Economic Decline 919

TABLE 3
FACTORACCUMULATIONAND CONVERGENCE:
ARGENTINAAND AUSTRALIA, 1890-1939
A. Argentinaand Australia

InitialLevels
Capital Capital GrowthRates (
Stock Population Intensity Capital Capital
(K) (N) (KIN) Stock Population Intensity
Argentina
1890-1913 478 3.377 142 4.8 3.5 1.4
1913-1929 1,450 7.482 194 2.2 2.8 -0.6
1929-1939 2,059 11.745 175 1.1 1.8 -0.7
Australia
1890-1913 1,099 3.107 354 1.9 1.9 0.0
1913-1929 1,713 4.821 355 2.3 1.8 0.5
1929-1939 2,470 6.396 386 1.2 0.9 0.3

B. ArgentinaRelative to Australia
GrowthRate Gap (%)
InitialRelative Level (Argentinaminus Australia)
(Australia= 100) Capital Capital
Capital Capital Stock Population Intensity
Stock Population Intensity Growth Growth Growth
(K) (N) (KIN) Rate Rate Rate
1890-1913 43 109 40 2.9 1.6 1.4
1913-1929 85 155 55 -0.1 1.0 -1.1
1929-1939 83 183 45 -0.1 0.9 - 1.0
Notes: In panel B the levels are derived from panel A by dividing the Argentinelevel by the
Australianlevel and multiplyingby 100;the growthrates are derivedby subtractingthe Australian
rate from the Argentinerate. K is ? millionsat 1910prices; N is millionsof persons.
Source: Table 2.

of the capital stock of Argentina, rising to 48 percent by 1913. In

contrast, the estimated share of foreign-owned capital in Australia in
1913 was 20 percent, considerablylower than even the Argentine 1900
figure (Table 2, panel B).
How can we relate these patterns of capital accumulation-and the
fluctuatingimportanceof foreign investment-to the observed patterns
of economic growth summarized in Table 1? The implications of
standardneoclassical growth theory require that we analyze long-run
performance in terms of capital deepening. In that framework, an
increased level of capital per worker augments labor productivity,
raisingincome per capita. To permita comparisonof capital deepening,
Table 3, panel A recapitulatesthe patternsof labor and capital accumu-
lation seen in Table 2 and computes commensuratecapital intensities
for Australiaand Argentinaover the entire period. The derived panel B
expresses Argentine performancerelative to Australia's: first in terms
920 Taylor

of an index number for levels (Australia equal to 100) and second in

terms of growth-rategaps.
The results in panel A offer a striking confirmation of the early-
retardationhypothesis and shed light on the mixed fortunes of the settler
economies. Given fast rates of capital accumulationprior to the war,
Argentina was able to augment her capital intensity at a rate of 1.4
percent per annum between 1900 and 1913: a far better record than in
Australia, where practically no capital deepening was achieved. In
contrast, interwar Argentine performance reveals capital widening.
Inhibited by reduced rates of capital accumulation and continued
population growth, Argentina made no gains in terms of capital deep-
ening, and its capital intensity actuallyfell at a rate of 0.6 to 0.7 percent
per annumfrom 1913to 1939. In this latter period Australiacommenced
modest capital deepening at the rate of 0.3 to 0.5 percent per annum.
In comparativeterms, panel B tells the story with even greaterclarity.
Prior to 1913 the Argentine capital intensity was converging up on the
Australianlevel, approachingas close as 55 percent in 1913.Thereafter,
relative capital widening caused the Argentine capital intensity to
diverge from the Australian level, reverting to a relative level of 41
percent in 1939. This last figure-comparable to the 1890position, when
Argentinahad a capital intensity level of 40 percent-suggests that over
the intervening 50 years Argentina was unable to achieve any lasting
convergence in capital intensity levels relative to Australia. What is
more, we know from Table 1 that Australiacould not keep pace with the
OECD average for income per capita growth over the 1900 to 1929
period. It is hardly surprisingthat after 1913, when Argentinacould no
longer maintainconvergence in capital intensity relative to a straggler
like Australia, retardationrelative to the OECD ensued.

EXTERNAL DEPENDENCE AND DEMOGRAPHICBURDENS:

A VULNERABLE GROWTHSTRATEGY

The assertion that Argentine retardationcommenced with the Great

War is supported by quantitativeevidence from a number of different
sources. In terms of per capita income, it was at this time that Argentina
started to lag behind the developed countries in growth performance.
Even more telling, Argentina failed to advance capital deepening
relative to Australia, itself a disaster case in terms of interwarretarda-
tion and slow growth.
I will argue that the retardationcan best be understood in terms of
Argentina's historically determined position on the eve of the Great
War, in terms of both population structureand foreign capital depen-
dence. Faster population growth, with more fecund and numerous
immigrants,tended to burdenArgentinademographically,not simply in
terms of capital widening but in terms of a high dependency rate.
 Argentine Economic Decline 921

Populous young cohorts threaten growth to the extent that their

consumptionneeds diminish savings, with a carryover effect in invest-
ment and accumulation. Admittedly, savings shortfall did not prove
bothersome to Argentina before 1913. Under the stability of the gold
standard ample flows of foreign investment could be attracted and
domestic investment sustained. A high-immigrationand high-overseas-
borrowingstrategy could work in a liberalworld order characterizedby
free migrationand internationallymobile capital.
Unfortunately,such a growth strategywas destined to grindto a halt,
given its vulnerabilityto the economic shocks precipitatedby the Great
War. Whereas a temporary squeeze in commodity markets had to be
endured, the severe squeeze in factor markets was permanent. Al-
though labor migrationrecovered somewhat, the Great War wrought
wholesale changes in the operation of internationalcapital markets. In
addition to the general retreat of all countries into a more autarkic
stance, the keeper of the gold standardwas unable to preserve its role
intact. Wardebts had bankruptedBritain,who, bailed out by the United
States, emerged from the war unable to continue playing the role of
banker to the world.
The sudden scarcity of funds had profound implications for those
nations heavily dependent on British finance, although the impact
variedfrom country to country. Foreign ownershipof Argentinecapital
measuredin real terms reached its peak in 1913;in contrast, Australian
capital inflows continued to mount through the interwar period. Note
also the retreat of foreign capital from Argentina:foreign owners held
47.7 percent of the Argentine capital stock of 1913, but the foreign
ownership share declined throughoutthe interwarperiod to a mere 20.4
percent in 1940. During this phase, net real additions to the Argentine
capital stock were funded entirely by domestic accumulation.
The general paucity of overseas funding for Argentine investments
duringthe interwarperiod is reflected in the accounts of contemporary
observers. Harold Peters recorded that Argentinahad limited success
trying to raise funds from the New York money market,noting that "in
the interimthe Americanmoney markethad been the only source from
which extensive capital requirements could be drawn. The United
States became, in a very literal sense, the world's banker." Vernon
Phelps noted that the rapidflow of funds was broughtto an abrupthalt
by the outbreak of war, and that thereafterlittle capital entered until
1923; subsequently, the bulk of new investment came from the United
States and practically none from Europe. Almost all of the new public
debt was financed in the New York money market, but prior to 1923
advances could only be obtainedover the short term and at high interest
rates.27
27
Peters, Foreign Debt, pp. 101, 123; and Phelps, International Economic Position, chap. 5.
922 Taylor

TABLE 4
SAVINGS RATES AND DEPENDENCY RATES: THE SETTLER ECONOMIES, 1900-1929

A. Savings Rates (%)

Argentine
Argentina Australia Canada "Savings Rate Gap"
1900-1913 4.52 15.61 15.90 -11.23
1914-1929 5.00 13.41 16.55 -9.99

B. Dependency Rates (%)

Argentine
Argentina Australia Canada "Dependency Rate Gap"
1900-1913 38.92 33.24 33.68 5.46
1914-1929 36.09 30.92 33.53 3.87
Notes: The "Savings Rate Gap" is defined as the Argentine savings rate minus the average of the
Australian and Canadian savings rates. Likewise, the "Dependency Rate Gap" is defined as the
Argentine dependency rate minus the average of the Australian and Canadian dependency rates.
Sources: See the Appendix.

The Argentine economy at the time of the Great War was hard
pressed to perpetuate development in keeping with prewar expecta-
tions. A temporarybreakdownin export markets before the recovery
and boom of the twenties constituted a minor hurdle. The dramatic
restructuringin internationalfinancial markets proved to be a perma-
nent shock that Argentina was ill equipped to handle. Argentina was
highly dependent on external finance:foreign investment accounted for
about half of the Argentine capital stock just prior to the war, but less
than a quarterin Australia.
The need for overseas borrowingfollowed directly from Argentina's
relatively low domestic savings capacity. As Table 4 shows, Argentina
saved less than 5 percent of nationalincome before 1929;in comparison,
Australia and Canada saved around 15 percent. Such a low saving
capacity inevitably spelled disaster for capital accumulation once the
stricturesof the interwarcapitalmarketbecame apparent.Unsuccessful
attempts to raise funds in New York for several years and the inability
to attract new foreign additions to the capital stock caused Argentine
accumulationto limp along, relying on low rates of domestic accumu-
lation to drive new investment.
What accounted for low Argentine saving capacity? Can the demo-
graphic burden explain the phenomenon?Panel B of Table 4 makes a
These observationslend credence to the notion that Argentinawas credit constrainedduringthe
early interwarperiod, an identificationproblem that must be addressed to determine whether
retardationin capitalformationwas drivenby investmentdemandor savingssupply.I arguefor the
latter, because interest rates rose and quantityconstraintsacted to impede Argentineaccess to
foreignloans. Peters, for example, notes that it was not until 1924that Argentinasecured its first
overseas loan since the war.
 Argentine Economic Decline 923

heuristiclink between the "savings rate gap" and the "dependency rate
gap" in the settler economies. Argentinahad a dependency rate about
four or five percentagepoints higherthan the Australia-Canadaaverage,
and a savings rate about ten or eleven points lower. In what follows, by
estimating savings functions for the settler economies, I explore how
much of the differencein savings rates can be attributedto demographic
effects via the dependency rate. A naturalcounterfactualexercise is to
postulate Argentine performance under an alternative (Australian or
Canadian)age structure with a lower dependency rate. I assume that
Argentineinvestment is constrainedat the marginby domestic savings
capacity-a rough approximationto the 1920s in Argentina, given the
abysmal conditions for overseas borrowing. I then calculate counter-
factual Argentine savings, investment, and accumulationrates for the
interwar period and project counterfactual economic growth. The
dependencyrate impact on savings is found to be large and significantin
settler economies, and the demographicburdenborne by Argentinacan
explain a large part of the interwar retardation under conditions of
internationalcapital immobility. Despite the restrictive counterfactual
assumption, I argue that this analysis offers a powerful explanation of
the closing of the Belle Epoque.

THE DEMOGRAPHICBURDEN, SAVINGS, AND FINANCIAL

DELINKING: ARGENTINAUNHINGED

I now turn to examine in detail the link between savings and the
demographicburden. An excellent survey of the empiricaland theoret-
ical aspects of this issue has been presented by Jeffrey Hammer.28The
theory has its roots in the life-cycle savings hypothesis developed by
Franco Modiglianiand others. According to this approach, population
growth will raise consumption (and depress savings) whenever the
average age of earning exceeds the average age of consuming-a
relationshipcertain to hold when the young greatly outnumberthe old,
and further reinforced by the typical life-cycle distributionof income,
which tends to peak in middleage. As Hammersummarized:"A rapidly
growing populationhas a large numberof young people. Young people
tend to consume more than they produce. If there is no countervailing
increase in the income of adults, the effect will be to reduce aggregate
savings."29
Unfortunately, these otherwise plausible predictions are very sensi-
tive to the precise theoreticalformulationof the model, and alternative
assumptions can generate a variety of predictions. Savings decisions
change characterentirely dependingon whether the unit of analysis is
the household or the individual. At the individual level, children
28 Hammer,"PopulationGrowthand Savings."
29
Ibid., p. 581.
924 Taylor

obviously consume more than they produce. In a crude household-

based model, life begins at 20, if you will, and the younger generation
(excluding children) now unambiguouslyproduces more than it con-
sumes. Another possibly inappropriateassumption is that of a fixed
distributionof income across age groups. In that case the rate of growth
of national income would also be a determinantof savings rates, as
Andrew Mason observed.30
Notwithstandingthe theoretical complexities, demographicanalysis
of savings has been a controversial element of the empirical develop-
ment literaturesince Nathaniel Lefts seminalwork in the late sixties.3'
Leff analyzed savings rates in a large cross-section sample including
both developed and less developed countries; he found that high
dependency rates had a significantnegative impact on savings rates.
The study generated much criticism because of its sample choice and
omitted variables, and subsequentwork has revealed a great disparityin
the magnitudeand significanceof the effect. As Hammer pointed out,
many variables in the development process are highly correlated, and,
consequently, cross-countrystudies will generally sufferfrom collinear-
ity problems and a lack of robustness with respect to alternative
specifications. A better approach would be to use individual country
time series data, which "would control for the country-specific vari-
ables which determine savings. However, since age distributions
change slowly and population censuses are conducted relatively infre-
quently, data restrictions for such studies are severe."32
Although data restrictions preclude a time series approachfor many
of today's less developed countries, we are not similarly hampered
when dealingwith the settler economies, whose documentedmacroeco-
nomic experience stretches back to the turn of the century and beyond.
National saving may easily be calculated using a residual approach,
exploiting the current-account identity; savings rates may then be
derived using an estimate of national income. Time series for real
national income provide estimates of growth rates, and frequent popu-
lation censuses allow calculation of the dependency rates, using inter-
polation as necessary. In this way, I built up a complete time series
database for the settler economies, comprising national savings rates
(s), dependency rates (D), and growth rates (g).33
Given the eclectic natureof the empiricaland theoreticalliterature,I
chose a hybrid model to incorporate both the direct effects of the
30 Ibid. See also Samuelson, "An Exact ConsumptionLoan Model"; and Mason, "National
Savings Rates and PopulationGrowth."
31 Leff, "DependencyRates and Savings Rates."
32 Hammer,"PopulationGrowthand Savings," p. 583.
3 The recordsbegin in 1900for Argentina(ECLA, El desarrollo econ6mico de la Argentina), in
1862for Australia(N. Butlin, AustralianDomestic Product), and in 1871for Canada(Urquhart,
"CanadianEconomicGrowth").However, the earlyECLA estimatesfor Argentinaare of dubious
quality, especially before 1935. See the Appendix.
 Argentine Economic Decline 925

dependency rate on savings, in the mannerof Leff and his critics, and
the indirect effects operating via the growth rate, following Mason.
Accordingly I estimated the following savings equation for Argentina,
Australia, and Canada over the entire time series for each country,
includingdummy variables to account for wartime effects.34

St = 830+ 81 gt + (32 D, + 133D, gt + f4 (Dummy WWI)t

+ /35(Dummy WWII)t+ Et

The results are presented in Table 5 for various sample choices. The
first three columns show the basic results on individual country time
series. In the last column, twentieth-centurypanel data are used for a
three-country sample. The results do not support the growth rate
interactiontheories, as neitherg nor D x g has a significantcoefficient.
The key finding is that the direct dependency rate impact on savings
rates is large and highly significant in all cases, with an estimated
coefficient of between -0.59 and -1.60 on the dependency rate,
correspondingto the partial derivative ds/dD. Using sample averages
renders an estimate of the elasticity of the savings rate with respect to
the dependency rate, (Dls)(dslcD), that ranges between -1.20 and
-4.08. These figures are much larger, on the whole, than the estimates
from contemporarycross-section studies shown in Table 6.
The question remains to what extent the demographic burden de-
pressed Argentine savings. The estimated coefficient suggests that a
one-percentage-pointfall in the dependencyrate would raise the savings
rate by 1.60 percentagepoints. A little mentalarithmeticbased on Table
4 should convince the reader that the Argentine dependency rate gap
relative to Australia and Canada accounts for about two-thirds of the
observed savings rate gap.
An assessment of the impact of the dependency rate effect on
Argentineinterwarperformanceis offered in Table 7. Row 5 compares
actual Argentine dependency rates with an interwar counterfactualin
which Argentina has the average of Australian and Canadian depen-
dency rates. Row 6 reveals that such a counterfactualwould imply at
least a doubling of Argentine saving, a dramatic illustration of the
3 This approachwas inspiredby the pioneeringwork of Ian McLean, who similarlyestimated
savings functionsfor Australiaand Canada(McLean, "Savingsin Settler Economies"). He used
the proportionof the populationaged 45 to 64 years as an explanatoryvariable,in an alternative
interpretationof the life-cycle hypothesis. My model differsin using the dependency rate as an
explanatoryvariableand admittinginteractionswith the growthrate. Thus, the coefficientsmay be
comparedwith those in the recentdevelopmentliterature,in which the dependencyrate is almost
always used. Finally, I prefer to use the autoregressiveARI specification:although a lagged-
dependent-variable(LDV) model could not be rejectedusing standardtests, I found that the ARI
specification dealt more convincingly with serial correlation problems, particularlywith the
Australian data. Nonetheless, the conclusions of this article are equally valid if the LDV
specificationis adopted.
926 Taylor

TABLE 5
SAVINGS FUNCTION ESTIMATESFOR SETTLERECONOMIES
Sample: Argentina Australia Canada Panel
1900-1988 1862-1988 1871-1988 1900-1988
EstimationMethod: ARI ARI ARI WLS
A. RegressionResults
Coefficients
Constant 0.620* 0.381* 0.360* 0.416*
(6.50) (5.05) (4.64) (8.01)
g 0.857 -0.534 -0.224 -0.246
(0.98) (1.47) (0.76) (1.10)
D -1.53* -0.685* -0.613* -0.834*
(5.22) (2.89) (2.51) (5.18)
D x g -2.17 2.05 0.607 0.887
(0.85) (1.95) (0.71) (1.37)
Dummy WWI 0.0805* -0.0105 -0.00926
(2.28) (0.39) (0.58)
Dummy WWII 0.0380 -0.0657* -0.0177
(1.27) (2.51) (1.12)
p 0.416* 0.755* 0.838*
(4.08) (12.78) (15.80)
Degrees of freedom 81 119 110 327
R2 0.603 0.749 0.836 0.089
Standarderrorof estimation 0.052 0.036 0.021 1.04
Durbin-Watson 1.96 2.33 2.26 2.09
B. Statisticsfor the Data Series
smean 0.129 0.161 0.159 0.152
s standarddeviation 0.080 0.070 0.052 0.068
g mean 0.031 0.032 0.038 0.034
g standarddeviation 0.052 0.053 0.053 0.053
D mean 0.329 0.317 0.323 0.322
D standarddeviation 0.038 0.054 0.047 0.042
C. ImpliedLong-RunCoefficients
as
Partialderivative: -1.60 -0.62 -0.59 -0.80
aD
D as
Elasticity: - -4.08 -1.21 -1.20 -1.70
s aD
* These are significantat the 1 percentlevel in a one-tailtest.
Notes: The dependentvariableis the savings rate s. Absolute t-statisticsappearin parentheses.
The first-orderautoregressive(ARI) estimationsutilize the Cochrane-Orcuttprocedure. In the
panelregressionsall variablesare transformedby p-differencing,and a residualvarianceseries for
each countryallows the use of weightedleast squares(WLS)to correctfor heteroskedasticity;but
the statistics in panel B of the table still refer to the untransformeddata.
Sources: See the Appendix.

magnitudeof the dependency burden.Given the knowledge that almost

all interwar additions to the Argentine capital stock were funded by
domestic savings, we can explore in rows 7 and 8 the implications for
capital accumulation (given the capital-output ratio) and economic
 Argentine Economic Decline 927

TABLE 6
ELASTICITIESOF SAVINGS RATES WITHRESPECTTO DEPENDENCYRATES:
EVIDENCEFROMCROSS-SECTIONALSTUDIES
Study Sample Elasticity
Leff (1969) 74 countries - 1.35*
47 less developed countries - 1.23*
Gupta(1971) Poor countries -0.77
Middlecountries -0.62
Rich countries -2.70*
Total sample -1.84*
Adams (1971) 47 less developed countries -0.46
Leff (1971) 74 countries -0.97*
67 countries -0.99*
Gupta(1975) 40 less developed countries -0.63*
Ram (1982) 110countries -0.004
66 less developed countries 1.32
31 developed countries -1.08
70 less developed countries 0.08
* This indicatesa significanceof the coefficientat the 10 percentlevel.
Notes: The dependencyrate used is the proportionof the populationunder 15 years of age. The
proportionof the populationover 65 was used in all studies as an additionalexplanatoryvariable,
except in Adams'sand Gupta's(1975).The latterused a simultaneousequationsmethod,with both
saving and dependencyrates endogenous.
Source: Hammer,"PopulationGrowthand Savings," p. 584.

TABLE 7
COUNTERFACTUALARGENTINEINTERWARECONOMICPERFORMANCE
Values
Parameters
(1) as /OD -1.60
(2) Capital-outputratio 3.38
(3) Capital'sshare in output (%) 60
(4) Dependencyrate gap (%) 3.87
Actual (%o) Counterfactual(%) Actual (%)
1913-1929 1913-1929 1900-1913
(5) Dependencyrate 36.1 32.2 38.9
(6) Savings rate 5.00 11.19 4.52
(7) Capitalstock growthrate 2.2 4.0 7.7
(8) GDP per capitagrowthrate 0.88 1.98 2.47
(9) Argentineretardation 1.59 0.49
(10) OECD retardation 0.25 0.25
Notes: Row 1 is the coefficientestimatedin Table5, column1. Row 2 is based on datafor 1913from
IEERAL, "Estadfsticas," pp. 114, 120. Row 3 is based on one minus labor's share in output
derivedfromRandall(p. 30) and is, if anything,a slightunderestimate(Randall'sfiguresare below
30 percent for labor's share for most of the period 1913-1929).Row 4 is from Table 4. Row 5 is
derivedfrom Table 4 and row 4. Row 6 is derivedfrom rows 5 and 1. Row 7 is derivedfrom the
Appendixand rows 6 and 3. Row 8 is derivedfrom rows 7 and 3. Rows 9 and 10 are derivedfrom
row 8 and Table 1. Retardationof GDP per capitagrowthrate, shown in rows 9 and 10, is relative
to Argentinafrom 1900to 1913. See the text.
Sources: Tables 1, 6, and 7: IEERAL, "Estadfsticas";and Randall,An Economic History. Also
see the Appendix.
928 Taylor

growth (given capital's share in output), if all of the extra counterfactual

savings were channeled into domestic investment between 1913 and
1929. We are now invoking the assumption of a savings-constrained
economy under conditions of poor international capital mobility-a
scenario that, as I have argued,bears a strongresemblanceto Argentina
in the twenties. Based on what we know about Argentineretardationat
the conclusion of the Belle Epoque, the results are arresting: in the
counterfactual scenario approximatelytwo-thirds of the slowdown of
the Argentineeconomy would have been eliminated,whether measured
in terms of capital accumulationor growth of income per capita. The
higher savings rate would have sustained capital deepening-the accu-
mulation rate would have fallen instead to 4.0 percent, well above the
populationgrowth rate of 2.8 percent (see Table 4).
Under the common assumptionof a Cobb-Douglasaggregateproduc-
tion function, and estimating capital's share of output at 60 percent,
such a counterfactualchange of plus 1.8 percentagepoints in the rate of
capital deepening would raise income per capita growth rates by about
1.1 percentage points. The counterfactual growth rate of per capita
income would have been 1.98 percent, not much below the spectacular
2.47 percent rate of growth observed prior to the Great War. Retarda-
tion would have been only 0.49 percentagepoints, about one-thirdof the
actual decrease and close to the average OECD retardation. In other
words, the Belle Epoque might have lasted: under the counterfactual
conditions, Argentina'sinterwarperformancewould have placed it not
in the outlying group of stragglers,but in the middle of the pack.

TOWARDAN UNDERSTANDING OF ARGENTINE ECONOMIC

RETARDATION

Measuredby almost any standards,Argentineeconomic decline set in

after the GreatWar-only a comparisonwith the other strugglingsettler
economies can make Argentina'sinterwareconomic performancelook
respectable. It would be unreasonable, however, to expect a single
story to underlie this phenomenon, and this article only offers a partial
accountingfor the decades of poor Argentineeconomic performance.In
doing so it highlightsthe difficulttransitionto the interwarperiod. One
distinctive feature of the early-twentieth-centuryArgentine economy
was its remarkablylow savings capacity compared with Canada and
Australia. Untroubled by low rates of domestic accumulation, Argen-
tina flourishedduringthe Belle Epoque priorto 1913:foreignborrowing,
principally in the London capital market, financed a rapidly growing
capital stock, and rates of capital deepening and income growth made
Argentinaone of the fastest-growingeconomies of the day.
External dependence on foreign capital was crucial in Argentina
 Argentine Economic Decline 929

because of the scarcity of domestic capital, which resulted in large part

from demographicconstraintson domestic savings. A high dependency
rate, driven by a fast-growingpopulation and substantialimmigration,
gave rise to an age structurewith a large share of young dis-savers. The
shortfallin available investable resources had to be made up by capital
inflows-what Jeffrey Williamsonand I viewed as an intergenerational
transferfrom mature savers in the Old World.35
When internationalcapital flows were cut off, following the collapse
of the international capital market and Britain's retreat into debtor
status, the balance-of-paymentsgap could be bridgedno longer, and the
demographic burden forestalled Argentine accumulation through the
interwarperiod. Counterfactualanalysis demonstratesthat under more
forgivingcircumstances-a lower dependency rate comparableto those
of the other settler economies-Argentine interwarperformancewould
have been close to the average for the rest of the world economy.36
In the development literature,much ink has been spilled in discussing
the obstacle that external dependencepresents to a developing country,
and the need for self-sufficiencyand delinkingfrom the core group of
industrialnations; such argumentsusually fall under the controversial
rubric of dependency theory.37Diaz-Alejandrooffered a scathing cri-
tique of such inward-lookingapproachesto development in his influen-
tial article "Delinking North and South: Unshackled or Unhinged?" In
the context of Argentine economic decline, I have sought to show that
another kind of dependency burden, of the demographicvariety, can
render external dependence in capital markets a vital underpinningto
the developmentprocess. Britishcapitalpaid for a Belle Epoque that the
young Argentine populationcould not underwritealone: delinked from
this external market Argentina became not unshackled but, indeed,
unhinged.
3 Taylor and Williamson,"CapitalFlows."
36 By the 1940s, the Argentinedependencyrate burdenhad almost disappeared;unfortunately,
a new autarkicregimehad by then made the cost of importedcapitalgoods very expensive, and
accumulationwas suppressed on that account-but that's another story. See Diaz-Alejandro,
Essays; and De Long, "ProductGrowthand MachineryInvestment."
37 For a survey see Palma, "Dependency." On Latin America, see Kay, Latin American
Theories.

Appendix: Data Sources

POPULATION

Argentina
Vaizquez-Presedo,Estadisticas, part 1, pp. 15-16, and part 2, p. 19.
930 Taylor

Australia

Maddison,Phases, appendixB.

CAPITAL STOCK

Argentina

Two series were constructedto provideestimatesof the real capitalstock in constant

prices. First, a series was based on estimates of real stocks. Post-1913data were taken
from IEERAL, "Estadisticas," pp. 120-21; 1900to 1913data were taken from ECLA,
El desarrollo,vol. 5, p. 91; the two series were splicedtogetherat 1913.A second series
was based on estimates of real investmentderivedfrom ECLA, El desarrollo,vol. 5, p.
81, and from Di Tella and Zymelman,Los ciclos, pp. 47-86. This second series was
computedfromgross domesticfixedcapitalformationdatain constant 1950pesos, using
a depreciationrate of 6 percent and assumingan arbitrarybase stock of 20,000 million
1950pesos in 1884.The depreciationand base stock parameterswere chosen so that the
second series closely matchedthe first for trend and cyclical behaviorover the period
of overlap.
The depreciationrate used in the second series is probablyan overestimate, being
much higherthan the rates of depreciationreportedfor Australia.This would tend to
underestimate the growth of the capital stock prior to 1913, thus generating an
acceptable bias toward an underestimateof Argentineretardation.To obtain a bench-
mark figure in pounds sterlingthe following procedurewas adopted, using data from
Diaz-Alejandro,Essays, p. 30. According to Diaz-Alejandro,foreigners owned 41
percent of the Argentinecapital stock in 1909,an amountequal to US$2,176 millionat
currentprices. Convertingto pounds sterlingat the par rate of ?1 equal to US$4.8666
produces an estimate of ?1,091 millionfor the total capital stock of Argentinain 1909.
This is assumed to be the value in 1910pounds sterling, too.
The final capital stock series used is a spliced version of the above two series, using
the second before 1909 and the first thereafter, normalized to the Diaz-Alejandro
benchmarkin 1909.

Australia
Data sources for 1900to 1939were based on the nominallevel of the capital stock in
the sectors that follow. Price indices for capitalformationwere used to deflatethe series
to 1910/11prices, and hence to obtain values in ?1910/11.I assumed ?1 to be equal to
A$2. Years are financialyears, beginningon July 1. All data were taken from M. Butlin,
"PreliminaryDatabase," tables 4.2, 4.8, 4.10, and 4.13.

Sector Deflator Used

Private, plant & equipment Private, nondwelling

Private, nonresidential structures Private, nondwelling
Public, plant & equipment Public, nondwelling
Public, railways Public, nondwelling
Public and private, all dwellings Private, dwelling

For 1880to 1900,the base stock in 1900was projectedbackward,using data on gross

domestic capitalformationand depreciationallowances taken from N. Butlin, Austra-
lian Domestic Product, pp. 6, 32.
 Argentine Economic Decline 931

SAVINGS RATES

Nationalsavingwas calculatedresiduallyas investmentplus the currentaccountin all

cases. The currentaccount equals exports minus importsplus the service account. In
some cases the service accountwas includedin the exportor importfigures.The savings
rate is defined as nationalsaving divided by nationalincome.

Argentina

For 1900to 1913, investmentin nominalterms was derivedfrom real investmentand

the price level; from ECLA, El desarrollo, vol. 5, p. 81; and from Della Paolera,
"Argentine Economy," p. 186, col. 4. Exports and imports in nominal terms were
derived from Della Paolera, "ArgentineEconomy," p. 186, cols. 8 and 10. National
income in nominalterms was derived from real income and the price level; see ibid.,
cols. 4 and 6. All these were normalizedto the IEERAL 1913nominalbenchmarksgiven
below.
For 1913 to 1984, investment (includingchange in stocks), exports, imports, and
nationalincome (GDP at marketprices) in nominalterms were taken from IEERAL,
"Estadisticas;"pp. 136-37.
For 1985to 1988, investment,exports, imports,and nationalincome (GDP at market
prices) in nominalterms were taken from the WorldBank, WorldTables 1989-90, pp.
92-93.

Australia
For 1861to 1900, investment, currentaccount, and nationalincome (GDP at market
prices) in nominalterms were taken from N. Butlin, AustralianDomestic Product, pp.
6, 16, 22, and 410-11.
For 1901 to 1960, investment (including change in stocks), current account, and
nationalincome (GDP at marketprices) in nominalterms were taken from M. Butlin,
"PreliminaryDatabase," tables 4.1 and 4.17.
For 1961to 1988,investment, currentaccount, and nationalincome (GDP at market
prices) in nominal terms were taken from the Australian National Accounts and
provided by McLean as a supportingdocumentto "Saving in Settler Economies."

Canada

For 1870to 1984, I used the impliedsavings ratio (calculatedresiduallyas described

above) and Urquhart,"CanadianEconomic Growth," pp. 18-21.
For 1985 to 1988, I used the Gross Domestic Saving plus Net Factor Income from
Abroad, all divided by GDP at market prices, from the World Bank, World Tables
1989-90, p. 161.

GROWTHRATES

The growth rate is defined to be the first differenceof the naturallogarithmof real
nationalincome.

Argentina
For 1900to 1913, real output is from Della Paolera, "ArgentineEconomy," p. 186.
For 1913 to 1984, GDP at market prices (constant 1960 prices) is from IEERAL,
"Estadisticas," pp. 114-15.
932 Taylor

For 1984 to 1988, the GDP at factor cost, constant 1980 prices, is from the World
Bank, World Tables 1989-90, pp. 92-93.

Australia

For 1861to 1901, GDP at marketprices (constant 1910/11prices) is from N. Butlin,

Australian Domestic Product, pp. 460-61.
For 1901to 1974, GDP at marketprices (constant 1966/67prices) is from M. Butlin,
"PreliminaryDatabase," table 4.3.
For 1974to 1988, GDP at factor cost (constant 1980prices) is from the World Bank,
World Tables 1989-90, pp. 96-97.

Canada
For 1870 to 1985, GDP at market prices (constant 1981 prices) is from Urquhart,
"CanadianEconomic Growth," pp. 8-11.
For 1985to 1988, GDP at factor cost (constant 1980prices) is from the WorldBank,
World Tables 1989-90, p. 161.

DEPENDENCY RATES

Dependency rates are based on linear interpolationbetween sample years. The

dependencyrate is definedas the populationunder 15 years of age divided by the total
population.

Argentina
For 1869 and 1895, Mitchell, International Historical Statistics, pp. 51, 70.
For 1915, 1920, 1925, 1930, 1935, and 1940, Vdzquez-Presedo,Estadisticas, part 2,
pp. 38-39.
For 1947, 1960, and 1970, Mitchell, International Historical Statistics, pp. 51, 70.
For 1980, United Nations, Demographic Yearbook 1981, pp. 218-19.
For 1988, United Nations, Demographic Yearbook 1989, pp. 178-79.

Australia
For 1861, 1871, 1881, 1891, 1901, 1911, 1921, 1933, 1947, 1954, 1961, 1971,and 1981,
Caldwell, "Population."
For 1988, United Nations, Demographic Yearbook 1989, pp. 196-97.

Canada
For 1851, 1861, 1871, 1881, 1891, 1901, 1911, 1921, 1931, 1941, 1951, 1961, and 1971,
Mitchell, International Historical Statistics, pp. 47, 57.
For 1980, United Nations, Demographic Yearbook 1981, pp. 214-15.
For 1989, United Nations, Demographic Yearbook 1989, pp. 174-75.

United Kingdom
For 1851, 1861, 1871, 1881, 1891, 1901, 1911, 1921, 1931, 1951, 1961, and 1971,
Mitchell, European Historical Statistics, pp. 34, 62 (England and Wales).
For 1980, United Nations, Demographic Yearbook1981, pp. 230-31 (England and
Wales).
For 1988, United Nations, Demographic Yearbook 1989, pp. 194-95.
 Argentine Economic Decline 933

United States

For 1850, 1860, 1870, 1880, 1890, 1900, 1910, 1920, 1930, 1940, 1950, 1960,and 1970,
Mitchell, International Historical Statistics, pp. 50, 66-69 (whites only in 1880).
For 1981, United Nations, Demographic Yearbook 1981, pp. 218-19.
For 1989, United Nations, Demographic Yearbook 1989, pp. 178-79.

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