XIVth International Economic History Congress

Helsinki, Finland, 21-25 August 2006

Session 97

Settler Economies in World History

_______________________________________________________________

Argentina-Australia: Growth and Divergence in the Twentieth Century

Andres Gallo
University of North Florida

This is a draft conference paper, not to be quoted without permission of the author

Abstract
Australia and Argentina had very similar economic and institutional structure in
the end of the nineteenth century. Both countries developed in similar ways and their
levels of income converged. However, in the twentieth century their paths diverged. This
paper analyzes the break of the convergent path of these countries using time series
econometric techniques. As it is showed, the divergence started in the 1940s, which
coincides with institutional and political changes that happened in Argentina.
Furthermore, these results also help to elucidate the starting of Argentinas decline in the
twentieth century, showing that the slowdown experienced after the Second World War is
stronger than the other competing periods, i.e. the First World War and the Great
Depression.

I.

Introduction
The impressive growth of Argentina and Australia in the last part of the

nineteenth and beginning of the twentieth century has attracted the attention of many
researchers. Both economies had many characteristics in common and economic
development proceeded in similar paths during many decades. However, as it has been
documented, the dismal economic performance of Argentina in the second half of the
twenty century strongly contrasted with the solid economic performance of Australia.
This paper analyzes the convergence of per capita GDP between both countries
throughout the twentieth century, looking into the effects of changes in policies and
international conditions in both countries. The main aim of the paper is to determine the
date, or period, in which both countries began to diverge. In order to determine the
presence of such a break in the convergence process, econometric tests, including test for
temporal breaks in the series, are implemented. As it is demonstrated, there is evidence of
a reversal in the convergence process between Argentina and Australia around 1947.
After this break economic growth in Argentina strongly departed from the growth path of
Australia. These results are consistent with my previous research that claims that the
changes in policies and rule of law during the 1940s in Argentina were the main cause of
long run economic stagnation. Furthermore, this finding calls for a review of the existent
literature that proposes 1914 or 1930 as the dates for the beginning of Argentinas
economic decline.
The paper is organized as follows: the second section explores the different
explanations for Argentinas development in the twentieth century, proposing the 1940s
as one of the main candidates for such a break. The third section analyzes comparatively
the economic performance of Argentina and Australia, highlighting both coincidences
and differences between the countries. The fourth section describes the theory and
methodology employed to study economic convergence in the long run. It also presents
the econometric results. Finally, the fifth section contains the conclusions.

II.

Argentinas Decline: Competing and Proposed Explanations

Argentinas economic performance during the first decades of the twentieth century

was remarkable, as Diaz Alejandro (1970) acknowledged,

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 (20 th) 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 also
one of the highest in the world. (Diaz Alejandro, 1970, page 1)

This performance contrasts with the decline and stagnation observed throughout
the second half of the twentieth century. Several authors have attempted to establish the
precise point in time in which the decline of the Argentine economy began. Some
asserted that the Argentine downturn started with the Great World War in 1914.
However, the reasons they claim are diverse. For Bunge (1920), Di Tella and Zimelman
(1973) and others, Argentina did not embrace import substitution policies in 1914,
waiting until the Great Depression to start industrial development. As a result, the period
from 1914 to 1930 was called the Great Delay (Gran Demora). A different set of
explanations came from more deterministic, or structural, forces like the weakness of the
banking system (della Paolera and Taylor, 1998), the reliance on international markets to
provide foreign investments for the country (Taylor, 1992, 1994 and 1997), or the
problems engendered by the unusual affluence of people to the Pampas (Taylor, 1994).
Nonetheless, most of these interpretations are taking into account the recession generated
by the First World War as part of the post 1914 economic performance, without
discerning between the War and Postwar recession and the strong recovery in the1920s.
If we take away the War recession and quantify the economic performance through the
period, the economic performance is comparable to the years before the War (Diaz

Alejandro 1970). Accordingly, the existence of a downturn in the 1920s is questionable,

as most of the economic indicators evolved favorably. Domestic savings were the chief
source that financed the economic expansion of the 1920s, which made up for the
shortage in foreign capital (Diaz Alejandro, 1970). As for the countries that invested in
Argentina, there was a rising importance of the United States competing hand on hand
with the U.K. as the main supplier of funds1. As a whole, investment did not attain the
pre-war levels. Even so, as Cortes Conde (2000) pointed out,

Without doubt, the variations in the capital stock point to a slowdown in the rate
of investment. It must be taken into account, however, that it has not been possible to
compare the prewar period with the period that ended in 1930, due to problems of
information. In Table 9.5 the levels of stock in 1914 are compared with those of 1935,
when the country was still suffering the effects of the 1930s crisis. ... However, the
slowdown does not necessarily imply that domestic savings shortages are to blame.
Instead, at least in this case, savings were greater than investments. (p. 275)

The other probable date for the commencement of the decline for Argentina is the
Great Depression (Diaz Alejandro, 1970, Cavallo and Domenech, 1984, Cortes Conde,
1998 and 2000). For the majority of these authors government involvement was the
culprit of starting the decline of the economy, which would not recover afterwards.
Nonetheless, contrary to these theories, there are recent accounts on the performance of
Argentina during the 1930s that speak positively of the economic policies of the time.
Government policies were successful in helping the economy to recover from the Great
Depression. Furthermore, Argentina was one of the countries that recovered faster as
compared with the developed world (della Paolera and Taylor, 1999 and 2001).
1

Most of the increase in the stock of foreign capital between 1913 and 1927 came from the United States
investments, although this flow was not enough to yield as vigorous expansion of foreign capital as during
the 1900-13. Lessthan one fifth of gross fixed investment was financed by foreign capital during 1921-29.
(diaz Alejandro, 1970, page 31) Domestic contribution to financing pre-1930 capital accumulation was
large and tended to grow. Argentina generated substantial domestic savings, not only in its prosperous rural
sector, but also in manufacturing, commerce, and other services sectors. Domestic gross savings seem to
have amounted to around 10 percent of the GDP in most years before 1930. A capital market made up of
some modern financial intermediaries channeled part of those savings toward housing, commerce, rural
activities, and manufacturing. By 1930 Argentina had become a highly monetized economy with an
expanding capital market. (Diaz Alejandro, 1970, page 32-35.)

Additionally, the significant expansion of industry coupled with protective policies for
the rural sector and the political decision of not taking part in the Second World War
allowed the economy to maintain the rate of economic growth. The avoidance of the
expenses of waging a war also permitted to amass invaluable resources from favorable
foreign trade balances. (Diaz Alejandro, 1970)
Accordingly, it is very difficult to settle on the precise moment in which the decline
started. After economic stagnation has ensued, almost any indicator showing a negative
trend, even though slightly harmful, can be an appropriate contender to elucidate the
entire decline of the country. In previous work I claim that there are several factors that
could have contributed to the Argentine problems during the first half of the twentieth
century. Nevertheless, the political changes that took place in the 1940s should be
acknowledged as the foremost rationalization for the Argentine dismal performance in
the second half of the century. Furthermore, the political and economic aspects that ended
up with the sweeping reforms in the 1940s can be traced up to the 1930s. (Gallo, 2003)
In order to compare the progress of GDP per capita of Argentina with respect to the
rest of the World, Figure 1 shows Argentinas growth against developed and less
developed countries. The first variable, Top 5 countries, corresponds to the proportion
between the average GDP per Capita of Argentina and the top 5 countries in the world.
The following variable, Top 5-10, represents the ratio of GDP per Capita of Argentina
with respect to the countries positioned in the top 5-10. The rest of the variables, Top1015, Top 15-20 and Top 20-25, have similar interpretation. Finally, OECD countries,
represents the ratio between the GDP per Capita for Argentina and the OECD countries.
As we can see, for nearly all of these variables, the ratio increased strongly at the end of
the nineteenth century and the beginning of the twentieth. This increase slowed down by
1913, and afterwards they maintained the same level, with some slight decrease.
Nonetheless, the ratios increased once again, for most cases during the Second World
War, because of the negative impact of the War on many European countries. Through
this period Argentina had a higher GDP per capita than all the countries up to the top 15,
and even higher than the average of the OECD countries.
Following the Second World War the situation is entirely different, since all the ratios
decreased rapidly, revealing the divergence of Argentina and the loss of its relative

position with respect to the rest of the developed world. This decline reverted in the
1990s with the market reforms and the stabilization policies that generated an impressive
expansion of the economy. Nonetheless, the crisis of 2001 and the failure of the
stabilization programs generated the return to the declining path. As a result, we can
claim that there has been a steady decline of the economy since the Second World War.

Figure 1
Comparison Argentina GDP per Capita and Other Top Countries
(PPP 1990)
3

Top 5 Countries
1.6

Top 5-10 Countries

Top 10-15 Countries

Top 20-25 Countries

.
GDP Per CapitaArgentina/ Average GDP per Capita

2.5

OECD Countries

1.2

1
1.5

0.8
1
0.6

0.5

GDP Per Capita Argentina/Average GDP per Capita Top 20-25 Countries

Top 15-20 Countries

1.4

0.4

0.2

1870 1890 1900 1913 1925 1929 1935 1937 1947 1950 1960 1970 1980 1990 2000 2002

This stagnation can also be analyzed by looking at the rankings of GDP per capita from
1890 to 2002 (Table 1). All the countries that were in the top 20 in 1890 (Australia, U.
K., New Zealand, Belgium, Netherlands, United States, Switzerland, Denmark, Germany,
Austria, France, Ireland, Sweden, Canada, Italy, Spain, Argentina, Norway,
Czechoslovakia and Finland) were also in the top 20 in 2002, with the exceptions of
Argentina and Czechoslovakia. Additionally, GDP per capita of Argentina was ranked
worse than Czechs Republics in 2002. Furthermore, according with the rankings, none
of the countries that reached the top 10 in GDP per Capita has slipped beyond the Top 20,

with the exception of Argentina. 2 As a result, we can be certain that Argentina is a lucid
example of reversal of economic development during the twentieth Century, which has
not been equaled by any country with some extent of development in the world. By 1947,
Argentinas GDP per capita was 13% higher than the average for the OECD countries,
and by 2002, Argentinas GDP per capita is only 37% of that of the OECD countries.
Furthermore, almost all the countries in the middle-income range, as indicated by Figure
8, have drastically improved their positions with respect to Argentina.
If we contrast the performance of Argentina with respect to other Latin American
countries (Mexico, Brazil, Chile, Colombia and Peru) we can see that Argentina also
diverged from Latin American countries (Figure 2). The Latin America/Argentina curve
compares the average GDP per capita of these Latin America countries with respect to
Argentina; the Top 10 Countries/Argentina curve represents the ratio of the average GDP
per capita of the top 10 countries with respect to Argentina. Finally, the Top 10
Countries/Latin America line corresponds to the ratio of the average GDP per capita of
the top 10 countries with respect to the average GDP per capita of Latin American
countries. As we can see, Argentina diverged from the Top countries as from the Latin
American Countries in the same fashion. On the other hand, Latin American countries
did not diverge from the Top 10 countries as fast as Argentina did in the second half of
the twentieth century (Figure 2). This behavior demonstrates that the deviation of
Argentina in the second half of the twentieth century is particular of the country and was
not common to the rest of Latin America. As a result, Argentina can be considered an
outlier compared with both the countries of recent settlement, i.e. Australia and Canada,
and the Latin American countries.

I did not take into account countries that are oil producers because of the bias this can introduce and the
nature of their riches.

Table 1: Rankings GDP Per Capita (PPP 1990)

1870

1890

1900

1913

1925

1929

1935

1937

1947

1950

1960

1970

1980

1990

2000

2002

Australia

11

14

11

UK

12

15

15

16

15

New Zealand

10

17

17

19

18

Belgium

12

11

13

13

10

12

13

Netherlands

11

10

11

13

10

11

US

Switzerland

Denmark

11

Germany

12

12

10

20

15

Austria

10

10

12

13

14

20

19

18

18

14

14

10

11

14

14

France

11

10

11

13

10

11

11

14

12

12

Ireland

12

12

15

15

19

21

16

20

17

19

20

18

21

19

Sweden

13

14

14

14

14

13

10

13

12

Canada

14

11

12

10

13

12

10

Italy

15

16

19

17

16

19

17

17

19

21

17

15

14

16

17

17

Spain

16

15

16

19

17

20

21

26

21

25

25

20

19

18

20

20

Argentina

17

13

13

10

11

11

12

13

10

13

18

21

22

26

24

27

Norway

18

17

18

18

18

17

14

15

13

14

15

19

12

Hungary

19

21

20

21

23

23

23

28

23

24

26

25

28

26

25

Czechoslovakia

20

18

20

21

20

18

24

21

18

20

19

22

23

23

25

24

Finland

21

19

22

23

22

22

18

16

15

16

16

17

16

12

15

16

USSR

22

22

23

26

31

26

25

25

22

22

24

24

25

37

37

Japan

23

21

25

28

24

26

25

24

29

30

23

16

13

10

Brazil

24

24

34

37

33

35

35

35

30

31

34

34

32

34

33

34

Thailand

25

23

31

38

40

44

42

40

36

30

30

Mexico

26

20

24

27

25

29

31

32

26

28

30

30

31

32

31

31

Indonesia

27

25

33

30

31

38

38

37

36

39

42

44

43

41

39

39

India

28

27

37

41

37

43

41

40

34

43

47

50

50

46

44

44

China

29

26

36

39

42

39

39

42

45

45

45

40

29

29
22

39

Greece

23

24

22

22

27

29

27

23

20

21

22

Turkey

36

36

36

37

34

31

34

36

37

38

35

34

35

Bulgaria

25

34

33

33

30

32

29

27

26

29

36

36

25

29

27

24

26

28

28

31

27

26

26

34

34

38

36

35

35

35

38

40

40

Poland
Romania
35

28

32

36

36

33

33

32

27

30

35

32

Chile

Yugoslavia
17

16

15

16

19

18

16

17

21

25

29

27

23

23

Colombia

27

29

27

28

28

29

24

27

32

33

33

33

32

33

Peru

30

34

30

27

27

28

23

26

28

29

34

39

38

38

37

44

53

53

53

51

50

49

45

52

54

51

52

35

41

50

46

47

45

45

45

Bangladesh

42

Burma
Pakistan

45
35

35

40

44

40

41

Philippines

26

24

35

38

39

39

43

42

42

South Korea

28

31

29

37

30
30

31

33

38

40

38

37

22

21

21

Taiwan

32

32

32

40

32

33

32

37

39

36

30

20

18

19

Figure 2
GDP Per Capita Argentina and Latina America
(Index 1900=100)

230

210

190

Latin America/Argentina

170

Top 10 Countries/Latin America

Top 10 Countries/ Argentina
150

130

110

90

70
1900

1913

1925

1929

1935

1937

1947

1950

1960

1970

1980

1990

2000

2002

In addition, analyzing investment and productivity in comparing different

countries in the world, Givogri (1993) concludes,

[T]he Argentine case is striking because, even though it is in the group of

countries of low growth, has an investment rate similar to countries of high growth. The
problem is rooted in the high capital-product ratio for the country. As a result,
Argentinas low growth is only comparable, in terms of investment return, with Zambia
and Jamaica. Both countries, although invest an important share of GDP with respect to
high growth economies, show a low productivity, similar to the results of Argentina.
From the previous analysis it can be concluded that the Argentine case is almost
the only case in the world and the reason is the poor resource allocation of the
investment. p. 17.

This uniqueness in the economic behavior is matched by the political instability exhibited
by the country following the Second World War,

10

Excluding Bolivia, no Latin American nation can match Argentinas record in

overthrowing constitutional governments. In the twenty-seven-year period from 1955 to
1982, Argentina had no fewer than twenty chief executives; the average tenure in office
was eighteenth months. Nine of these men (Leonardi [1955],Aramburu [1955], Guido
[1962], Ongania [1966], Levingston [1970], Lanusse [1971], Videla [1976], Galtieri
[1981], and Bignone [1982]) achieved power through military coups, and four ousted
popularly elected governments. This numbers only includes those coups that were
successful; the world is still awaiting research on the number of abortive attempts to
replace an existing government in Argentina.
And few South American nations can match Argentinas recent record of human
rights violations. The Argentine government and its paramilitary allies in the late 1970s
refined the art of disappearing people to such an extent that in 1980 the founder of
Argentinas Service for Justice and Peace, Adolfo Perez Esquivel, received the Nobel
Prize for his defense of human rights against governmental terror. (Schoultz, 1983).

III.

Argentina and Australia in the Twentieth Century

Argentina and Australia share many similarities because of their geographical

characteristics and the type of economic policies applied in both countries (Gallo, 1979).
As a result, the comparison of economic development has been the interests of several
authors. Many studies have compared these economies since their early integration to
international markets at the end of the nineteenth century and during the twentieth
century (Gallo, 1979; Fogarty 1989; Boehm, 1979; Armstrong, 1985; Fogarty, 1985; di
Tella, 1985; Diaz Alejandro, 1985; Taylor, 1992; Schevdin, 1990).
By the end of the nineteenth century, the U. K. consolidated its economic power
in the international economy, contributing to a strong globalization process (Williamson,
1996; Taylor, 1999). In this context, Argentina and Australia played and important role in
the international market system as providers of rural goods (Fogarty, 1985; Schedvin,
1990). Both countries shared characteristics that made them ideal for their integration to
the world markets. First, they had open grasslands suitable for the development of rural

11

activities (Gallo, 1979). Second, low density of population permitted the generation of
mayor surpluses of rural goods for export. Third, settlement was easier by the fact that
these areas were scarcely populated with indigenous peoples (Schedvin, 1990)3. Finally,
all these characteristics combined made the countries attractive to migratory currents
from Europe (Taylor, 1997; Gallo, 1979).4 Together with the United States and Canada,
these countries were the main exporters of rural products during this period of
globalization of the world economy (Schedvin, 1990)5. Favored by strong integration in
the world economy, both economies developed fast, growing at high rates (Diaz
Alejandro, 1985). Furthermore, U. K. interests in these economies generated an important
inflow of capital that accounted for growing shares of investments, mainly in
infrastructure sectors like railroads and other transportation systems. Accordingly, it is
expected to observe a degree of convergence on the rate of growth between these
countries under similar conditions and inserted in the world economy under the same
model of economic growth (Bernard and Durlauf, 1995).
During the first half of the twentieth century, Argentina and Australia continued
to be integrated to international markets, even though market conditions changed, and the
globalization era was coming to an end (Estevadeordal et. al., 2002). Nonetheless,
increasing productivity on rural production generated capital accumulation and growth in
the industrial sector (Fogarty, 1979 and Table 2). Given that Australia had an initial GDP
per capita higher than Argentina, GDP per capita should grow faster in Argentina than in
Australia, according to the neoclassical theory of economic growth (Barro and Sala-iMartin, 1992). This process of economic growth should give rise to a convergence
process between both economies. As expected, growth rates of GDP per capita were
higher in Argentina during most of the first half of the twentieth century (Table 2).

3
In Argentina, the government finished the campaigns to expel Indians (Campaa del Desierto) around
1880s, giving more security to settlers in the vast Pampas.
4
All the countries that shared similar characteristics and the same type of insertion in international markets
during this period have been labeled under the Staple theory of economic development (Fogarty, 1979).
5
Even though the three countries adhered to the staple theory of economic development, there were
differences among them that determined the degree of specialization in particular industries, or superstaples. According to Fogarty (1985), the successful development of super staples, and the associated
initiation of economic development were triggered by local enterprise and initiative at either the individual
or government levels., page 33.

12

In this period three main shocks in the international markets produced by the First
World War, the Great Depression and the Second World War changed the environment
on the international markets (Estevadeordal et. al, 2002). These shocks affected all
economies in general and economic growth declined in Argentina and Australia.
However, Argentina seemed to suffer more from the effects of external shocks. The
disruption of international markets generated a deep crisis in the country, especially in
terms of investments and foreign trade (Taylor, 1992, 1999, 1994). The fragility of the
Argentine economy to international shocks was due to the fact that the country depended
more on international markets and capital, and as a consequence, the impact of these
crises was greater than in Australia (Taylor, 1992). As a result, during the crisis years,
GDP per capita in Argentina declined as compared with Australia (Table 2). As the
international economy returned to normalcy, GDP per capita in Argentina continued
growing faster and converged to the level of Australian GDP per capita (Table 2 and
Figure 3). The fact that both economies were closely integrated with international
markets during this period is represented by the high degree of openness in both
economies (Table 2). Crises on international markets had an impact on the share of
exports and imports, which strongly declined during periods of trade disruption (Table 2).
In the case of Argentina, the decline in imports was very important, given the high
dependence on imported goods the country had during this period (Taylor, 1992). As
mentioned before, the engine for growth in both countries was the rural sector, which
represented an important part of GDP and provided most of the exporting goods (Table
2). Nonetheless, industry also developed as surpluses from rural production were
transferred to the sector (Table 2; Fogarty, 1979). Accordingly with the export-led
development based on rural products, most of the economy concentrated around the rural
sector and other activities related with trade of goods and services (Fogarty, 1979;
Fogarty, 1985). Finally, both economies presented stable general economic conditions
with low rates of inflation and small governments (Table 2). It is also important to notice
the confidence of the people in the economy, as reflected in the high ratio of M1 and M3
as percentage of GDP. Even in the political arena there is some convergence during this
period. Australia had a long standing tradition of stable democratic institutions in place,
which produced a stable environment for economic development (Gallo, 1979). In the

13

case of Argentina, the lack of democracy was replaced by political stability thanks to the
control of a ruling elite. In the first part of the twentieth century, the country evolved
towards more democratic institutions, with free elections and the access of new political
groups to power. Nonetheless, the new democratic regime did not change the basic
foundation of the exporting model, but favored it (Yablon, 2002). The transition to
democracy in Argentina was short lived, with the military coup of 1930 and the return of
conservatives to the power by electoral fraud (See Alston and Gallo, 2003).
Given the similarities in country characteristics and the economic model applied
for development, it is not strange that the evolution of GDP per capita in both countries
during this period showed the same tendency in growth rates over time (Figure 2). As we
can see, GDP per capita growth rates were higher for Argentina during times of normal
international markets, but the crises had a bigger impact than in Australia. As the whole,
Argentina exhibited higher growth of GDP per capita that Australia (Table 2). Comparing
the GDP per capita growth with other countries, we can see that the performance of
Argentina during the first half of the twentieth century was acceptable, showing the same
pattern in direct comparison with Australia (See section II).
During the 1930s, the end of the globalization era and decline of U. K. influence
created incentives in both countries to industrialize (Estevadeordal et. al., 2002). As a
result, in this decade both countries began to support industry, while maintaining the rural
sector as the most important producer of hard currency through exports (Diaz Alejandro,
1970; Boehm, 1979; Di Tella, 1979). The political transition towards an industrial society
proved to be smoother in Australia than Argentina. As shown in Gallo (2003) and Alston
and Gallo (2003), in Argentina conflicting interests and the lack of legitimacy in the
political system created the bases for populist governments and attacks on the rule of law.
As it is shown in this paper, it is during the second half of the twentieth century that both
countries diverged in terms of economic policies and also in terms of economic growth
(Table 2 and Figure 4).

14

15
19
46

19
44

19
42

19
40

19
38

19
36

19
34

19
32

19
30

19
28

19
26

19
24

19
22

19
20

19
18

19
16

19
14

19
12

19
10

19
08

19
06

19
04

19
02

19
00

130

110
Index 1900=100

Figure 3

(PPP US Dollars 1985)

GDP Per Capita

170

150

Argentina

90
Australia

70

Table 2: Comparison Argentina-Australia

1900-1905
1906-1910
1911-1915
1916-1920
1921-1925
1926-1930
1931-1935
1936-1940
1941-1945
1946-1950
1951-1955
1956-1960
1961-1965
1966-1970
1971-1975
1976-1980
1981-1985
1986-1990
1991-1995
1996-2000
1998-2002

GDP per Capita

Investment
Openness
Rural Production
Manufactures
(Annual growth rate)
(As % of GDP)
(Exports + Imports)/GDP
(As % of GDP)
(As % of GDP)
Argentina Australia Argentina Australia Argentina
Australia Australia Argentina Australia Argentina
8.8
1.9
16.9
13.8
45.2
41.3
18.5
21.9
11.3
15.5
5.8
6.7
31.6
12.9
48.4
44.3
24.6
18.1
11.9
15.7
0.1
1.4
27.8
16.1
53.8
41.4
18.6
16.1
14.0
16.9
3.3
0.9
25.8
16.8
38.0
38.8
23.5
20.2
13.0
17.3
5.7
3.2
17.0
18.2
39.7
38.4
19.7
18.3
13.8
17.9
3.6
-1.5
21.7
17.8
44.0
36.3
16.2
16.4
16.2
19.2
1.2
3.8
14.5
12.0
34.5
30.0
17.6
16.0
15.7
20.0
2.4
1.5
15.5
16.1
31.4
33.8
17.3
15.6
17.0
22.3
2.9
2.1
12.0
22.2
17.7
32.5
15.8
23.1
3.8
6.5
15.8
19.7
18.7
43.0
11.6
24.9
3.0
2.4
19.1
24.7
8.4
37.7
10.0
24.1
3.0
5.6
18.7
24.7
8.3
26.9
10.5
9.4
26.8
4.4
4.7
23.7
26.3
9.2
25.7
8.9
8.7
27.4
4.3
6.3
22.6
27.5
8.7
24.0
7.2
8.0
30.1
2.9
4.2
25.9
25.6
7.8
23.0
5.4
7.3
32.0
2.3
2.5
26.7
24.3
9.2
25.0
3.7
7.5
18.1
30.7
-2.2
2.7
23.5
24.4
11.5
25.9
2.9
7.7
17.0
26.9
-0.3
2.7
19.1
25.7
11.3
27.5
2.3
8.0
15.7
26.7
5.7
3.5
17.8
22.0
16.9
33.0
2.4
8.3
14.7
26.8
2.6
3.8
23.1
22.9
39.6
2.7
-15.6
3.6
3.2

16

Construction
(As % of GDP)
Australia Argentina
7.2
7.9
5.7
13.6
8.8
12.4
7.6
2.9
9.1
6.0
8.6
7.4
6.1
6.1
6.4
6.6
6.2
6.8
7.6
6.7
6.3
6.5
7.7
7.9
8.5
7.5
7.1
7.2
6.0
6.6
5.1

Table 2: Comparison Argentina-Australia (Continuation)

Finance
Other Services
(As % of GDP)
(As % of GDP)
Australia Argentina Australia Argentina
1.9
9.0
45.5
45.4
1.8
8.9
42.7
43.6
1.7
9.6
46.1
44.7
1.8
10.5
44.7
48.6
1.9
11.9
47.3
45.5
2.1
11.6
48.9
44.8
2.1
12.2
50.2
45.0
2.3
11.0
48.1
43.5
11.1
42.5
12.6
43.0
14.5
42.6
14.2
41.6
13.9
41.4
13.0
39.7
11.9
37.8
4.5
12.0
50.1
38.0
4.7
15.3
51.6
39.0
5.2
15.3
51.8
39.8
4.6
15.3
53.1
40.0

Inflation
Government
M1
M3
(Annual Rate)
(Expenditures % of GDP)
(As % of GDP)
(As % of GDP)
Australia
Argentina
Australia
Argentina Australia Argentina Australia Argentina
1900-1905
0.8
0.0
30.4
45.3
1906-1910
0.6
2.7
32.2
50.3
1911-1915
5.8
2.0
12.5
31.1
52.0
1916-1920
6.4
11.7
9.5
26.4
53.1
1921-1925
0.5
-6.2
10.0
24.9
60.5
1926-1930
-3.5
-0.7
12.4
26.0
60.4
1931-1935
0.3
-3.9
17.6
26.2
58.7
1936-1940
4.6
3.0
17.8
23.4
47.5
1941-1945
4.5
5.6
20.0
23.3
41.5
1946-1950
11.4
19.9
19.4
29.6
31.2
45.3
1951-1955
6.5
18.1
19.7
30.4
25.0
62.2
32.1
1956-1960
1.5
38.3
18.6
27.4
19.8
52.2
22.8
1961-1965
2.3
23.2
22.2
21.7
11.7
50.0
15.6
1966-1970
3.9
19.3
24.0
21.9
10.9
49.1
18.1
1971-1975
11.7
64.4
24.4
23.9
9.2
45.8
17.7
1976-1980
10.1
192.9
28.3
27.3
11.
5.1
41.1
16.5
1981-1985
8.4
322.6
29.2
34.0
9.8
3.2
39.8
15.5
1986-1990
7.0
583.8
28.4
28.0
10.1
2.8
46.0
11.6
1991-1995
1.5
32.3
28.2
26.8
13.7
5.7
55.8
16.7
1996-2000
1.8
-0.2
17.6
8.8
61.3
29.0
1998-2002
2.9
21.1
9.1
30.0
Source: Butlin, 1962; Diaz Alejandro, 1970; CEPAL, 1958; Reserve Bank of Australia, Veganzones and Winograd, 1997, Ministry of Economy of the Argentine Nation.

17

After the end of the Second World War, things changed abruptly. As analyzed in
Alston and Gallo (2003), institutional change in Argentina made the economy depart
from the market orientation of earlier decades. Government intervention expanded to all
activities, mainly in the rural sector, and generated uncertainty over property rights and
stable rules for market transactions. Furthermore, political instability and the lack of the
rule of law characterized the environment in which economic decisions were made. In
both countries we observe an increase in the role of the state in the economy, a tendency
observed worldwide, and especially in Latin America (Diaz Alejandro, 1970; Taylor,
1994). During this period, economic performance in Argentina was dismal compared to
Australia (Table 2). Even though Argentina grew after the Second World War, the rates
of GDP per capita growth are low compared with other countries, both developed and
underdeveloped (Section II and Appendix A). Furthermore, Argentina is the only country
in this sample that had a GDP per capita growth rate below the rate observed during the
first half of the twentieth century. Even in the most successful period of 1947-73, the
growth rate in Argentina was the lowest of the sample (Appendix A). During the 1970s,
the oil shocks and the end of the Bretton Woods agreements hit the world economies.
Most countries implemented policies to adapt to the new environment. However, because
of the continuing political turmoil, the Argentine government was not able to overcome
the shock successfully. As a result, economic growth declined further sending the
economy into stagnation, until reforms were introduced in the early 1990s. Nonetheless,
the recent crisis of convertibility and the political conflicts among disparate forces in the
country were the cause of further decline in the beginning of the new century (della
Paolera and Taylor, 2001; Baer et. al., 2002).
With respect to the comparison with Australia, both countries engaged in strong
industrial policies during the postwar period and subsequent decades (Fogarty, 1985).
However, Australia seemed to be more successful in terms of economic growth, as
economic policy and political factors were more stable than in Argentina (Gallo, 1979).
Industrial production grew in both countries as a percentage of GDP and agriculture had a
steady decline (Table 1). With respect to investment, there is different behavior in both
countries, with a much lower ratio in Argentina than Australia (Table 1). The lower level
of investment in Argentina could be associated with the unstable environment for

18

economic growth, with an impact on the dismal growth performance (Appendix A). In
the case of integration with the rest of the world, there was a tendency in both countries
to close their economies as industrial development progressed (Table 1). Nonetheless, by
the reasons explained in Gallo (2003), the taking of government over agricultural income
in Argentina is extreme, producing a strong stagnation in agriculture and a much closed
economy (Table 1). In terms of monetary policy and government expenditures, there is a
departure from policies followed in the previous period. In the second half of the
twentieth century there is a higher participation of the state in the Argentine economy and
a more discretionary monetary policy, as compared to Australia (Table 1). The effects of
such policies can be seen in the higher levels of inflation and lower confidence of the
public in the monetary policies (Table 1). This erratic behavior resulted in hyperinflation
during the 1980s and continuous financial and monetary crises, reflecting the political
instability of a society in continuous conflict (Baer et. al., 2002). In the case of Australia,
monetary and fiscal policies are more aggressive than in the first half of the century, but
they are more stable throughout the period. Even though the crisis at the beginning of the
1970s created the need for adjustment in the economy, Australia recovered and
performed better than Argentina. On the side of stabilizing policies, neither inflation nor
abuses of monetary policies were threats to stability in Australia (Table 1). This sharp
difference between the policies applied in each country resulted in different growth rates
in GDP per capita (Figure 4). Unlike the situation depicted in Figure 3, in the second half
of the twentieth century, the GDP per capita of both economies diverges, widening the
differences in income.

19

Figure 4
GDP Per Capita
(PPP US Dollars 1985)
300

250

200

150

100

50

Argentina
Australia

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

1976

1974

1972

1970

1968

1966

1964

1962

1960

1958

1956

1954

1952

1950

1948

Given the common characteristics of both countries at the beginning of the twentieth
century, the initial convergence during the first half of the century, and the deep changes
observed afterwards in this paper I will address the issues of comparative development
between both economies during the twentieth century.

IV.

Economic Growth and Convergence

One of the main topics of the economic development literature has been the

convergence of the economies around the world. Solow (1956) presented the first
neoclassical model of economic growth, which profoundly affected the vision of
economic growth among economists. Since this work, a general debate on the sources of
economic growth and the differences in performance among countries took place in the
economic development literature. Furthermore, the existence of convergence was
established as a test of validity of the neoclassical growth models. In the 1980s two new
developments contributed to revitalize the field. First, the creation of datasets with

20

homogeneous economic indicators across countries permitted the econometric testing of

this hypothesis (Sala-i-Martin, 1997; Summers and Heston ,1991). Second, a new
generation of growth models, with endogenous theories of economic growth, permitted a
widening of the debate about convergence (Romer, 1986; Lucas, 1988). As a result, a
reinvigorated debate about the existence, or not, of economic growth convergence among
economies was established. In the empirical side, the seminal work of Baumol (1986)
supporting the existence of convergence among developed nations and the debate started
by deLong (1988) downplaying the claim, was the beginning of an abundant literature on
the measurement of economic convergence (Maddisson 1995a, 1995b).
The empirical testing of economic convergence is based on two types of
econometric models. First, most of the work on convergence has been done following a
cross section analysis (Barro and Sala-iMartin, 1992). These models have been applied to
many different set of countries and regions around the world, with mixed results. Second,
in looking at long run convergence among a small set, or just two, countries, time series
tests have proved to be a useful technique to evaluate convergence. Furthermore, as
pointed out by Geasley and Oxley (1998) a weakness of cross-sectional tests is that they
are limited when it comes to investigating the process of convergence or the tendency
towards catching up. Cross-sectional tests do not provide evidence on the existence of
long-run income convergence. Accordingly, given the characteristics of the subjects of
this paper, and the similar characteristics of Argentina and Australia described above, it
would be interesting to evaluate the economic performance of both economies by looking
at the rate of convergence among them in the long run.
Following Bernard and Durlauf (1996) there are two definitions of convergence
that can be explored in a time series setup.
Definition 1: Convergence as equality of long-term forecasts at a fixed time. There is
long run convergence between country i and j if the long term forecasts of (log) GDP per
capita for both countries are equal at time t,

lim E y i ,t + k y j ,t +k t = 0
k

(1)

21

where t is the information available at time t, and yi,t+k and yj,t+k are the GDP per capita
of countries i and j respectively, at time t+k. Under this definition, convergence would be
satisfied when the variable yi,t+k yj,t+k is a mean zero stationary process. Following
Camarero et. al. (2000), it implies that the two series must be cointegrated with
cointegrating vector [1,-1].
Additionally to the previous definition there are other two definitions of
convergence, which are complementary to definition 1. According to Bernard and
Durlauf (1995, 1996), Oxley and Greasley (1997) and Camarero et. al. (2000), we can
define convergence with common trend and catching up process. In the first case, the
GDP per capita series would be cointegrated but the cointegrating vector would be [1,],
with <16. In the second case, the series would be cointegrated with a cointegrated vector
[1,-1], but the difference between the series is a stochastic variable with a non-zero trend.
Accordingly, the difference between the series will decrease but not disappear in the long
run. Accordingly,
Definition 2: Convergence as catching up. Countries i and j converge between dates t and
t+T if the (log) of GDP per capita difference at t is expected to decrease, then

E yi ,t +T y j ,t +T t < yi ,t y j ,t

(2)

According with the characteristics of each definition, definition 1 implies definition 2, but
definition 2 does not imply definition 1. In this sense, definition 1 is a more strict
definition of convergence than definition 2 (Bernard and Durlauf 1996).
Empirically, these definitions can be evaluated by running unit root tests on the
difference between two price series (Zivot and Andrews 1992; Greasley and Oxley
1997). The rejection of a unit root and a deterministic trend would support the existence
of convergence according to definition 1. In this case the GDP per capita ratio should be
described as a zero-mean stationary process. If a deterministic trend is present we would
6

In this case, we can change definition 1 and create definition 1 as follows: countries i and j contain a
common trend if the long term forecasts of output are proportional at a fixed time t:

lim E ( y1,t +k y p ,t +k | t ) = 0
k

Bernard and Durlauf (1995).

22

be in the presence of a catching-up process, as described by equation 2. In this case GDP

per capita ratio should be a stationary series with a time trend. (Camarero et. al., 2000).
Accordingly, the empirical analysis of time series has two steps. First, unit root tests
should be performed to determine the stationarity of the series. If the series is stationary,
the second step is to determine the presence of a significant trend in order to distinguish
long run convergence from catching up.
However, the main problems of the implementation of unit root tests to analyze
convergence in time series is the presence of structural breaks and discontinuities, which
affect the convergence of prices (Camarero et. al., 2000). In the last decade there have
been important advances in how to test for unit roots under the presence of structural
breaks. One of the first works is the paper of Perron (1989), who developed unit root tests
for exogenous breaks. Afterwards the literature advanced to consider unit root tests for
endogenous breaks (Andrews and Zivot, 1992; Perron and Vogelsang, 1992a, 1992b
1993; Perron, 1997; Perron and Vogelsang, 1998). In this paper I will follow this
methodology in order to test for price convergence in Argentina and Australia GDP per
capita.

A. Econometric Model

In order to evaluate the GDP per capita series for Argentina and Australia, we
have to test the individual series and the price ratios for unit root with breaks. There exist
two types of models, the Innovational Outlier (IO), in which the break occurs slowly over
time and feeding back into the process dynamics, and the Additive Outlier (AO), in
which the change is assumed to occur instantly and has no further effects on future
observations (Camarero et. al. 2000; Perron and Volgensang 1998). Following Perron and
Volgelsang (1998), there are three types of structural breaks that can affect the series,

23

Case 1: Change in the intercept,

yt = + t + dD(Tb ) t + DU t + yt 1 + ci y t i + u t

(3)

i =1

Case 2: Change in the intercept and the slope,

y t = + t + dD(Tb ) t + DU t + DTt + y t 1 + ci y t i + u t

(4)

i =1

Case 3: Change in the slope

y t = + t + DTt + y t 1 + c i y t i + u t

(5)

i =1

where y is the variable of interest, dD(Tb)=1 if t=Tb+1), 0 otherwise, DU=1 if t>T b,

DTt=1(t-Tb) if t>T b, and Tb is the break date. Models 1 and 2 can be tested using the
additive or innovative models, but model 3 can only be tested for the additive case. Under
the null hypothesis of unit root, =1 and =0 in cases 1 and 2, and =0 in cases 2 and 3.
In case 3 the break in the trend is not needed (Vogelsang and Perron, 1998). The null
hypothesis is tested using the t statistic for testing =1 in the three regressions. The break
date is determined endogenously by minimizing the one side t statistic for testing =1 in
the three models described in equations (3), (4) and (5), when small values of such
statistic lead to the rejection of the null, i.e. the unit root. Accordingly, the break date T b
is determined according with the following procedure: define the t statistic on (for a
null hypothesis that =1) by t*,(1) for Model 1 and by t *,(i) (i=2,3) for Models 2 and
3. Then,

24

t * , (1) = t (1, Tb* , k )

where Tb* is such that,

(6)

t (Tb* ) = MinTb ( k +1,T ) t (Tb , k )

the statistics t * , (i) (i = 2,3 are defined in analogous fashion

According to this procedure, we are allowing that the date of a crash is selected assuming
that it is negative, i.e. the shock in the GDP per capita ratio is negative. However, we
assumed that the exact date is unknown, i.e. it is the econometric model the one that
determines endogenously the exact date of the break. Then, we are restricting the analysis
to the cases where crash or slowdown in growth happened (Perron, 1997). In this paper it
is also allowed to find the optimal break by maximizing the absolute value of t or t
(Perron, 1997).
In order to evaluate the presence of a break in the ratio of GDP per capita between
Argentina and Australia lets look at Figure 5.

Figure 5
Argentina-Australia: GDP pe r Capita Ratio
(PPP US Dollars of 1985)
0.65
0.6

0.5
0.45
0.4
0.35
0.3
0.25
0.2
19
00
19
04
19
08
19
12
19
16
19
20
19
24
19
28
19
32
19
36
19
40
19
44
19
48
19
52
19
56
19
60
19
64
19
68
19
72
19
76
19
80
19
84
19
88
19
92
19
96

Argentina GDPpc/Australia GDPpc

0.55

25

During the first half of the twentieth century, the ratio of GDP per capita seemed to
increase when international markets were working properly, i.e. at the beginning of the
century, during the twenties and in the middle to late 1930s. Nonetheless, there are some
shocks as a consequence of the First World War, the Great Depression and the Second
World War. As analyzed before, these shocks had a stronger effect on Argentina than on
Australia, producing a decline in the ratio of GDP per capita. As a consequence, the
changes observed in the ratio during these crises could be candidates for the break in the
trend of GDP per capita ratio among between the countries. In the second half of the
twentieth century the constant characteristic is the decline in the GDP per capita ratio.
From simple inspection of the graph we can also determine a completely different
behavior in the second half of the twentieth century. As a consequence, the two periods
are well defined and we should test for the existence of breaks in the GDP per capita ratio
between Argentina and Australia. In this paper the changes in GDP per capita seem to be
instantaneous and, as a consequence, an Additive Outlier Model is estimated for all of the
series. Following Vogelsang and Perron (1998) and Perron (1997) we test the GDP per
capita ratio for unit root considering a structural break in the trend function, when the
exact occurrence of the break is unknown.

B. Empirical Results

First, we test for the existence of unit root in the series for GDP per capita for
Argentina and Australia, and also for the ratio of both series. As it is shown in Appendix
A, we cannot reject the existence of unit root in any of these series. Accordingly to this
result, we cannot prove the existence of convergence between Argentina and Australia
GDP per capita in the twentieth century. However, following the econometric model
presented in the previous section, we should test for unit root under the presence of
breaks. Table 3 presents the test results for all the three models for testing unit roots with
a break. In the case of Model 1, the break date is 1925, which coincides with the initiation
of the international attempts to go back to the gold standard at the level previous to the
First World War. Figure 6 shows the evolution of the GDP per capita ratio and the

26

absolute value of the t-test for the break at all the different time periods. This break is
positive, but we cannot reject the existence of unit root. For model 2, the break date,
according to the test t for the trend brake is 1948. Nonetheless, at this break point, only
the slope break is significative. Figure 7 depicts the GDP per capita together with the
value of the t-test for the constant break and the absolute value of the t-test for the slope
break. If we take into account just the constant breaks, there are two candidates, a
positive break in 1927, just before the beginning of the Great Depression, and a negative
break in 1981, which coincides with the debt crisis in Argentina and the rest of Latin
America. However, in none of these cases the slope break is significative. Finally, we
consider the case for which the chances of rejecting the unit root hypothesis is the
highest, i.e. at the date in which the t-test for unit root is the lowest. In this case, the date
is 1943, which coincides with the military coup that brought Peron to power. In this case,
both the slope and constant breaks are significative, but we cannot reject the existence of
unit root (Table 3). Finally, we analyze Model 3 that allows for a break just in the slope.
The break for this model is in 1947, which coincides with the first year of Peron
government and the postwar period. Figure 8 shows the GDP per capita together with the
absolute value of the t-test for the slope break. Differently from the other models, in this
case we reject the existence of unit root (Table 3). Furthermore, as the constant term and
the time variable are significative different from zero we have a case of catching up,
according with the definitions of convergence described before. As we can see, after the
break in 1947 there is a negative change in the slope of the series, meaning a divergence
in GDP per capita between the two countries in the second half of the Century (Figure 8).
Accordingly, there is no long-run convergence, i.e. we cannot prove definition 1.
However, since the series is stationary with a trend we are in the presence of a catching
up process, as described by definition 2. Nonetheless, the impact of the break in the series
poses some doubts on the actual convergence in the long run for this series.

27

Figure 6
GDP per Capita Ratio and Break Test
(Model 1: Constant Break)

0.7

13
0.65

0.55
3
T-Test Breaks

0.5
0.45
-2
0.4
-7

0.35

Ratio GDP per capita Arg/Australia

0.6

Value Constant Break t

0.3

Ratio gdp per capita

-12

0.25

19
09
19
13
19
17
19
21
19
25
19
29
19
33
19
37
19
41
19
45
19
49
19
53
19
57
19
61
19
65
19
69
19
73
19
77
19
81
19
85
19
89
19
93
19
97

0.2
19
05

19
01

-17

Years

Figure 7
GDP per Capita Ratio and Break Test
(Model 2: Slope and Constant Break)

0.7

14

0.65

0.55

T-Test Breaks

0.5
0.45
4
0.4
0.35
-1
0.3
Value Const ant Break t
Absolut e Value Slope Break t

0.25

Rat io gdp per capita

-6
19
17
19
21
19
25
19
29
19
33
19
37
19
41
19
45
19
49
19
53
19
57
19
61
19
65
19
69
19
73
19
77
19
81
19
85
19
89
19
93
19
97

19
13

19
09

19
05

19
01

0.2

Ye ars

Figure 8
GDP per Capite Ratio and Break Test
(Model 3: Slope Break)

0.7

16
0.65
14

12

0.55

10

0.5

0.45
8
0.4
6
0.35
4
0.3
Absolute Value Slope Break t
2

Ratio gdp per capita

0.25

0.2
19
05
19
09
19
13
19
17
19
21
19
25
19
29
19
33
19
37
19
41
19
45
19
49
19
53
19
57
19
61
19
65
19
69
19
73
19
77
19
81
19
85
19
89
19
93
19
97

19
01

Ye ars

28

Ratio GDP per capita Arg/Australia

T-Test Breaks

0.6

Ratio GDP per capita Arg/Australia

0.6

We can try to construct a counterfactual and see what would have happened if
both countries had followed the same convergence process as before the break, i.e. if the
convergence in policies in both countries had been constant throughout the Century. As
we can see in Figure 9, the convergence between both countries would have continued
along the whole period. By the end of the twentieth century, the ratio in GDP per Capita
would be 60%, as compared with the current 25%.

29

Table 3: Unit Root Tests for GDP per Capita Ratio

Series

Range

Model

Tb

1900-2001

1925

-0.0104

0.3629

(-24.11)

(12.45)

0.0021

-0.0208

-0.0152

(2.84)

(-0.71)

(-15.23)

0.0019

0.0706

-0.0149

(2.13)

(2.38)

(-13.87)

0.0020

-0.0152

1900-2001

2a

1948

GDP per Capita Ratio

(Argentina/Australia)

1900-2001
1900-2001

2b
3

1942
1947

7
7

(3.40)

0.7049

-2.477

0.4452

-4.411

0.3887

-4.711

0.4281

-4.570 **

(-15.29)

Notes: The t statistics are in parenthesis. , and represents the significance of the test for =1 at 1%, 5% and 10%, respectively. The critical values for unit root tests, minimizing the t statistic for the
break data as established in equation (6) are as follows: Model 1 (1%: -5.15, 5%:-4.64, 10%: -4.37); Model 2a (1%: -5.28, 5%: -4.62, 10%: -4.28) Model 2b (1%: -5.57, 5%: -5.08, 10%: -4.82) (Perron
and Vogelsang (1998)); Model 3 (1%: -4.67, 5%: -4.08, 10%: -3.77) Perron (1997). The number of lags, k, was fixed at kmax=5 and the selection procedure followed was by the size of the absolute
value of the t-statistic greater than 1.6 (Perron and Voelsang (1998).
*** **

30

Figure 9
GDP Per Capita Ratio: Argentina and Australia
0.65

Argentina GDP per Capita/Australia GDP per Capita

0.6
0.55
0.5
0.45
0.4
0.35
0.3
0.25
Actual
0.2

Fitted (No Break)

10
19
15
19
20
19
25
19
30
19
35
19
40
19
45
19
50
19
55
19
60
19
65
19
70
19
75
19
80
19
85
19
90
19
95
20
00

19

19
05

19
00

0.15

From the previous results we can look at the estimated GDP per capita for Argentina with
and without the break in the trend (Figure 10). In the absence of the break, and assuming
that Australias GDP would have grown at the same rate as the actual rate, the GDP per
capita of Argentina should be 127% higher than the actual amount. As a consequence, the
break determined in the econometric analysis was key for the change in performance
between both countries.
Figure 10
GDP Per Capita Argentina
11000

7000

5000

3000
Actual
Fitted (No Break)
1000
19
00
19
05
19
10
19
15
19
20
19
25
19
30
19
35
19
40
19
45
19
50
19
55
19
60
19
65
19
70
19
75
19
80
19
85
19
90
19
95
20
00

Argentina GDP per Capita

9000

31

C. Institutional Changes and Economic Performance

From the analysis of the previous section we can conclude that performance, in
terms of economic and institutional factors, diverged in the second half of the twentieth
century. As analyzed in Gallo (2003), the second half of the twentieth century in
Argentina was characterized by institutional and political instability, which made
economic investment risky and evasive. As we can see in Table 4, the economic
performance of both countries was totally different between the two periods. Both
countries have similar economic indicators in the period 1900-47. However, Argentina
performs much worse than Australia in the second half of the twentieth century.

Table 4: Argentina-Australia: Economic Indicators

1900-1947
1947-2001

GDP per capita

Annual Growth
Arg.
Aus.
1.3
0.9
0.6
2.0

Inflation Rate
Annual
Arg.
Aus.
2.3
2.3
77.7
5.9

Openness
Average
Arg.
Aus.
39.2
33.2
12.0
24.4

Investment
% GDP
Arg.
Aus.
20.3
16.2
21.9
26.6

Gov Expend.
% GDP
Arg.
Aus.
14.3
27.1
24.3

M1
% GDP
Arg.
Aus.
27.1
11.9
12.4

M3
% GDP
Arg.
Aus.
52.1
22.6
50.3

The differences in economic growth observed in Argentina are also correlated with the
deterioration of political and judiciary institutions analyzed in Alston and Gallo (2003).
As Table 5 shows, the political and judiciary instability accompanied the deterioration in
the economic performance for Argentina.

Table 5: Argentina: Political and Judiciary Indicators

Period

1863-1946
1946-2002

Tenure Presidents
Total
4
2.36

Adjusted *
4.9
2.45

Military Coups

Supreme Court
Removal

S.C. Justices
Tenure

2 **
4

0
9

4.4

Note:

* The measure was adjusted by taking into account the presidents that died in office.
** The two military coups before 1947 were in 1930 and 1943 and as argued in Alston and Gallo (2003), they were
considered the cause of the political instability in the second half of the twentieth century.

As we can see, the institutional changes introduced in Argentina in the 1940s, which
determined the characteristics and incentives for the polity afterwards, coincide with the
break in the rate of economic development (Alston and Gallo, 2003; Jones, et. al., 1999;
Iaryczower et. al., 2002; La Porta, et. al., 2002). These institutions are a key ingredient
for economic development, since its lack is deemed as one of the main factors that

32

determines the failure of developing countries to reach levels of income and similar to
those of developed societies (North, 1989, 1990, 1993 and 1998).

V.

Conclusions
Argentina and Australia were promising lands for many immigrants from Europe.

They developed fast and converged for over fifty years. Australia managed to fulfill the
expectations of becoming a developed economy but Argentina fell short. This paper
presents a convergence analysis for both countries during the twentieth century.
Econometric techniques used in this paper found that there was a catching up process
between both countries, but that there was also a break in the trend around 1947.
Afterwards, both countries economic growth diverged, Argentina heading toward
stagnation and Australia towards full development. The break found in this analysis is
supportive of changes in policies, rule of law and institutional instability analyzed in
previous research by the author. Furthermore, this study permitted to evaluate the
different theories that propose the First World War or the Great Depression as the periods
in which the economic stagnation of Argentina began. As it is claimed in the paper and
corroborated by the findings, the changes in policies and institutions that occurred in the
1940s have more explanatory power for the economic growth downturn than the other
proposed periods.

33

Appendix A: GDP Per Capita Growth Rate Several Countries

1900-1913
1913-1916
1917-1929
1929-1932
1932-1938
1900-1938
1900-1929
1900-1946
1947-1990
1947-1994
1947-73
Change in
Growth Rates
(1900-38/47-94)

Argentina
2.4
-6.6
3.8
-6.9
2.4
1.0
1.6
1.1

Australia
1.9
-2.6
0.2
-1.7
1.6
0.6
0.6
0.8

0.3
0.8
1.3

-26.1

US
2.0
1.0
2.3
-10.7
3.2
1.0
1.8
1.8

Brazil
1.4
-0.3
2.0
-2.3
3.3
1.6
1.6
1.6

Canada
3.3
1.5
0.4
-10.2
3.1
1.1
1.9
1.9

Germany
1.6
-6.9
2.8
-9.0
6.6
1.3
1.1
-0.5

France
1.5
-0.2
3.9
-5.6
1.7
1.1
1.7
0.6

Belgium
1.0
-1.1
3.1
-3.0
0.7
0.7
1.1
0.4

Italy
2.8
7.0
-0.5
-1.6
1.7
1.6
1.9
0.7

Japan
1.3
5.5
1.6
-1.1
3.2
1.9
1.9
0.4

2.0
2.0
2.6

2.1
2.0
2.4

2.8
2.6
3.8

2.5
2.2
2.8

4.5
4.2
6.2

3.5
3.2
4.5

3.0
2.8
3.6

4.1
3.8
5.1

225.9

92.2

63.8

88.1

230.7

181.5

321.2

136.7

Source: Maddison (1995) and own elaboration

34

UK
0.7
3.0
-0.4
-2.2
2.8
0.7
0.5
0.7

Spain
0.8
-0.3
2.5
-2.0
-4.4
0.0
1.3
0.4

Chile
2.4
-0.4
1.6
-12.5
4.7
1.2
1.9
1.5

6.1
5.6
8.0

2.2
2.1
2.5

4.0
3.7
5.3

1.4
1.7
1.4

198.2

201.5

40.6

Appendix B: Unit Root Test

Australia GDP Per Capita: Dickey Fuller Tests

Augmented Dickey-Fuller test for unit root
Number of Observations: 100
Test Statistic
1% Critical Value
5% Critical Value
1.509
-4.04
-3.45
* MacKinnon approximate p-value for Z(t) = 0.8249
Variable
Coefficient
Std. Error
t-statistic
Aust(t-1)
-0.0497
0.0329
-1.509
VarAust(t-1)
-0.1996
0.0995
-2.006
Trend
0.0010
0.0005
1.887
Constant
0.4067
0.2653
1.553

10% Critical Value

-3.15
Prob.
0.134
0.048
0.062
0.129

Argentina GDP Per Capita: Dickey Fuller Tests

Augmented Dickey-Fuller test for unit root
Number of Observations: 100
Test Statistic
1% Critical Value
5% Critical Value
-3.097
-4.04
-3.45
* MacKinnon approximate p-value for Z(t) = 0.1069
Variable
Coefficient
Std. Error
t-statistic
Arge(t-1)
-0.1718
0.0555
-3.097
VarArg(t-1)
0.1685
0.1011
1.667
Trend
0.0016
0.0006
2.788
Constant
1.3109
0.4194
3.126

10% Critical Value

-3.15
Prob.
0.003
0.099
0.006
0.002

Argentina/Australia Ratio GDP Per Capita: Dickey Fuller Tests

Augmented Dickey-Fuller test for unit root
Number of Observations: 93
Test Statistic
1% Critical Value
5% Critical Value
-1.057
-4.04
-3.45
* MacKinnon approximate p-value for Z(t) = 0.9358
Variable
Coefficient
Std. Error
t-statistic
Ratio(t-1)
-0.0579
0.0548
-1.057
VarRatio(t-1)
-0.1096
0.1141
-0.961
VarRatio(t-2)
-0.2376
0.1144
-2.077
VarRatio(t-3)
-0.0576
0.1168
-0.493
VarRatio(t-4)
0.0423
0.1154
0.367
VarRatio(t-5)
0.0349
0.1136
0.307
VarRatio(t-6)
-0.0628
0.1109
-0.566
VarRatio(t-7)
0.0609
0.1071
0.569
VarRatio(t-8)
-0.2152
0.1059
-2.033
Trend
-0.0008
0.0004
-1.797
Constant
-0.0176
0.0287
-0.622

35

10% Critical Value

-3.15
Prob.
0.294
0.340
0.041
0.623
0.715
0.759
0.573
0.571
0.045
0.076
0.536

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