Drifting Apart:

The Divergent Development Paths of Argentina

and Australia

Alexis Esposto and Fernando Tohme

 Drifting Apart: The Divergent Development Paths of Argentina and Australia

Foreword
Dr Esposto and Professor Tohme’s book Drifting Apart: The Divergent Development
Paths of Argentina and Australia is an excellent analysis of the two countries and
peoples that have passionately influenced their lives, experiences and learning.

Dr Esposto’s depth of convictions derives from his childhood in Cordoba, Argentina

and, later in life, from his solid academic development in the academic institutions of
Melbourne. Professor Tohme’s is grounded in his passion to understand institutions and
their impact on the wealth of nations.

This work reignites the important debate about the relationship of the economy and our
central institutions – the state, public service, the rule of law – and their dynamic
interaction. It raises the question: do nations prosper with good economies that provide
the basis for strong institutions or, conversely, do strong institutions lead to good
economies? This is a conundrum for both economists and politicians alike.

The book looks at Australia since Federation in 1901 to the reform policies of prime
ministers Curtin, Menzies, Whitlam, Hawke and Keating; and it also follows Argentina
from independence in 1816 to the governments of Juan Perón, “Isabelita” Perón,
dictator Videla and democratically elected presidents Alfonsin, Menem and Kirchner.

The authors’ work analyzes, with intellectual finesse, the complex relationships that
Argentina and Australia have had with the United States and the United Kingdom and
how these relationships have influenced the economic and institutional development of
both.

This work strengthens the notion that Argentina and Australia, different as they are,
have much in common, and not just in economic terms: Both are in the Southern
Hemisphere, are historically founded on Judeo-Christian values and have large
ethnically mixed populations.

Fundamentally, both Argentina and Australia have functioned within the paradigm of
competition with one another. However, exploiting the complementarity of their
economies is more likely to assist in meeting the challenges of climate change,
population growth and food crisis.

2
 Drifting Apart: The Divergent Development Paths of Argentina and Australia

Victoria’s Memorandum of Understanding for scientific collaboration with Argentina in

biological sciences, as applied to the agriculture and livestock industry, is a good
example of Dr Esposto and Professor Tohme’s argument for strengthening the bilateral
relationship.

In light of the current global financial crisis, Drifting Apart: The Divergent
Development Paths of Argentina and Australia is a timely work, and unique in its
historical coverage. It challenges us to reassess the relationship of our institutions and
the creation of wealth and its distribution.

The analysis of both nations’ economic and political development is, moreover, a
fascinating contribution to contemporary debate, and one that should assist in advancing
understanding between these two great countries.

Telmo Languiller

Telmo Languiller is Australia’s first Member of Parliament of Latin American

background. He represents the people of the west of Melbourne in the Victorian
Parliament and is Parliamentary Secretary for Human Services.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

Contents

Foreword_____________________________________________________________2
Preface ______________________________________________________________6
1. Introduction ____________________________________________________8
2. Institutions and economic development ______________________________13
2.1 Why institutions matter __________________________________________13
2.2 Defining institutions ____________________________________________14
2.3 Classifying institutions __________________________________________17
2.4 Theorizing about institutions ______________________________________20
3. Argentina and Australia: The story so far ____________________________24
3.1 The importance of comparing these two countries _____________________24
3.2 Convergence, divergence or parallel paths: Why and how? ______________26
3.3 Institutional aspects _____________________________________________32
3.4 Federal fiscal arrangements in Argentina and Australia ________________34
3.5 Socioeconomic conditions in Argentina and Australia: Some comparisons __43
3.6 Conclusion ____________________________________________________48
4. Comparing Argentina’s and Australia’s current performance _____________50
4.1 Economic freedom ______________________________________________51
4.2 Business freedom _______________________________________________56
4.3 Trade freedom _________________________________________________57
4.4 Fiscal freedom _________________________________________________59
4.5 Government size _______________________________________________60
4.6 Monetary freedom ______________________________________________62
4.7 Investment freedom _____________________________________________62
4.8 Financial freedom ______________________________________________63
4.9 Property rights _________________________________________________66
4.10 Freedom from corruption ________________________________________68
4.11 Labour freedom ________________________________________________68
4.12 The Human Development Index ___________________________________71
5. Conclusions ___________________________________________________75
Bibliography ________________________________________________________77

4
 Drifting Apart: The Divergent Development Paths of Argentina and Australia

List of tables
2.1 A hierarchical based classification scheme for institutions _______________ 18
3.1 Comparative phases _____________________________________________ 27
3.2 Structure of Commonwealth payments to state and local governments _____ 36
3.3 Basic characteristics of Argentine provinces __________________________ 40
3.4 Government revenues, 2000 (percentage total) ________________________ 41
3.5 Poverty lines, Argentina, 1992-2005 ________________________________ 45
3.6 Unemployment rates, Argentina and Australia, selected years, 1992-2008 __ 48
4.1 Economic freedom indices and rankings, Australia and Argentina,
selected years (rankings in brackets) ________________________________ 55
4.2 Australian exports ______________________________________________ 57
4.3 Australian exports of goods and services by destination, current prices,
percent _______________________________________________________ 58
4.4 Human Development Index (HDI), various years ______________________ 74

List of figures
2.1 Ways of classifying institutions ____________________________________ 20
3.1 Argentina: Coparticipación’s labyrinth, March 2002 ___________________ 42
4.1 Index of Economic Freedom scores for Australia and Argentina, 1995-2008 ___ 53

5
 Drifting Apart: The Divergent Development Paths of Argentina and Australia

Preface

The idea for this book started upon my arrival in Argentina after 17 years of absence.
En route from Ezeiza Airport on a cold May evening in Buenos Aires in 2007, my
mother enquired why the freeway’s lights were out. The taxi driver meekly responded:
“Señora, this is Argentina and the freeways lights are on occasionally”. “But”, he added,
“did you know that your airplane landed manually because the airport’s radar has not
been repaired for months, due to a dispute between the government and whoever is
supposed to repair it?” “Nobody is in charge here?”

At the end of my conference presentation at Universidad Nacional del Sur (UNS) in the
southern city of Bahia Blanca I had the pleasure and good fortune of meeting Professor
Fernando Tohme. Professor Tohme had worked in the United States and his expertise in
game theory and economics in general had taken him to different parts of the world. His
frustration was exactly the same as mine. Why is it that such a rich nation, in both
natural and human capital endowments, which was once the best destination for
migrants from all over the world, is languishing in economic and social crises that never
seem to end, whilst Australia continues on a path of steady economic development?

The idea quickly emerged to write a book about institutions and their impact on the
economic development of nations. A way of tackling our problem was to find two
economies, similar in many aspects, namely, the physical features that matter for
economic performance, the endowment of human capital and so on, differing almost
only in their institutions. Say, one with “good” and the other with “bad” institutions.
The perfect candidates were Argentina and Australia. Why focus on comparing
institutions? Because institutions really matter in that they help solve a key economic
problem of agents coordinating their economic plans and activities. They play a
significant role in determining whether transaction costs are low or high and potentially
generate a structure of incentives that foster economic growth. They give shape to
property rights and provide markets with an environment where competition can exist
and flourish. As North explains, institutions are “the rules of the game in a society or,
more formally … the humanly devised constraints that shape human interaction”
(1990a, p. 3).

6
 Drifting Apart: The Divergent Development Paths of Argentina and Australia

In June-July 2008, Professor Tohme arranged accommodation and office space for me
to come to work in Argentina, and Swinburne University through the Vice-Chancellors’
Special Studies Program provided me with funds to travel to UNS to conduct my
research. My stay there was a wonderful experience. I had the pleasure of meeting Dr
German Gonzalez who is also studying Argentina’s economic woes and comparing
them with Canada’s fortunes. I also had the pleasure of meeting Federico Contigiani
and Juan La Rosa. Professor Tohme’s expertise and advice was also invaluable. In spite
of the tyranny of distance we are now good friends and continue to exchange ideas and
pursue new projects.

Acknowledgments
Fernando and I take this opportunity to acknowledge the help and support without
which this book would not have been undertaken. Firstly, Professor Bhajan Grewal who
provided us with invaluable ideas about the structure of the book. Secondly, Professor
Kay Lipson and Associate Professor Everarda Cunningham who supported my
application for the Special Studies Program, and the staff at UNS who provided me with
accommodation and office support. Also Professor Brian Costar from Swinburne
University’s Institute for Social Research. Finally, I would like to thank my partner
Donna Walker who stayed behind in Australia to look after my daughters Ciara and
Beatrice.

Alexis Esposto

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

1. Introduction
One of the most relevant problems in economics is to find the determinants of economic
performance. Even when just focused on economic growth, the literature on this
phenomenon shows little agreement. While there are authors who describe many
seemingly plausible causes of rapid growth and development, their views are up to
some point contested by others (Barro, 1997; Easterly, 2002). Even so, casual evidence
suggests that successful economies are endowed with solid and effective institutions
(North, 1990a).

In fact, the main tenet of the neo-institutional strand of economics is that good
institutions induce a good economic performance over time (North, 1991). Drawing on
Coase’s theorem, they see the main roadblock for efficient economic behaviour as the
pervasiveness of transaction costs, in other words, the cost of engaging in economic
transactions. Institutions are created for handling these costs, and how well they manage
them determines the degree of efficiency of the economy, and consequently its
performance (North, 1990b). So, the way in which both the culture and the legal system
enforce rights and contracts becomes a determinant of the size of the efficiency losses in
the economy, due to both bad policy and business practices or just to unfavourable
conditions (North, 1994; Acemoglu and Johnson, 2005). Of particular interest is how
economies reduce all kinds of informational asymmetries among agents, the source of
various kinds of corrupt behaviours (Tirole, 1994).

While this is pretty much common wisdom among policy makers and ordinary citizens,
it remains as an open and hard problem for economics. The reason is that this
interpretation of real world economic phenomena does not answer all the questions that
may be raised. So, for instance, what if in actuality “good” institutions arise because of
good performance and not the other way around?

Notice that this reversion of the causality in the relation also makes sense: affluence
leads to a reduction in the size of families and to an increase in human capital (Galor
and Moav, 2006). This, in turn, leads to an expansion of the middle classes which
demand more rights and better mechanisms for control of policy making by the
citizenry (Easterly, 2001). Therefore, a circular characterization lurks behind the
institutions-performance relation. The question is how to unravel it.

8
 Drifting Apart: The Divergent Development Paths of Argentina and Australia

Econometrics has found some shortcuts in analogous situations. Each time a postulated
causal relation is plagued by endogeneity, the remedy is to look for a “natural
experiment” that may settle the question, that is, to find a situation in which one of the
elements in the relation is fixed from outside and see how the other variable changes in
consonance with the exogenously controlled variable (Rosenzweig and Wolpin, 2000).
Many interesting economic and social questions have been answered thanks to this
realization.1

A way of tackling our problem is to find two economies, similar in many aspects – the
physical features that matter for economic performance, the endowment of human
capital and so on – differing almost only in their institutions. Say, one with “good” and
the other with “bad” institutions. If the latter exhibits a consistent pattern of worse
performance than the former, the issue would be finally put to rest (La Porta et al.,
1999; Acemoglu et al., 2004). If, instead, economies with “good” institutions do not
show a better performance, the question will remain open, although it will be time to
look at the converse that this failure might indicate that performance impacts on the
institutional architecture of society, and not the other way around.

This work is aimed at finding the aforementioned natural experiment. Our candidates
are Australia and Argentina. These two Southern Hemisphere countries share many
physical similarities, such as climate, soil and abundance of natural resources in vast,
rather scarcely populated, territories. Their current populations arose in demographic
processes in which the native inhabitants were decimated and masses of immigrants
(mostly Europeans) arrived in the late 19th and early 20th centuries. In recent decades
the source of most of the immigration has been the geographical neighbourhood.

The early implementation of mass education to high rates of literacy and the creation of
educated elites, providing the basis for a sustained process of development. A robust
middle class arose in both countries, unlike their neighbours, which acted as a strong
force for upward mobility (Meredith, 1995).

The economies of the two countries show a striking parallelism, both specializing in the
production of commodities, while their urban population is catered for by a large variety

1
A good deal of the results reported by Steven Levitt and Stephen Dubner in their bestselling
book Freakonomics (2005) were obtained from natural experiments.

9
 Drifting Apart: The Divergent Development Paths of Argentina and Australia

of services like those in the rich countries of the Northern Hemisphere (Gerchunoff and
Fajgelbaum, 2006). In fact, up to the Great Depression, Australia and Argentina were
two dominions of the British Empire, one in official and the other in informal but
equally real terms. They exported food and other commodities to Britain, while the
latter invested in the development of their infrastructure, mainly in transportation and
communications, but also in all kind of services aimed to support these commercial ties
(Schedvin, 1990).

But since the 1930s their paths started to diverge, Australia following a steady course
while Argentina started a cycle of upswings and downturns that left it well behind in
terms of per capita income. While up to some point this was due to the disintegration of
the British Empire, its impact was not the same on both countries. Australia rapidly
found new markets, but political events in Argentina became an obstacle to this, leaving
the country without major commercial partners (Della Paolera and Taylor, 2003).

The explanation for the differences lies, for us, in the institutions and culture of the two
countries. In Australia, law abidance, enforcement of contracts and transparency in
public affairs were the norm, but in Argentina, arbitrariness, authoritarianism and
corruption became widely “accepted”.

Our goal is to analyze the extent of those differences and to determine their exact
impact on economic performance. We do this in a rather simple way. We begin by
collecting a variety of popular indices published by organizations of international repute
(not all sharing the same philosophical stand) and compare their relative performance
over time, where possible. If we find that the trends are the same regardless of index
measure employed, then we can to a certain extent conclude that the “good” economic
performance of one nation relative to the other has been as a result of the performance
and strengths of its institutions.

The methodology of analysis to be pursued here follows the prescription given by

Helmer and Rescher (1959) in their analysis of the epistemology of inexact sciences, in
particular, in the discussion on the nature of the so-called “historical laws”. Their point
of view is that research in history can be deemed as scientific only if it intends to
determine the validity of claims about historical events. These claims must be
propositions concerning the actions of one or more human groups subject to certain

10
 Drifting Apart: The Divergent Development Paths of Argentina and Australia

constraints. If the claims are shown to be true, they can be seen as representing
historical laws.

Nevertheless, the scope of the term “law” must somehow be restricted in order to keep
it different from the meaning in physical sciences. The “confirmation” of claims is
clearly less applicable than in those sciences, and the presence of counterexamples does
not always imply the non-validity of historical claims. In consequence, Helmer and
Rescher redefine the class of propositions that can be candidates to represent historical
laws. Firstly, they have to be vague enough to not be falsified trivially by
counterexamples. Secondly, they have to be legaliform, that is, they must be able to be
used as explanations (and therefore not be mere descriptions of facts) and must have
counterfactual power. They must, therefore, be able to explain events to which they do
not make direct reference, that is, they should have the following form:

At time t system S reached value s* and consequently the variables X took value x*

To confirm a statement of this form, two methods are required: the counterfactual
method and the inductive method.

The former requires checking that the non-validity of the precondition leads to the non-
validity of the conclusion. The empirical verification of such statement can be eased if
in a context “close” to the real one, the non-validity of s* is accompanied by the non-
validity of x*.

The second method can be applied when the number of variables X is large enough to
facilitate a non-quantitative version of hypothesis testing. The idea is that a statement
will be accepted if the majority of cases (preferably not known at the moment of making
the hypothesis) differ “little” from its conclusions.

In both cases, the degree of arbitrariness – reflected in the notions of “close” and “little”
used above– is higher than in more exact disciplines. In history, most of the information
can only be formulated in a natural language or another non-quantifiable representation,
which requires the expertise of historians to fix the degree of precision required in
establishing the validity of a statement.

In this paper we will apply these methods in order to establish the validity of the
following claim:

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

“Good institutions are necessary for the continuous growth of economies rich in
primary products.”

As said before, one way to corroborate a historical statement is by analysis of the validity of
the counterfactual statements that can be derived from it. So, if the statement is:

At time t system S reached value s* and consequently the variables X took value x*

a derived counterfactual statement that can be used to corroborate the former is:

If at time t system S had not reached value s* X would not take value x*

This statement is counterfactual since its antecedent is contrary to the facts. To establish
its truth value we have to consider various possible worlds (alternative scenarios). The
statement is true if, in the possible world that is closer to the true one, the validity of the
antecedent goes together with the validity of the consequent.

This notion is due to Robert Stalnaker (1968) and David Lewis (1973). It is completed with
a notion of closeness among worlds. It is quite difficult to say that “everything is identically
true”. In practice, the method consists of finding a context that minimizes the differences
with the one under analysis, except for the fact the precondition of the historical statement is
not true. There we have to check that the consequence is not true either.

The inductive method, in turn, requires finding a family of cases for which the legaliform
statement is postulated, that is, we look for all the situations in which s* is satisfied. Then
we observe X. If the actual values x´ and x* are relatively close, we can deem the statement
to be true. The most serious problem is the inability to examine all cases exhaustively. Even
so, the statistical practice of looking for a representative sample can be also applied here.
Again, we need to find a notion of proximity among cases.

In this book we will show that Australia and Argentina are quite close, in the sense of
being a good representative sample of countries rich in resources but with different
institutions. While this closeness has been widely acknowledged, we will dig deep into
it, trying to detect the turning point that led to a progressive differentiation in economic
performance. We think that, otherwise, the exercise would miss the causal relation
between institutions and economic performance.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

2. Institutions and economic development

2.1 Why institutions matter
One of the main effects of the predominance of the neoclassical paradigm in economics
after 1850 was the disregard of all other aspects that were not deemed purely economic
(preferences, production factors and natural events). This made a stark contrast with the
thought of classical masters such as Smith, Malthus, Ricardo and Marx. They insisted in
the relevance, for the analysis of economic phenomena, of many social, cultural and
political aspects that were dismissed in later studies (Mirowski, 1989). Nevertheless,
off-mainstream lines of thought kept alive the interest in the interactions of the socio-
political environment and the economy. The German historicist school as well as
American institutionalism both saw the preponderant current of those times as an
impediment to the development of their nations and a hindrance to better understanding
of economic affairs (Keaney, 2002).

Since then, many of those “school disputes” have fallen into oblivion and former
opposite camps have become fused into a far larger mainstream. On the one hand, the
initial project of providing economic analyses of social and political phenomena ended
up yielding a better understanding of their importance (Coase, 1990). On the other, the
maturity of the neoclassical conceptual framework, with the introduction of
asymmetries of information and tools drawn from game theory, opened up the
possibility of incorporating those aspects into economics. A very influential current
known as new institutionalism2 took the best of institutionalism and neoclassicism,
showing that the interaction of preferences and production factors is critically mediated
through various layers of social, cultural and political institutions.

The fusion of neoclassical tools of analysis and concepts with the concerns of
institutional economics provides the right setting, we find, to understand the difference
in performance between Argentina and Australia. In order to run this analysis we will
provide a quick refresher on the main tenets of new institutional economics (NIE),
focusing on the fundamental notion of “institution”.

2
Similar connections were established, although with somehow different goals, by currents such
as public choice theory (Buchanan and Tullock, 1962) and political economy (Alt and Shepsle,
1990).

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

The interest of NIE in institutions has arisen from the realization that they influence the
incentives that give rise to efficient economic performance (Acemoglu et al., 2004).
Institutions play a significant role in determining whether transaction costs are low or high
and potentially generate a structure of incentives that foster economic growth (North,
1990a). They give shape to property rights and provide markets with an environment where
competition can exist and flourish. For example, without the existence of property rights,
individuals could not invest in human or physical capital, develop or adopt new
technologies or implement new ideas. Another important function of institutions is that they
help allocate resources in the most efficient way by determining who gets profits, revenues
and residual rights of control (Acemoglu et al., 2004, p. 2). When economic institutions do
not allow markets to flourish, as in the Soviet bloc prior to 1989,3 resources tend to be
misallocated. Societies with economic institutions that assist in the facilitation of innovation
and the efficient allocation of resources are more likely to prosper. Such institutions can
thrive where good governance4 is allowed to exist.

Ali (2003, p. 350) argues that institutions that operate successfully will provide a setting
that will have a substantial impact on economic growth, while poorly functioning ones
will hinder it by inducing economic agents to engage in redistributive behaviours that
hinder growth.

Institutions matter because they help solve a key economic problem of agents
coordinating their economic plans and activities:

[they] promote cooperative behaviour and overcome opportunism; make agents

internalize externalities, and reduce uncertainty. They support the formation of
social capital and of a historical experience of collective action which, in turn,
positively affect the likelihood to credibility commitment in cooperative
strategies (Gagliardi, 2008, p. 419).

2.2 Defining institutions

As said, in NIE and beyond there is a strong consensus emerging that institutions play
an important role in shaping the growth and development of nations. A body of work in

3
Less extreme cases are commonplace in less developed countries. Argentina, for instance,
experienced several bouts of government interference in the private sector which discouraged
investment and led to unsustainable public spending.
4
This means “good for economic development” (La Porta et al., 1999, p. 223).

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

the social sciences points to their role in promoting economic change and sustainability
(Gagliardi, 2008, p. 416). Furthermore, they offer the justifications that explain
differences in growth rates and development paths across developing and developed
nations (Jutting, 2003). Many economists and other social scientists have put forward
the notion that good economic institutions, particularly in the public sector, are crucial
and instrumental to generating both economic growth and development (La Porta et al.,
1999, p. 222).

Even with these realizations, the meaning of the term “institution” varies in the
literature. Social scientists have not arrived at a definition that can be regarded as
widely accepted, mainly due to the fact that a unified theory of institutions does not
currently exist. As a result, defining institutions becomes a complex undertaking.
Definitions abound, many of which are narrow, overarching or vague, while others
confine themselves to describing organizational bodies. Institutions are not
homogenous, they vary in shape, size, importance and role, they are not easily
transportable or transferable (almost impossible in the case of informal institutions5)
from country to country or from one region to another, and they differ significantly not
only between developing nations, but also on the whole with those of developed
nations. Institutions are difficult to define because they include the written laws and
rules of a society, formal and informal norms and manners of behaviour, and distinct
and varied beliefs about how the world is actually interpreted.

Gagliardi (2008) classifies definitions of institutions in three categories:

• The first category considers institutions as the rules of the game as described
by North (1990a);

• The second classification is that of Nelson (1994) who defines institutions as

the players participating in the game. This definition considers the role of
those who have to apply the rules and ensure that those participating abide by
them. Examples include universities, industry groups, government agencies and
hospitals;

• The third definition considers institutions as the self-enforcing equilibrium

outcome of the game. Under this definition, they consist of two interrelated

5
Perhaps one exception to this rule would be norms, traditions and customs found in diasporas.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

elements: the beliefs individuals form of other players and the organizations,
which alter the rules of the game (Gagliardi, 2008, p. 417).

The last definition is closely linked to Aoki’s “self-sustaining systems of shared beliefs”
(2001, p. 10), mapping out not only the rules of the game but also the way in which it
needs to be played. Notice that a component missing in the second and third definitional
classifications is that organizations and institutions are not distinguished or delineated
and hence it appears that both are the same thing.6

Given this proliferation of interpretations, it is convenient to keep a consistent view for

our analysis. This has been attempted by one of the main authors in NIE, Douglass
North. According to him (1991), institutions are:

the humanly devised constraints that structure political, economic and social
interaction. They consist of both formal and informal constraints (sanctions,
taboos, customs, traditions, and codes of conduct), and formal rules
(constitutions, laws, property rights).

This definition is further simplified by North as “the rules of the game in a society or,
more formally … the humanly devised constraints that shape human interaction”
(1990a, p. 3). This concept provides a roadmap indicating how human beings interact
with each other as individuals or as social groups, and in political, social or economic
exchange processes. North’s definition is intrinsically historical in suggesting that much
of the development of nations has been shaped by historical decisions (correct or
otherwise), thus placing path dependence at the centre of institutional evolution:

But economic history is overwhelmingly a story of economies that failed to

produce a set of economic rules (with enforcement) that produce sustained
economic growth. The central issue of economic history and of economic
development is to account for the evolution of political and economic institutions
that create an economic environment that induces increasing productivity (1991,
p. 98).

North’s view of institutions is twofold. Firstly, history matters because the process of
institutional theory is incremental and path dependent. Secondly, institutions impact on
economic performance by influencing the level of transaction costs. If correctly

6
North et al. (2007) make a distinction between institutions and organizations; however, the
distinction seems rather unclear.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

implemented, institutions are potentially capable of reducing uncertainty and providing

a setting in which individuals and organizations can engage in economic transactions in
such a way that transaction costs7 are minimized and profit maximization is ensured.

Nevertheless, the view of institutions as the rules of the game has a striking limitation. Such a
definition appears hazy, encompassing a spectrum ranging from social and religious practices
to rules of behaviour to physical coercion (Portes, 2006). It renders the concept unclear,
lacking concreteness and open to a wide variety of interpretations.

2.3 Classifying institutions8

In trying to put order into such open-ended definitions, some authors have attempted to
define institutions by creating categories or distinctions of different institutional forms.
Hollingsworth (2002) classifies them into institutions, institutional arrangements,
institutional sectors, organizations and outputs and performance. As an overarching
classification, institutions are classified as norms, rules, conventions, values and
lifestyles, among other things. Institutional sectors are arranged as markets, states,
corporate hierarchies and networks and are compiled as financial systems, systems of
education, health systems and business systems, while organizations and outputs and
performance are often concerned with deliverables such as quantity and quality of
products produced or provided. A limitation with this is that such taxonomies tend to be
ad hoc and often lack clarity, creating much confusion by putting together different
elements under the same category (Portes, 2006, p. 235).

Another approach is to separate institutional definitions into formal and informal rules.
Typically, formal rules are written down, while informal rules tend to supplement these.
Both pose constraints on society. As detailed by Jutting (2003), formal rules and
constraints consist of constitutions, laws, property rights, charters, bylaws, statute and
common law, regulations and enforcement characteristics (sanctions). Informal rules are
extensions, elaborations and modifications of formal rules, socially sanctioned norms of
behaviour (customs, taboos and traditions) and internally enforced standards of conduct
(p. 11). Both formal and informal rules exist in developed rich and underdeveloped poor

7
Transaction costs were introduced by into economics Ronald Coase. They involve all the costs
incurred in making exchanges, such as searching, bargaining and enforcing costs (Williamson,
1985).
8
This explanation draws on the work of Jutting (2003).

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

nations. In less developed countries and regions characterized by isolation and poverty,
informal institutions (or communally understood arrangements) tend to substitute
formal institutions. This is often because no formal ways of enforcing norms are
available, while departures from socially sanctioned customs and ways are more easily
punishable in small groups. As societies develop and the number of agents (individuals
or organizations involved in economic and social transactions) increases, market
transactions become more complex. This requires higher levels of formal sets of rules.

Williamson (1985) provides a classification of institutions based on the formality of

institutions. This consists of four hierarchical levels as detailed in Table 2.1.

Table 2.1: A hierarchical based classification scheme for institutions

Level Examples Frequency of Effect

change
Institutions related to Mainly informal Very long-term Defines the way a
the social structure of institutions such as horizon (100 to 1,000 society conducts
the society (level 1) traditions, social years) but many itself
norms, customs changes also in times
Exogenous of shock/crisis
Institutions related to Mainly formal rules Long-term horizon Defines the overall
the rules of the game defining property (10 to 100 years) institutional
(level 2) rights and judicial environment
system
Exogenous or
endogenous
Institutions related to Rules defining the Mid-term horizon (1 Leads to the building
the play of the game private business to 10 years) of organizations
(level 3) governance structure
of a country and
corresponding
contractual
relationships, e.g.
business contracts,
ordering
Endogenous
Institutions related to Rules related to Short-term horizon Adjustment to prices
allocation resource allocation, and continuous and outputs,
mechanisms (level 4) e.g. capital flow incentive alignments
controls; trade flow
regimes, social
security systems
Endogenous
Source: Jutting (2003, p. 12).

18
 Drifting Apart: The Divergent Development Paths of Argentina and Australia

The higher level imposes constraints downwards while a mechanism of responses is

present and acts upwards from the lower to the higher level. The purpose of these
institutions at each level is to define how society regulates its own operations. Level 1
institutions exert influence on the design of property rights, namely, level 2 institutions.
Level 2 institutions are concerned with the rules of the game. They define and enforce
property rights and often require a legal system for defining laws and enforcing them.
Level 3 institutions are concerned with issues of governance. They craft order and
reshape incentives, thereby building the governance structure of a society and leading to
the building of specific organizations such as national or state governments, NGOs etc.
At the bottom of the hierarchy are level 4 institutions which define the extent to which
adjustment occurs through prices and quantities and determine the resource allocation
mechanism. In this type of structure, rules are easy to change modularly. For example,
changes to the social security system, rates of taxation and bylaws can be changed
without affecting levels 1 and 2.

An alternative way of classifying institutions is to differentiate them by their scopes.

Jutting (2003) classifies them into four categories. Economic institutions deal with the
allocation and distribution of resources and the functioning of markets. Political
institutions are concerned with details about elections, electoral rules, political
institutions, party composition of government and opposition, and political checks and
balances. Legal institutions deal with the type of legal system, and the definition and
enforcement of property rights. Finally, social institutions deal with issues related to
rights to access such as health benefits, education and social security arrangements.

Figure 2.1 summarizes the ways in which concepts used in defining institutions are
organized.

19
 Drifting Apart: The Divergent Development Paths of Argentina and Australia

Figure 2.1: Ways of classifying institutions

Institutions

Formality Hierarchy Areas

• Formal • Level 1 • Economic

• Informal • Level 2 • Political
(traditional, • Level 3 • Law
indigenous) • Level 4 • Social

Source: Jutting (2003, p. 14).

2.4 Theorizing about institutions

Economists, historians, sociologists and political scientists have developed numerous
theories of institutions. La Porta et al. (1999) divide these into three main categories:
economic, political and cultural.

Economic theories of institutions suggest that these are created whenever the social
benefits of doing so exceed the costs of not having them (North, 1981). Property rights
over natural resources are created when these become scarce, and when the costs of
enforcing such rights fall below the benefits. Governments will tend to protect private
property when the returns to such protection exceed the costs. Implicit in this theory is
that institutions are efficient, and that the problem is due to their absence. This does not
take into account the existence of inefficiently performing institutions, which inevitably
result in inefficient government, of which there are many examples in economic history
and development studies. Acemoglu et al. (2004) argue that economic institutions are
endogenous and are created as a result of the cooperative decision making of a society
designed to respond to economic change. Typically, decisions about how to shape
institutions will have an impact on the rest of the society and on particular groups who
are affected by those institutions. As a result, conflicts occur between social groups. The

20
 Drifting Apart: The Divergent Development Paths of Argentina and Australia

group with the most political power will have a stronger say as to which form the
economic institution will take (p. 3).

A second group of theories of institutions is political. These generally state that

institutions and policies are shaped by those individuals or groups of individuals who
are in power in order to protect their own interests and to amass influence, power and
wealth. The role of government becomes a means of controlling assets and people,
converting this control into more wealth. Marxist economists and sociologists take this
analysis further, arguing that societies are divided into social classes and policies are
designed by those in power or ruling classes to either maintain their privileges or
improve them. It can also be argued that, just like economic institutions, political
institutions are endogenous, because they are determined or created by social, political,
economic and cultural influences of society (Acemoglu et al., 2004, p. 5).

The final group of theories is those formed as a result of cultural influences. This group
emphasizes the idea that different societies have different values, embodied in preferences
and beliefs, because of different shared experiences. Culture is seen as a key determinant
of those values. As a result, these differences play a key role in shaping economic
performance. Two of the best-known exponents of this theory are Weber (1930) and
Landes (1998) who have argued that the origins of Western economic dominance are due
to a particular set of beliefs about the world that are linked to religious differences. La
Porta et al. (1999, p.224), following the work of authors including Weber, Landes and
Putnam (1993), use religion as a proxy for work ethic, tolerance, trust and other social
characteristics that are regarded as crucial in developing efficient governmental
institutions. Their findings indicate to a large extent that successful government
performance can be shaped by political and cultural factors.

A recent theoretical proposition that attempts to amalgamate economic, political and

cultural factors as determinants of efficient institutional (government) performance is
proposed by North et al. (2007, 2006). This suggests that the economic and political
success of some nations is closely linked to those institutions that shape their economic,
political, religious and other interactions. In trying to understand the historical success
of some nations relative to others, the organization of the state is central to the
discussion. Organizations are distinguished from societies and are categorized as not
being the same as institutions. Instead, they are concrete, “made up of specific groups of

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

individuals pursuing a mix of common and individual goals through partially

coordinated behaviour” (North et al., 2006, p. 20).

Organizations are required to perform two specific functions: to act and to make
choices. The most important organization is the state, whose main responsibility or
function is to provide social order. North et al. (2006, 2007) argue that there are three
types of social orders: the primitive social order of hunter-gatherers, the limited access
order (LAO) and the open access order (OAO). The evolutionary transition from one
order to the next appears to be linear and may be interpreted as being path dependent.
These three orders structure society in a variety of ways. The primitive social order is
quite limited in that it has no capability to support complex organizations and is
considered to have existed before the LAO.

LAO states exhibit a number of characteristics. One is the ability of certain elites
(individuals or groups) to seek economic rents by manipulating the legal, economic or
political environment for their own self-interest. This manifests itself in the form of
market interference by promoting or gaining monopoly power, excess corruption and
promotion of certain other privileges. LAOs are classified by North et al. (2007) in three
categories. The first, fragile states, are those which are unable to restrict violence or
maintain social order and hence face severe civil unrest. Iraq, Zimbabwe and Somalia
are current examples. The second, basic LAO states, are those which possess the ability
to restrict violence and where the elites are closely tied with the operations and running
of the state. Such operations include trade, exploitation of natural resources and
provision of public goods such as health and education. Particular rents end up in the
hands of elites that are closely aligned with those in power. The final classification,
mature LAOs, have the ability to support a large variety of organizational structures,
including legal, economic and political. Domestic business organizations, NGOs and
other non-state organizations are free to operate but competition and entry into markets
and mobility is difficult to achieve, as these are often restricted by elites who are closely
aligned or embedded with those in power. Argentina and other Latin American
countries are regarded as falling into this category, since in many ways they support a
variety of more or less autonomous organizations, while corrupt practices allow easier
access to their markets.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

OAO states, for their part, operate in an environment characterized by economic,

political and cultural openness to organizations. Entry and mobility into markets occurs
without difficulty or constraints, competition is ubiquitous and the encouragement of
thriving markets is commonplace. The OAO state maintains and supports a competitive
economy, property rights are clearly defined and competition is allowed to flourish:

Open access orders maintain their equilibrium by allowing a wide range of

economic and social interests to compete for control of the polity. Creative
economic destruction produces a constantly shifting spectrum of competing
economic interests. The inability of the state to manipulate economic interests
sustains open political competition: politicians cannot cripple their opponents by
denying them economic resources. The creation of rents by the political system
will motivate the economic interests adversely affected by the rent creation to
organize politically. Because organizations mobilize and coordinate their
members when interests are threatened, open access to organizations of all types,
especially economic, helps maintain political competition (North et al., 2007, p.
2007).

Australia, along with other nations classified as developed, falls into this
category.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

3. Argentina and Australia: The story so far

3.1 The importance of comparing these two countries

Interest in the comparative economic performance of these two nations began as early as the
1880s when Argentine political leaders noticed Australia’s extraordinary economic surge and
affluence. To gain deeper understanding of this, two envoys were sent over to investigate
Australia’s socioeconomic structure. They were Armando Llerena and Ricardo Newton,
members of the Argentine “aristocracy”. Newton was described by Duncan and Fogarty
(1984, p. 4) as the Argentine Marco Polo. Specific attention was paid to the meat industry.
Llerena and Newton (who also visited the United States) compiled five tomes of detailed
information on their travels and findings (Gerchunoff and Fajgelbaum, 2006). Argentine
interest in Australia’s economic development, institutions and ways of doing business became
almost a popular obsession:

They discussed colonial land legislation, they asked for definitions of the term
“squatter”, and they eagerly analyzed the possible reasons for Australia’s
markedly [sic] wool productivity. Some Argentines imagined the colonies as
antipodean utopias, blessed with model farms, and “novel applications of
science to agriculture” (Duncan and Fogarty, 1984, p. 2).

Since then, much has been written about these two countries’ long-term economic
performance. This has mainly focused on comparing the advances, misfortunes and
challenges that both experienced throughout the late 19th century and during the whole
of the 20th century, and even the early part of the 21st century.

But critics of the comparisons between Australia and Argentina have also emerged. One
such critique is by Veliz (2005) who has argued that the historical differences are so
deeply rooted in cultural differences that comparing the two nations is an irrelevant and
negligible exercise. The only similarity is that they produced similar commodities,
namely, wheat and beef:

The two countries then appeared similarly constrained by a geographical

remoteness enlivened none the less by a robust prosperity based on the export
of similar agricultural products destined for similar European markets. It was
this that nourished the ill-founded belief in a fundamental similarity that has so
distorted attempts to explain the latter-day divergent fate of the two nations. It
is true that both countries produced and exported the same commodities, but it
does not follow that their economies and social arrangements are necessarily
similar. Such a correlation is as unwarranted in the case of producers of beef

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

and wheat as it is with producers of oil, shortbread biscuits, sherry wine or

beach umbrellas; Egypt produces and exports sugar, so does Australia; Saudi
Arabia is a major exporter of oil, so is Venezuela; Chile mines and exports
huge amounts of copper, so does Zambia (Veliz, 2005).

But, even if we are to compare the two nations solely on the commodity export sectors,
the comparison would be useful because it might provide clear insights as to how two
young societies have structured their economies and institutions in order to trade and
compete with the rest of the world. Furthermore, it would provide a comparative
landscape with signposts indicating how each country faced adversity and difficulty and
the strategies each used to solve challenges and problems.

In responding to Veliz’s critique, Duncan (2007) argues that the comparison is both
legitimate and useful for three reasons. Firstly, it provides a sound methodology for
understanding the role that commodity trade has for relatively small societies such as
Argentina and Australia in facing an increasingly complex and changing world.
Secondly, both are similar in having large urban populations supported by an economy
that, despite geographical remoteness and small total population size, is based on a
large and successful commodity export base. Finally, the comparison isolates a
sometimes unseen but basic driver of economic and political history, being the sectoral
clashes idiosyncratic to each nation (pp. 3-4).

Another justification for comparing Argentina and Australia is precisely that of

comparing and contrasting their cultural differences. A fundamental explanation for
economic growth emphasizes the idea that different societies have diverse cultures,
because of differences in shared experiences, customs, religions or environmental
settings. Moreover, culture is seen as a key determinant of the values, preferences and
beliefs of individuals and societies. These differences play a key role in shaping
economic performance. Comparing and contrasting such beliefs, particularly in two
nations reshaped by immigration flows from Europe, has the potential of providing
important insights that may not be captured by just looking at patterns of trade or
production. The experience of Australia is that cultural and ethnic diversity has had a
positive social and economic pay-off. This has manifested itself in a mix of beliefs,
ideas, experiences and cultures that have served to make Australia a prosperous and
outward looking society (Bertone et al., 1998). Argentina’s multi-ethnic migrant mix

25
 Drifting Apart: The Divergent Development Paths of Argentina and Australia

has also had very positive impacts, but it seems that the literature has not touched upon
this issue in great detail.

Another limitation of Veliz’s critique is that it ignores a vast and powerful literature and
body of knowledge in the economic development literature that is related to this very
exercise. To gain an understanding as to why some nations have become wealthy, others
continue to be poor or become even poorer, while others – such as Argentina – flounder
is the raison d’être of the economic development discipline.9 Indeed, the intellectual
quest in the field is to find the right mix of economic and social policies that lead to
wealth creation, reducing poverty, and generating social equity, long-term prosperity as
well as social and environmental sustainability. The source of development is the
transition from a low access order (LAO) to an open access order (OAO) social
arrangement, in which institutions are at the centre of economic development. As
discussed in Chapter 2, understanding this transition is a main goal of the theory of
economic development. The study and comparison of Australian and Argentine
economic development, cultural, social and institutional functioning provides a wealth
of evidence that may help to achieve this objective.

3.2 Convergence, divergence or parallel paths: Why and how?

Argentina at the beginning of the 20th century occupied the privileged position of being
amongst the ten richest nations in the world, while Australia, prior to the First World
War, experienced a deep economic downturn and failed to grow at rates similar to those
experienced by Canada and Argentina (McLean, 2006, p. 215-16). Since then the tables
turned and Argentina has experienced an economic history characterized by deep
economic crises and stagnation and social instability, which contrasts:

the “golden years” of Argentine economic development around the turn of the
century. At that time Argentina boasted one of the highest growth rates of per
capita income in the world and its economic future, compared with other
“settler economies” such as Australia and Canada, and more broadly, with that
of Europe, seemed secure (Sanz-Villarroya, 2005, pp. 439-40).

What have been the reasons and course of events that have pushed Argentina down the
ladder of economic performance to levels comparable to nations that boast lower levels

9
Numerous comparative studies exist in the economic development literature. An excellent
source for the beginner is Todaro and Smith (2009, pp. 133-6). Here a case study of
comparative economic performance as it relates to industry development policy is made for
Argentina and South Korea.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

of natural and human capital endowments (e.g. Gabon, Malaysia and Turkey10) while at
the same time other “new settler” nations such as Australia and Canada have been able
to manufacture a more prosperous future for their population?

Gerchunoff and Fajgelbaum (2006) commence this complex and awkward exercise
by comparing Argentina’s GDP per capita as a percentage of Australia’s GDP per
capita for the 1884-2005 period. 11 The idea is to gain a broader understanding of
when the two nations began to converge and diverge by comparing economic
phases. Phase comparisons are important in the contrast of the economic history of
these two relatively young nations because they can give a starting point as to
when they began to come together or move apart in an economic, social and
institutional sense. The phases are elegantly summarized by Gerchunoff and
Fajgelbaum as seen in Table 3.1.

Table 3.1: Comparative phases

Period Phase
1884-1929 Convergence
1884-1914 Initial convergence
1914-29 Final convergence
1929-2002 Divergence
1929-45 Moderate divergence
1945-75 Weak divergence
1975-2002 Strong divergence
Source: Gerchunoff and Fajgelbaum (2006, p. 21).

Table 3.1 shows two long phases, one of convergence between 1884 and 1929, and one
of divergence after 1929. The convergence period is divided into initial convergence
(1884-1914) and final convergence (1914-29).12 The divergence period consists of three
phases: moderate, weak and strong divergence.

10
Data refer to the year 2008. World Economic Outlook Database, April 2009, International
Monetary Fund. Accessed 19 June 2009.
11
The authors concentrate on GDP per capita as the summary measure, i.e. Argentina’s GDP
per capita compared to that of Australia. Symbolically, y i is GDP per capita of country i and
the comparison is materialised using y Arg / y Aus (Gerchunoff and Fajgelbaum, 2006, p. 22).
12
Exact dates for divergence between Australia and Argentina are disputed by both
econometricians and economic historians (Gerchunoff and Fajgelbaum, 2006, p. 20).
Nevertheless, regardless of measure used, the fact that the economies diverged is not under
question.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

The convergence phase (1884-1929) is characterized by a stronger rate in GDP per

capita growth for Argentina than for Australia. Real GDP grew by 4.6 per cent per year,
while Australia only managed 2.8 percent (Duncan and Fogarty, 1984, p. 25). The
depression of the 1890s had hit Australia pretty hard, and recovery was slow and
painful. In the initial phase, the 1880s boom for Argentina represented an era of both
expansion and wealth which ended with the Great Depression of the 1930s. For
Australia, in contrast, the 1880s represented the end of the boom and the end of an era
of economic growth that had begun 50 years earlier (Duncan and Fogarty, 1984, p. 27).
According to McLean (2006), economic growth in Australia from 1895 to 1913 was far
below that of the comparable economies of Canada and Argentina. He argues that
Argentina’s recovery may have been more successful than Australia’s due to the
adoption of more effective policy decision making in terms of exchange rate settings
and foreign debt servicing. In contrast, these policies may not have been available to, or
utilized by, the Australian government. This together with a long period of severe
drought may have made things even worse for Australia until just after the First World
War. It also seems that the reconstruction and the absence of debt relief in the 1890s
prevented Australia from borrowing funds in overseas markets (McLean, 2006, p. 239).

Duncan and Fogarty (1984) argue that after the 1880s Argentine growth in output was
solid and stable and was broken up by the First World War and the Great Depression of
the 1930s. For Australia, the pattern of economic growth was unstable and often went
backwards. Argentine economic policy had continuity and was characterized by a high
degree of pragmatism, whereas for Australia it was unsure, ill-directed and at times ill-
conceived (p. 28). Besides, Argentina’s population grew by 3.8 percent annually,
compared to Australia’s 1.8 percent. This demographic difference impacted on
productivity, since this increase was mostly due to the immigration of labourers. One
reason why more workers reached Argentine shores was the more restrictive
immigration policy applied by Australia, known as the White Australia Policy. Its
comparative impact over this 45 year period was to slow population growth compared
to that of Argentina’s more open immigration policy (Carter and Sutch, 2004).

Between 1914 and 1929 further differences began to emerge, particularly after the First
World War. In terms of social policy, both Australian and Argentine workers suffered
the curse of inflation and productivity declined. Argentine economic policy continued

28
 Drifting Apart: The Divergent Development Paths of Argentina and Australia

on the path of trade, while Australians had lost trust in openness and opted more for
redistributive policies and stronger government intervention. During the 1920s,
Argentina continued to “export the food of its popular classes, real wages rose due to
increased labour demand and accompanied by industrial diversification” (Gerchunoff
and Fajgelbaum, 2005, p. 17).

Divergence begins as the Great Depression engulfs the world. The fall in international
demand for agricultural products and commodities and the protectionist policies that
take hold in Europe and the United States have negative consequences for both nations.
Exports per capita appear to be increasing for Australia, relative to Argentina. But
perhaps a more plausible reason for the increasing difference between both countries is
Australia’s alliance with the United States, both as a result of Japan’s threat to Australia
during the Second World War, and Britain’s debacle in Singapore and its concurrent
diminishing importance in the world stage. Prime Minister Curtin, in the aftermath of
Pearl Harbor and at a moment of great threat from Japan, declared:

Without any inhibitions of any kind, I make it quite clear that Australia looks to
America, free of any pangs as to our traditional links of kinship with the United
Kingdom (quoted in Fullilove, 2007).

Thus emerges a strong political alliance which to this day assists Australia in its
economic development and international standing.

The period of weak divergence (1945-75) is characterized by political fortune (or

misfortune), together with a policy of egalitarianism which was far better managed in
Australia than in Argentina. Menzies, Australia’s longest-serving prime minister, adopted
a “steady as she goes” policy of modernization, while Argentina’s Perón adopted one of
accelerated egalitarianism which according to many observers (e.g. Smithies, 1965) had
unfortunate economic consequences. In two years, salaries grew by 60 percent which in
the long term proved disastrous, given the poor performance of Argentina’s terms of trade
(Gerchunoff and Fajgelbaum, 2005, p. 26). Some social researchers have argued that this
problem emerged earlier as a response to the Great Depression. Unfortunately, according
to Alston and Gallo (2004), the 1930s saw the beginnings of a disregard for rule of law in
Argentina. Conservatives resorted to electoral fraud, which was largely ignored by the
political institutions. This led to popular support for Perón who managed the
impeachment of the majority of the Supreme Court. The direct effect of this was a culture

29
 Drifting Apart: The Divergent Development Paths of Argentina and Australia

of the erosion of checks and balances and the rise of populism, producing a highly volatile
and unpredictable economy. Alston and Gallo claim that the long-term impact of not
respecting the political institutions may account for Argentina’s fall in economic standing
in the world stage over the last 50 years. Contrast this with the view of Castles (2000, p.
8) for Australia who argues “that the choice of democratic institutions rather than
authoritarian ones conferred major advantages both in terms of popular liberties and gains
in material well-being”.

Australia’s fortunes were further enhanced by a mining resources boom in Queensland

and Western Australia. Nevertheless, Argentina over the 30 year period still grew at an
average rate similar to Australia. In the postwar era, even with its institutions seriously
eroded, Argentina provided large amounts of food to Europe. Although the relative
price of commodities fell, the amounts exported helped to compensate for this decline in
the terms of exchange. But this process also affected Australia, although less intensely,
since the relative price of minerals did not fall as rapidly as that of food.

Finally, the period from 1975 to 2002 is described as one of strong divergence, marked
by sharp political conflict and economic hardship in both nations. However, the extent
of political conflict and economic difficulty in Australia was in no way matched by the
political dysfunction, oppression and economic mismanagement and collapse
experienced in Argentina where this epoch was characterized by a continuum of inept
application of economic policies and flagrant disregard for both political and economic
institutions, and human rights violations by populist governments and oppressive
dictatorships. Added to this, the Malvinas/Falklands adventure organized by the
military, who had incompetently underestimated Britain’s military might, led to further
isolation of Argentina in the world context.13 These events, together with the spectre of
path dependence, have come to haunt Argentina to this very day. On the economic side
of this downturn, Argentina experienced some of the highest inflationary periods in
economic history. As pointed out by Gerchunoff and Fajgelbaum (2005), only one year
between 1975 and 1990 witnessed an annual inflation below 100 percent, whereas
Australia’s highest inflation over the period did not reach 20 percent per year.

13
Much has been written about this forgotten war. A good account can be found in Freedman
(2005).

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

Australia’s major difficulties in the period can be summarized by two events. One was
Prime Minister Whitlam being dismissed by Governor-General John Kerr in 1975. This
divided the nation, causing an institutional crisis never seen before in Australian history.
The Whitlam government’s principal shortcoming was that it tried to do and achieve too
much in a very short period of time, placing too many demands on limited resources.
Added to this was the haste with which policy was developed and implemented.
Programmes appeared to be rushed and at times ill-conceived, creating considerable
pressures in terms of administrative and financial shortcomings. The lack of policy
coordination with the states became a major weakness but, to a large extent, the states
contributed to this by being antagonistic and difficult to deal with (Matthews and
Grewal, 1997). The other event was the economic change of the late 1980s and early
1990s which had a negative impact on unemployment. Nevertheless, the economic
effects of these events were quite mild in comparison with the turmoil in Argentina:

Simply, in Argentine economic history there has been no worse fifteen years
than those going from the collapse of Peronism’s dispersion and hyperinflation:
standstill, real volatility, huge price increases, indebtedness (Gerchunoff and
Fajgelbaum, 2005, p. 28)

The authors argue that the divergent and convergent experiences of Australia and
Argentina over the period examined can be summarized as a result of time lags,
economic and political geography and institutional performance.14 The close relations
that Australia has had with Asia, particularly Japan, since the Second World War by
supplying it with raw materials for reconstruction and industrial expansion, its
privileged relations with Britain and its alliance with the United States can be
explanations as to why Australia has prospered while Argentina has had a turbulent
experience characterized by economic and social mismanagement and misfortunes.
Australia’s closeness to the United States came as the result of a strenuous debate about
the weaknesses of its military, economic and political position in the world. Prime
Minister Curtin was aware that Australia needed to find a powerful ally, given its
geographic isolation. In the end, this alliance was approved by Australia’s institutions,
which in open and transparent discussions sanctioned long-term policies for the country.
This is quite contrary to what happened in Argentina where arbitrariness and

14
Other authors are less compromising about the timing of this divergence. At the other
extreme, Gallo (2006) argues that the timing of Argentina’s poor performance relative to
Australia is very precise, 1947.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

malfunctioning institutions led to erratic policies and finally to isolation from the rest of
the world.

Sanz-Villarroya (2005) argues that Argentina’s rapid catch-up with Australia ended
close to 1899. Between then and 1975 their economies evolved in parallel, although
Australia achieved higher levels of income and wealth. From 1975 this parallel
evolution ceased.

Duncan and Fogarty (1984) demystify the notion that to a certain extent Australia was the
“lucky country”. This nickname has strong favourable connotations when it comes to
describing Australia’s relative position to the rest of the world. It implies “luck” in spite
of its isolation, which guards it from the political and social problems that often spill over
from bordering nations. It also refers to Australia’s abundance of natural resources,
history, prosperity, climate and not having experienced massive internal problems such as
civil wars or famines. Better yet, much change in Australia has occurred as a result of
consultation and negotiation. It is often seen as a place to be emulated. “Why can’t we be
like them?” is the question often asked by many Argentines. Duncan and Fogarty explain
the historical experiences of both countries and show that not all was so easy for
Australia, as up to the end of the Second World War Argentina had performed much
better. The change of fortunes occurred during the 1950s when Australia, thanks to its
alliance with the United States and the building of closer economic ties with Asia, surged
ahead. The authors argue that Argentina’s decline occurred due to policies designed to
force industrialization at the expense of agricultural production. They present a solid
critique of what was once thought to be the reasonable policy to be followed by a
developing country: import-substitution designed to industrialize the nation, based on the
notion that economic self-reliance at the expense of comparative advantage is the way
forward. These policies are put forward and supported by populist and nationalistic
political discourses, such as those in Argentina after the Second World War. Duncan and
Fogarty conclude that Australia’s prosperity is due to pragmatic, stable and flexible
governance, compared to the poor succession of inefficient governments, policies and
economic decision making in Argentina.

3.3 Institutional aspects

Exactly what role have institutions played in Argentina’s fall from being in the top ten
in terms of income per capita at the beginning of the 20th century to 66th in the world in

32
 Drifting Apart: The Divergent Development Paths of Argentina and Australia

2007 (International Monetary Fund, 2008)? Prados de la Escosura and Sanz-Villarroya

(2005) argue that institutions have played a major part in this pronounced decline.
Institutional instability conditioned capital accumulation and economic growth in
Argentina, and as a result the country’s relative position in the world deteriorated. In
particular, this instability had a negative impact on the comparison with seemingly
similar economies, such as Canada and Australia. While an intuitively sound claim, a
major challenge is to measure the extent of the connection between institutions,
investment and growth implied here. The authors adopt the methodology of Clague et
al. (1999) who proxy institutional stability with contract intensive money (CIM), a
measure that indicates how contracts and property rights are complied and secured in an
economy. The association between institutional stability (CIM), investment and growth
in Argentina indicates that institutional instability had a negative impact on investment.
In a counterfactual exercise, the authors demonstrate that a higher value of CIM would
have led to relatively cheaper capital goods and this would have caused a higher rate of
investment. They conclude that poorly defined property rights held back investment and
led to lower economic growth.

A similar view of the role of institutions as a determinant of economic development is

put forward by Mitchell (2006). He argues that the state is the best actor to provide
collective action in order to coordinate resource allocation when factor endowments are
not abundant. One explanation for Australia’s economic success has been the role of the
state in providing public goods such as infrastructure. Examples include investment in
railways and roads for the development of the mining industries, and scientific research
designed to improve crop yields in a land lacking good quality soils and well known for
its dryness. For the state to provide these goods, its fiscal institutions must be able to tax
with a high level of credibility and to borrow sustainably:

State credibility goes to the core of the state’s institutional capacity, and thus
institutional explanations for development. Fiscal institutions are important
physical representations of state credibility. Less credible states are limited by
weak fiscal institutions, and compulsion is highly ineffective in collecting
revenue (Mitchell, 2006, p. 5).

Prior to Federation in 1901, each Australian colony had its own distinct taxation system,
most of which were reliant on customs and excise duties. Customs duties acted as trade
barriers, limiting trade between the colonies. These were abolished after Federation. In

33
 Drifting Apart: The Divergent Development Paths of Argentina and Australia

1915, Australia introduced a federal income tax, designed to fund the war effort. Similar
taxes were already levied by the states. Over a relatively short period of time, this form
of taxation became Australia’s most important fiscal institution. By the end of the
Second World War, legislative changes had been introduced to ensure federal control of
taxing powers and further limiting those of the states (Reinhardt and Steel, 2006).
Argentina introduced income taxation in 1932, but from the mid-1950s its significance
as a fiscal institution began to wane.

Mitchell (2006) argues that a healthy income tax system is a good indicator of the
credibility of the state because tax collection requires cooperation from individuals as
well as an organized and efficient system. Australia’s income tax system is
characterized by high levels of voluntary compliance even when it is known by the
taxpayer that tax evasion has a low probability of detection. Torgler and Murphy (2004)
found that people who trusted the Australian parliament or legal system also had also a
high level of confidence in the tax system, and that this confidence had increased
between 1981 and 1995. In contrast, according to Mitchell, tax compliance in Argentina
is poor and evasion levels are high. Poor tax compliance means that the state is unable
to collect its revenues for the purposes of financing projects, and its role as a provider of
public goods is severely curtailed. As a result, the state’s credibility as a provider of
public goods with the population becomes heavily tarnished.

In Argentina the inefficient income tax system makes project funding a difficult task for
governments, and its credibility as a serious agent of distribution of resources is further
diminished. This is a major problem, and the comparison with Australia shows that both
state credibility and institutional capacity have a positive influence on economic
development.

3.4 Federal fiscal arrangements in Argentina15 and Australia

Federalism, as a form of government and of fiscal administration, is a crucial element in
the development of Australia’s and Argentina’s economy and society. Both have
relatively small populations living in large and sparse areas of land. This is more so for
Australia than Argentina, but nevertheless both nations in comparative terms have
relatively low concentrations of population other than in their major metropolitan

15
The section on Argentina draws on the work of Saiegh (2007).

34
 Drifting Apart: The Divergent Development Paths of Argentina and Australia

centres. Australia’s federal system is made up of three levels of government, namely,

federal (or Commonwealth), state and local. Argentina’s government structure is quite
similar, in that it is organized in terms of a central federal government, provinces and
municipalities.

A common feature of federal systems around the world is that of running fiscal
imbalances. There are two types of fiscal imbalances, vertical and horizontal. Both
Australia and Argentina suffer from imbalances. Vertical fiscal imbalances arise because
different levels of government have different abilities as well as limitations in raising
revenues to finance different expenditures. Horizontal fiscal imbalances arise because the
states or provinces that make up the federation experience divergent costs in the provision
of public goods and services and do not have the capabilities to raise revenues to match
these expenditures (Dollery and Worthington, 1996, p. 81). The way fiscal equalization is
organized in Australia differs considerably from that of Argentina. Australia has in place
a sophisticated and efficient system of equalization that has evolved since Federation.
This evolution has come about as a result of the growth in the size of government and
demands placed on governments in terms of the provision of public goods.

Much debate exists in relation to the advantages accorded to the Commonwealth to

manage the financial intergovernmental relations. According to Matthews and Jay
(1997), the debate is basically split into two camps. Some authors place much emphasis
on the advantages while others focus on the disadvantages. The main advantage is that it
provides the Commonwealth with the fiscal powers for the promotion and maintenance
of stability and economic growth. The second advantage is that it provides for a uniform
income tax arrangement. This simplifies the administration of the tax system as well as
providing uniform treatment of taxation across the states and territories. Critics of the
current system argue that it robs the states of the independence required of a federation;
it leads to high levels of resource allocation by governments and unnecessarily high
levels of bureaucracy and replication; both state and Commonwealth governments of all
political persuasions use constitutional areas of dispute to deny responsibility, creating a
culture of “blame game” or “passing the buck”; and that many vital services such as
education, transport and water are not correctly administered and provided, avoiding
jurisdictional responsibility (Mathews and Jay, 1997, pp. 12-13; Bennett, 2008, p. 138).

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

Grewal (1995) argues that vertical fiscal imbalances are a serious problem for the
functioning of Australia’s federal system. He shows that although by conventional
measures these may have improved prior to 1995, their impact on the states’ tax
structure has worsened. Since the Second World War, argues Grewal, the states have
become heavily dependent on payments by the Commonwealth. Furthermore, these
payments have not provided a practical or feasible means of revenue for the states.

Bennett (2008) argues that Section 96, a last minute addition to the constitution
designed to deal with issues of financial emergency, began to be used for “top up”
payments to the states. This practice began as early as 1910 when the Commonwealth
provided a grant to Western Australia. In the 1920s, South Australia sought special
assistance from the Commonwealth. Given the demand for extra grants from the states,
the Commonwealth in 1933 set up the Commonwealth Grants Commission which is
required to recommend how the Commonwealth’s purpose grants are to be distributed
among the states and territories. The so-called equalization principle was applied to the
states under Section 96 so that they could request further financial assistance from
(Hancock and Smith, 2001, p. v). During the Second World War the Commonwealth
government took over all the income taxes levied by the states and created a uniform
income tax system. The transfer of the states’ largest tax base to the Commonwealth
forced it to make larger grants to the states and the structure of Commonwealth
payments to the states and local governments took different shapes, namely, general
purpose payments and specific purpose payments. These are detailed in Table 3.2.

Table 3.2: Structure of Commonwealth payments to state and local governments

Name Examples Description

CURRENT GRANTS Tax sharing grants Payments made to the states
General revenue assistance Special revenue assistance for purposes of recurrent
Financial assistance grants budget support with
Tax reimbursement grants essentially no constraints as
GST revenue grants to manner of expenditure

Specific purpose payments – Large number of payments in Effectively Commonwealth

recurrent functional areas own expenditures, but
delivered through taxes

CAPITAL GRANTS General purpose/specific Funds provided for capital

purpose capital purposes. General purpose
discontinued now.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

ADVANCES Loans from Commonwealth

to states payments for asset
purchases
Source: Hancock and Smith (2001, p. 2).

The states receive the general purpose payments from the Commonwealth and spend
them according to their wishes. Specific purpose payments on the other hand are
required to be spent subject to specific conditions.

The election of the Whitlam government in 1972 saw the introduction of fundamental
reforms. Many of these reforms have been seen as controversial in terms of
Commonwealth and state relations. Whitlam regarded the Australian constitution as
outdated and in need of much reform (Bennett, 2008, p. 130). His government
introduced a statute which ensured that the concept of equal fiscalization principle was
enshrined into legislation. States could still request special assistance by entering into
deals with the Commonwealth.

The Fraser government elected in 1975 made further changes winding back
Commonwealth grants to local governments and took steps to strengthening fiscal
equalization. The structure of grants to the states became more stable in the 1990s and
general revenue assistance was matched to inflation and population growth (Hancock
and Smith, 2001).

The Fraser government was replaced by the Hawke (later Keating) government in
March 1983, which lasted just over 13 years. The new government had high
expectations of solving Australia’s economic problems, caused by high inflation and
unemployment, high interest rates, increasing international debt and large current
account deficits. However, according to Matthews and Grewal (1997), the government
acted like “ultra-conservatives with their policies closely resembling those of the
Thatcher and Reagan regimes in the UK and the USA respectively” (1997, p. 790). It
was characterized by microeconomic reform designed to improve efficiency and
competition between the public and private sectors, with the states and the
Commonwealth governments working closely through the Special Premiers’
Conferences and later the Council of Australian Governments (COAG). Another
important reform was the deregulation of the financial system, which included the

37
 Drifting Apart: The Divergent Development Paths of Argentina and Australia

floating of the Australian dollar and the privatization of the Commonwealth Bank
(Matthews and Grewal, 1997, p. 794).

The Howard government, elected in 1996, introduced a broad based goods and services
tax (GST) in 2000. The effect of this was the abolition of numerous inefficient state
taxes and reductions in income tax. All GST proceeds go to the states and this has had
the effect of abolishing Financial Assistance Grants. Constitutionally, however, the
Commonwealth has the power to change any arrangements made unilaterally.

Although the vertical financial structure of Australia has been criticized due to its
vertical imbalance, a major drawback of moving away from this system is that it would
take away the concept of equity of individuals residing in different states. As Hancock
and Smith conclude:

While an appropriate equalization system is a necessary but not sufficient

condition for attainment of broad-based horizontal equity, it appears that the
current system makes an important contribution to horizontal objectives (2001,
p. 102).

Australia’s federal system continues to evolve. COAG has implemented a new

framework for federal financial relations. The aim is to modernize payments for specific
purposes and drive the economic and social reforms pursued by the Rudd government
elected in 2007. The COAG agenda comprises the following goals:

• Deliver better services for all Australians, wherever they live;

• Address social inclusion, including in respect of homelessness and Indigenous
disadvantage;
• Develop human capital;
• Increase labour force participation;
• Build national productivity;
• Reduce costly waste and duplication in service delivery;
• Create more effective markets for resources;
• Increase international competitiveness;
• Move towards a seamless national economy (Commonwealth of Australia, 2009,
p. 8).

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

Argentina’s current federal system of governance evolved after it formed its first
autonomous government in 1810 and later formalized its independence from Spain in
1816. Until the federal republic was created in 1853, there were violent struggles over
the shape and form that the constitution should take. Modifications were made in 1860,
giving the provinces autonomy on how they administered their territories. The federal
government still retained the power to intervene in the provincial territories (Saiegh,
2007, p. 91). Some changes have been made to the constitution, but in essence the spirit
of its functioning remains relatively the same. The Argentine republic consists of 23
provinces and the autonomous city of Buenos Aires, which is also the national capital.
Each province is self-governing, with its own constitution and elected governor and
legislature. Table 3.3 details data on population levels, concentration of wealth and
poverty levels. Argentina is a country that displays extremes of wealth and poverty,
which is typical of many Latin American nations.16

For example, in 1999, the city of Buenos Aires, had a per capita income nearly twice
that of the province of Buenos Aires, and more than twice each of the other 22
provinces. The lowest per capita income is found in the north of the country, in the
provinces of Jujuy, Salta, Santiago del Estero and Formosa. Nearly 20 percent of
Argentina’s population lives in poverty or experiences “unsatisfied basic needs”. Thus,
the imbalances take their toll in terms of how the public purse is to allocate its
resources. Furthermore, societies such as Argentina, which are characterized by high
levels of inequality, places an extra burden on revenue collections. An illustration of
this notion can be seen in the last column in Table 3.3. It provides information on the
level of vertical fiscal imbalance. According to Saiegh

The vertical imbalance is not only large but also asymmetric among the
provinces. Fifteen … provinces finance less than 30 percent of their spending.
Argentina addresses this fiscal imbalance through a complex system of
intergovernmental transfers. Its most important component is the tax sharing
agreement, called coparticipación (2007, p. 97).

16
The magnitude in polarization of incomes and increases in inequalities and poverty in
Argentina has become prevalent over the last two decades.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

Table 3.3: Basic characteristics of Argentine provinces

Province Population GDP per Percentage Population Geographic Vertical

(1,000s) capita of with NBI area (km2) fiscal
(2001 ($1,999) population (1,000s) imbalance
census) with NBI (% of
national
resources/
total
provincial
resources)
Buenos Aires City 2,729 15,634 8 221 200 8
Buenos Aires 13,756 8,325 17 2,352 307,571 47
Catamarca 331 4,887 28 93 102,602 87
Córdoba 3,053 6,132 15 461 165,351 57
Corrientes 927 5,569 31 291 88,199 81
Chaco 979 5,967 40 387 99,633 84
Chubut 408 6,303 22 89 224,686 58
Entre Rios 1,152 6,447 21 237 78,781 71
Formosa 489 4,520 39 191 72,066 95
Jujuy 609 3,812 36 216 53,219 81
La Pampa 299 7,633 14 40 143,440 63
La Rioja 288 5,836 27 78 89,680 90
Mendoza 1,574 6,511 18 277 148,827 54
Misiones 961 4,721 34 323 29,801 81
Neuquen 472 6,464 21 101 94,078 32
Rio Negro 549 6,083 23 127 203,013 67
Salta 1,065 3,836 37 395 155,488 76
San Juan 617 6,341 20 12 89,651 83
San Luis 367 6,367 2 9 76,748 68
Santa Cruz 197 6,278 15 29 243,943 49
Santa Fe 2,976 7,061 18 524 133,007 58
Santiago del Estero 796 4,269 38 304 136,651 85
Tucuman 1,332 4,925 28 369 21,571 75
Tierra del Fuego 100 7,682 22 22 22,524 61
Total 36,026 7,722 20 7,169,381 2,780,730 56
Source: Saiegh (2007, p. 93). NBI stands for Necesidades Básicas Insatisfechas (unsatisfied basic needs),
a measure of poverty used in Argentina.

40
 Drifting Apart: The Divergent Development Paths of Argentina and Australia

Table 3.4: Government revenues, 2000 (percentage total)

Form of taxation Federal Provincial Municipal Total

Income tax 19 19
(personal and
corporate) and
capital gains tax
Social security 21 21
contributions
Taxes on goods, 37 10 0.1 47.1
services, and
transactions
Wealth tax 2 4 0.3 6.3
Trade taxes 3 3
Other 1 3 4
Total 83 17 0.4 100
Source: Saiegh (2007, p. 96).

The Argentine constitution stipulates that much of the tax collection occurs at the
subnational level. The provinces, however, have allowed much of the practice of
revenue collection to fall under the responsibility of the federal government. For
example, as shown in Table 3.4, 83 percent of total tax revenues are collected by the
federal government. This contrasts with only 17 percent for the provinces and an
insignificant 0.4 percent at the municipal level. In spite of this imbalance, the provinces
and municipalities are responsible for spending nearly half of all public sector
obligations (Saiegh, 2007, p. 96).

Argentina’s fiscal and tax transfer systems are characterized by their complexity and
their lack of clarity and transparency. It has been termed the “federal fiscal labyrinth”
because of its unintelligibility and intricacy. In trying to explain its convolution, Saiegh
borrows a diagram consisting (Figure 3.1) of 20 rectangles, eight irregular octagons,
three ovals, countless lines and arrows, together with other geometrical figures – all of
this in order to explain the complexity of the coparticipación labyrinth. This complexity
and lack of clarity embedded in the fiscal transfer system has led to much criticism. The
system has been under attack over many years by academics, politicians, the public and
international organizations such as the World Bank and the IMF. Its major deficiencies
are:

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

• High deficits, increasing indebtedness, and procyclical finances of provincial

governments;
• Bailouts carried out to rescue financial mismanagement in many provinces;
• Poor provincial and national tax collection;
• Distortive national taxation;
• Highly distortive provincial taxation;
• Inefficiencies in the fiscal mix and difficulties for national fiscal adjustment;
• Inefficiencies in the provision of local public goods;
• Insufficient capital spending by the provinces (Saiegh, 2007, pp. 98-100).

This list of deficiencies shows that the system is in need of urgent reform. A new
system characterized by transparency and simplicity, adopting a uniform tax
arrangement, could promote more stability and help the development of Argentine
economy.

Figure 3.1: Argentina: Coparticipación’s labyrinth, March 2002

Source: Saiegh (2007, p. 99).

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

3.5 Socioeconomic conditions in Argentina and Australia:

Some comparisons
We have previously mentioned that Argentina’s economic performance over the last 30
years has been quite poor. Similarly, its comparative performance in relation to other
Latin American countries has deteriorated considerably. In the 1970s, poverty and
inequality levels were of a lesser magnitude, unemployment levels were manageable,
social conditions were acceptable and working conditions were fairly better protected
than elsewhere in Latin America. Now the differences between Argentina and some of
the most successful countries in the region are far less marked. Things are far worse in
comparison with Australia.

In constructing a comparative sketch of socioeconomic indicators in Australia and

Argentina, we use the work of Gasparini and Cicowiez (2007) as the benchmark to
highlight differences. We begin by comparing income levels, we then look at changes in
poverty levels, consider changes in the labour market and conclude by providing an
assessment of the changes to the educational structure. At the outset, we would point
out that cross-national studies of inequality, poverty level, labour market and
educational change are extremely difficult to do. Compatible data across nations is very
difficult to obtain and compare because of differences in the measuring techniques
employed.

Real incomes in Argentina as reported by the EPH17 fell by nearly 8 percent between
1992 and 1998; however, this change does not match the growth in GDP per capita of
8.9 percent. The difference may be due to under-reporting in the EPH. The crisis of
1998-2002 saw a decline of nearly 40 percent in mean income as reported in the EPH,
while in the preceding two years the economy experienced a phase of rapid expansion.
This clearly shows the volatile nature of Argentina’s economy, characterized by periods
of rapid expansion and sharp contraction. Income changes in terms of deciles between
1992 and 2002 increased inequality. The economic crisis of 2000-02 impacted
negatively on the whole population, although the richest decile was the least damaged in
terms of income losses. Since then there has been a recovery and it seems that
improvements to the economy between 2003 and 2005 have impacted positively on the

17
EPH stands for Encuesta Permanente de Hogares, the main household survey in Argentina.
Its equivalent in Australia is the Survey of Income and Housing.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

poor. The non-uniform falls in income experienced from 1992 indicate that poverty and
inequality levels have increased considerably, exacerbated by the economic decline of
2000-02.

The picture for Australia cannot be more distinct. According to the Survey of Income
and Housing, between 1994-95 and 2005-06 there was an increase of 31 percent in the
real mean income of low income people, compared to 32 percent for middle income
people and 36 percent for high income people, and it appears that there has been no
significant change in income inequality from the mid-1990s until the period the survey
was conducted. The poorest 20 percent of households account for 1 percent of total
household net worth, with a net worth of AU$27,000 per household. In real terms,
average equalized disposable household income in 2005-06 (AU$664 per week) was 10
percent higher than in 2003-04 (AU$585 per week). Finally, the income of households
considered to have the lowest levels of economic wellbeing (those with income between
the bottom 10 percent and bottom 30 percent) grew by 8 percent from 2003-04 to 2005-
06, and an 8 percent growth was also recorded for middle income people compared to
13 percent for high income people.

In terms of poverty, the picture is depressing for Argentines. Gasparini and Cicowiez
(2007) show that poverty increased between 1992 and 1996, in spite of a considerable
expansion in GDP (see Table 3.5). Between 1992 and 2005 nearly one million
Argentines moved into the extreme poverty line of US$1 per day. This pattern was
confirmed using other poverty indicators. When using the next level of extreme poverty,
US$2 per day, between the same period poverty increased to around three million out of
a population of around 38 million. Indeed, the massive increase in poverty is captured
regardless of the measure employed. Extreme poverty reached a peak of 27.6 percent in
2002 but declined to 12.2 percent in the second half of 2005. During the economic
catastrophe of 2002, almost 60 percent of Argentines lived under the poverty line. A
more accurate representation is to consider Argentina’s position compared to the rest of
Latin America. At one stage its poverty levels were similar to those of Uruguay and
lower to those of Chile. Today Chile and Brazil have experienced declines in poverty
compared to Argentina (Gasparini and Cicowiez, 2007, p. 7). In terms of inequality
measures, the picture is virtually the same. Regardless of the type of conventional
measures employed, be they the Gini coefficient, the Theil Index, the coefficient of

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

variation, the Atkinson index or the generalized index of entropy, all show signs of
increasing inequalities of income (p. 9).

Table 3.5: Poverty lines, Argentina, 1992-2005

Year US$1 per day US$2 per day

poverty line poverty line
EPH 15 cities Number of people Number of people
1992 478,378 1,407,829
1993 586,197 1,689,431
1994 585,525 1,549,582
1995 1,108,580 2,592,179
1996 1,309,616 3,141,943
1997 1,105,174 2,967,630
1998 1,149,506 3,007,165
EPH 28 cities
1998 1,233,383 3,405,663
1999 1,281,780 3,316,156
2000 1,557,903 4,039,454
2001 2,589,201 5,848,228
2002 3,737,657 9,376,508
2003 3,014,981 9,083,922
EPHC
2003-II 3,021,707 7,650,293
2003-II 3,917,955 7,325,050
2004-I 2,221,433 6,049,215
2004-II 2,009,830 5,429,855
2005-I 1,809,907 5,194,536
2005-II 1,521,238 4,538,654
Source: Gasparini and Cicowiez (2007, p. 23, Tables 4.2 and 4.3).

Comparing poverty levels between Australia and Argentina is almost a meaningless

exercise. This is because the incidence and level of poverty is so much pronounced in
Argentina than it is in Australia. For example, Australia is ranked under Human and
Income Poverty amongst developed OECD nations. Its ranking is 14th, ahead of the
United States which is ranked 16th. The top ranked nation was Sweden (UNDP, 2006,
p. 296). Argentina for its part is ranked amongst developing countries. Its ranking is
high, standing at 4th (p. 295), but comparisons of poverty levels between the two
nations do not exist.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

Poverty and income inequality in Australia are constantly monitored, generating much
debate about causes and consequences. Saunders and Bradbury (2006) highlight the fact
that research on poverty and income distribution has been the subject of much analysis
and criticism in relation to the methods employed, measures and data quality. Their
findings suggest that progress in reducing poverty in Australia has been slow. When
they measure it in absolute terms using a poverty line that is held constant in real terms,
poverty fell overall. Using data from the third wave of the Household, Income and
Labour Dynamics in Australia (HILDA) Survey, they find that those who lived in
extreme poverty in any single year manage to escape from it within the next two years,
though it is not known if this is on a permanent basis. However, the authors conclude
that “there is only a small core of entrenched poverty” (p. 361).

The Argentine labour market between 1992 and 2005 experienced marked changes
characterized by strong fluctuations. Gasparini and Cicowiez show that real wages rose
for the first part of the 1990s and declined thereafter. During the last crisis between
September 2001 and April 2003, workers experienced a massive fall in wages of 28
percent. Over this period, the gender wage gap was closed. The data compiled by the
authors derived from the EPHC show that on average women earn slightly more than
men. Contrast this with Australia’s situation where labour market change is
characterized by gradual and consistent growth in opportunities. Australia’s average
weekly earnings survey shows that weekly earnings for male and female employees
rose by 56 percent. This increase occurred between 1997 and 2007, where male weekly
earnings for full-time employees rose from AU$741 to AU$1,158, while for females it
rose from AU$620 to AU$96818. The higher levels of earnings by males reflects the
higher proportion of women working part-time and the inclusion of overtime work for
which men earn more than women.

Skill bias in the demand for labour was much stronger in Argentina where the gap
between skilled and unskilled workers widened. For example, workers with at least
some superior (post-secondary) education earned twice as much as those who had not
completed high school. By 1998 this gap had widened to 2.8 times, and it has not
changed considerably since the recent economic crisis. Differences in earnings in
Australia, however, are best explained in terms of industry and occupational pay

18
These earnings statistics are obtained from ABS (2008).

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

differences. The booming mining industry recorded the highest pay increases over the
last decade. In May 2007, the industry had the highest average weekly ordinary time
earnings for full-time adults (AU$1,811 for men and AU$1,399 for women), whereas
the lowest were in the retail trade (AU$874 for men and AU$757 for women).
Elementary clerical, sales and service workers recorded the lowest average weekly
ordinary time cash earnings of all the occupations for men (AU$758). For women,
however, it was labourers and related workers (AU$658). Managers and administrators
recorded the highest paid earnings (AU$1,722 for men and AU$1,697 for women).

Both Australia and Argentina have experienced enormous changes in labour force
participation. Argentina’s participation rate has increased considerably as a result of a
large number of low and semi-skilled prime age women entering the labour market. For
example, in 1992, 48 percent of women were participating19 in the labour market and by
2002 this had risen to 60 percent. The implementation of the Jefes de Hogar program in
2002 saw a sharp rise in female participation. Loosely translated as the “breadwinners’
program”, its aim is to assist 2 million men and women and their families who live
under the poverty line.

The Australian labour market has experienced enormous change over the last three
decades. A major feature has been the increasing diversity in the nature of work and
types of employment (VandenHeuvel and Wooden, 2000). Up until the 1970s, most
Australian workers were in permanent full-time employment. During the early 1970s,
just over one in ten worked in part-time employment, defined by the ABS as less than
35 hours per week. By 2002 nearly one in three employees were employed on a part-
time basis (ABS, 2002). In the early 1980s, alternative work arrangements also began to
flourish, especially casual employment.

Two major factors have contributed towards a trend that promotes labour market
change, namely, demand and supply factors, and institutional forces. The desire of
many workers to combine responsibilities and personal interests with participation in
the labour market has impacted the supply side. Such examples are the entry into the
labour market of many married women who combine home and family duties with
employment. Students have become strong participants in the labour market by studying

19
Labour force participation is defined as defined as the ratio of the labour force to the working
age population, expressed in percentages.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

and working at the same time. These can be seen as positive outcomes, in that they have
improved both groups’ social and economic wellbeing (Esposto, 2005). As Borland
(1997, p. 21) explains:

Government policy has also encouraged a move towards labour market flexibility,
largely achieved, amongst other things, through the spread of enterprise bargaining
and a corresponding decline in compulsory conciliation and arbitration, a key
feature of Australia’s industrial relations landscape prior to the 1980s … These
changes implemented by both Labor and Liberal governments over the past two
decades continued the trend towards increasing diversity of job types, particularly
the rise in part-time and casual employment … As expected, the male participation
rate has been consistently higher than that of females, but there is a pattern of
convergence as evidenced by the large number of female entrants into the labour
market since the mid to late 1960s and the decline in male participation rates.

The most remarkable facts about the two labour markets are changes to unemployment
levels. Table 3.6 shows changes for selected years from 1992 to 2008. The striking feature
is that Australia’s unemployment declined steadily from a high of 10.7 percent to 4 percent
in May 2008, the lowest in over 30 years. In contrast, Argentina’s unemployment is
characterized by volatility generated by periods of recessions and booms. The recession of
1995-96 pushed it to a record high of 18.4 percent, declining to 8.4 percent in May 2008 as
a result of the period of economic growth after the 2001-02 crisis.

Table 3.6: Unemployment rates, Argentina and Australia, selected years, 1992-2008

Year Argentina Australia

1992 6.9 10.7
1994 12.1 9.0
1995 18.4 8.8
1997 16.1 8.2
2000 15,4 6.0
2003 15.6 5.8
2007 9.8 4.3
2008 8.4 4.0
Sources: INDEC (2008) and ABS (2008b).

3.6 Conclusion
This chapter has briefly discussed Argentina’s comparative decline to that of Australia
since the 1890s. Much of that discussion described the points at which the two countries
diverged and converged throughout a history encompassing nearly 120 years. The

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

reasons can be summarized as being due to economic events, issues related to

geographic proximity and the performance of institutions. The exact timing and impact
of economic events is in dispute. For example, Alston and Gallo (2004) and Gallo
(2006) argue that the disregard for the rule of law in Argentina in the 1930s was the
catalyst for it decline. Sanz-Villarroya (2005) argues that Argentina began to fall behind
Australia in 1899. Other views abound. It is also argued that Australia’s geographic
closeness to Asia and its alliance with the US have benefited its progress. In contrast,
Argentina’s inability to meaningfully engage with the US and Europe have not helped.
We have also seen that perhaps much of the blame for Argentina’s lack of progress is its
inability to create institutions that operate efficiently and assist in the promotion of
economic development. Rodrik (2003) argues a taxonomy of three components that
creates the conditions for economic development. These are geography, integration or
trade and institutions. It is our view that neither geography nor trade are useful
explanations for Argentina’s fall from grace. The role of institutions has been
determinant for its continuous faltering in the world stage and even of under-performing
with respect to its capabilities

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

4. Comparing Argentina’s and Australia’s current

performance

A comparison of Australia and Argentina at one point in time and historically is quite a
gripping and intricate exercise, given the complexities of such a task. These two
societies and economies have much in common yet differ markedly in their economic
development and prosperity, particularly since the 1930s. Nevertheless, we strongly
believe that much can be learned from such a comparative exercise. In trying to
understand their social and economic differences, we compare so-called popular
economic indicators. We call them “popular” because they are easy to access and quick
comparisons can be made at different points in time between nations.

The indices also allow us to contrast the relative performance of nations across time and
to monitor their successes and failings. At the outset, it is important to note that reliance
on a single index can be fraught with uncertainty. No matter how well constructed an
index might be, no single index or group of indices can capture or measure exactly what
we would like them to assess and evaluate.

Some of the indices that we use have been criticized for the methodologies employed
and ideological stance, and others for the type of data used. This is not uncommon in
economic development work. In spite of these shortcomings, they continue to be useful
for the purpose of comparative analytical purposes and to gather information about the
relative performance of nations in terms of economic and human development. Indeed,
we have chosen indices that convey different political, economic and philosophical
points of view because we feel that they give our analysis and conclusions a higher
degree of credibility. Another reason for choosing different indices is that each
particular one may not capture all of the social and economic complexity experienced
by a particular country at a point in time. Indeed, no index that tries to capture a specific
or various aspects of human or economic development ever created is perfect. Because
of this, as a companion to the comparative exploratory analysis, we also present a
discussion of how the indices are constructed and the advantages and disadvantages of
using them.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

4.1 Economic freedom

We begin with the Index of Economic Freedom which was created in 1995 by the
Heritage Foundation20 and the Wall Street Journal. The rationale behind it is
unapologetically laissez faire as the authors consider economic freedom as the driver of
prosperity for individuals, crucial for the development of nations and intrinsically
important for economic prosperity. Philosophically, it is based on the ideas of Locke
and Montesquieu who viewed private property as a fundamental human right and
intrinsically important for personal welfare and advancement. The authors define
economic freedom as encompassing:

all liberties, rights of production, distribution, or consumption of goods and

services. The highest form of economic freedom provides absolute right of
property ownership; fully realized freedoms of movement of labor, capital and
goods; and an absolute absence of coercion or constraint of economic liberty
beyond the extent necessary for citizens to protect and maintain liberty itself
(Holmes et al., 2008, p. 40).

The index is made up of a simple average of ten freedoms that are considered to be
crucial for the development and prosperity of nations and individual freedoms. These
are weighted on an equal basis to avoid bias on any factor or particular policy leaning.
The index uses a grading scale ranging from 0 to 100, where 100 is a perfect score for
freedom. A nation that achieves a score close to 100 would then be operating in an
economic system that most approximates economic freedom. The index possesses a
continuous grading scale, indicating that a particular nation can have a score of 77.8
while another can have a lower or higher score, thus allowing for comparability. The
period of the study is over a financial year. For example, the data examined for 2008
covers the second half of 2006 and the first half of 2007. The data used to construct the
10 indices comes from a wide range of sources, including the IMF, World Bank,
Economist Intelligence Unit, US Department of Commerce, Corruption Perception
Index and many other organizations that collect and disseminate data.

The index aggregates the following items:

• Business freedom: the ability to create, operate and close an enterprise quickly
and easily;

20
The Heritage Foundation was founded in 1973 and is regarded as one of the United States’
most influential New Right think tanks. It is based in Washington, D.C.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

• Trade freedom: a composite measure of the absence of tariff and non-tariff

barriers that affect imports and exports;
• Fiscal freedom: a measure of the burden of government from the revenue side.
It includes the tax burden in terms of the top tax rate on income (individual and
corporate separately) and the overall amount of tax revenue as a portion of GDP;
• Government size: defined to include all government expenditures, including
consumption and transfers;
• Monetary freedom: combines a measure of price stability with an assessment
of price controls;
• Investment freedom: an assessment of the free flow of capital, especially
foreign capital;
• Financial freedom: a measure of banking security as well as independence
from government control;
• Property rights: an assessment of the ability of individuals to accumulate
private property, secured by clear laws that are fully enforced by the state;
• Freedom from corruption: based on quantitative data that assess the
perception of corruption in the business environment, including government and
administrative corruption;
• Labour freedom: a composite measure of the ability of workers and businesses
to interact without restriction by the state (Holmes et al., 2008, pp. 40-1).

The Index of Economic Freedom has not been free of criticism. For example, Sachs
(2005) questions the notion that market economies perform better in an economic sense
than those that are centrally planned. He demonstrates that the Index of Economic
Freedom between 1995 and 2003 did not correlate with annual growth in per capita
GDP. For example, even though China grew rapidly, this did not occur as a result of
scoring highly on the index. Rather, it occurred more as a result of government policies
directed at maintaining a tight grip on the economy and on issues related to human
rights and liberties. He also points out that there are many cases where economic growth
was slow for countries that received a good score, for example, Uruguay and
Switzerland (pp. 319-20).

Others have questioned the methodology by which the index is constructed and the
validity of the scores obtained. Karlsson (2005) argues that it is nearly impossible to

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

create a measure to capture “economic freedom” and that the validity of each of the
items is either incorrectly measured or even reflect the wrong thing. His critique lists
faults with each of the ten indices constructed and details their corresponding faults,
though he admits:

It may be presumptuous of me to criticize the index without having made an

alternative index myself, but this is merely meant to indicate how the index
should be improved to better reflect the actual levels of economic freedom.

In spite of these limitations, we still believe that the Index of Economic Freedom
provides useful insights into the performance of both nations since its inception in 1995.
Figure 4.1 shows the trajectory for Argentina and Australia from 1995 to 2008. A lower
ranking denotes a more successful performance.

Figure 4.1: Index of Economic Freedom scores for Australia and Argentina, 1995-
2008

Source: Heritage Foundation (2008), http://www.heritage.org/research/features/index/

It was only in 1996 that Argentina experienced a higher level of economic freedom than
Australia. Thereafter, its position declined, reaching its worst ranking of 120th in 2005
and then improving to the current lowly ranking of 108th. According to the index’s
assessment, Argentina’s economy was at its least free in 2005 at 52.8 percent (rank 120)
compared to 55.1 percent free in 2008 (rank 108). In contrast, Australia had its lowest

53
 Drifting Apart: The Divergent Development Paths of Argentina and Australia

level of economic freedom in 1996, at 74 percent (rank 10), improving to its best
ranking of 4th in 2008, at 82 percent free.

Australia’s high ranking of economic freedom can simply be explained by its strong
democratic tradition since Federation in 1901. From the early 1980s, the
Hawke/Keating governments began a process of labour and financial market
deregulation and the reduction of trade barriers. After 1996, the Howard government
continued with an agenda that included taxation reform, continued labour market
deregulation and persistent engagement with Asia, particularly China and more recently
India.

In contrast, Argentina experienced of severe economic crises, stretching as far back as

the years previous to the military rule from 1976 to 1983. Governments amassed
massive debts in the international credit markets in the post-oil shock of 1973 era.
Democracy was restored with the election of President Alfonsín in 1983, but the
country was soon in deep economic trouble. As a result of excessive foreign debt
repayments, the economy collapsed and hyperinflation topped 3,000 percent annually.
Alfonsín resigned six months before the end of his term and President Menem took
power in July 1989. He is remembered for his plan of reforming the economy by
adhering closely to the Washington consensus. The convertibility plan of 1991 became
the trademark of the ensuing decade, a plan designed to peg the Argentine currency to
the US dollar. Although the plan was initially intended (and succeeded) to reduce
inflation, the government kept engrossing its national debt, mostly due to high levels of
government spending. By 1999, when President Fernando de la Rúa took power,
Argentina was experiencing massive unemployment while economic confidence started
to touch new lows. A deep recession ended in a massive socioeconomic collapse.

In 2001 confidence was so low that the herd mentality took over. People withdrew their
money from bank accounts in pesos and turned them into American dollars, sending
them overseas or keeping them literally “under the mattress”. A run on the banks started
and the government was forced to freeze accounts for 12 months. Known as the
corralito,21 this marked the end of the convertibility plan. Since 2002, the economy has
picked up, with strong continuous growth averaging around 9 percent per year. Between

21
Corralito translates as ‘farm animal enclosure’. It is a metaphorical description of the financial
restrictions imposed by Economy Minister Domingo Cavallo, in order to stop the run on the banks.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

December 1999 and July 2008 Argentina had seven presidents. Nestor Kirchner took
power on 25 May 2003. His first steps were to reform the judiciary by replacing
conservative judges by new ones and to start negotiations to restructure Argentina’s
massive debt with the IMF, becoming a strong advocate of Mercosur and rejecting the
Free Trade Area of the Americas.

Table 4.1: Economic freedom indices and rankings, Australia and Argentina,
selected years (rankings in brackets)

1995 1999 2002 2006 2008

Ranking AU ARG AU ARG AU ARG AU ARG AU ARG
Economic 74.1 67.9 76.4 70.6 77.3 65.7 79.4 54.6 82 55.1
freedom (8) (22) (5) (20) (11) (44) (7) (112) (4) (108)
Business 70 85 70 85 85 70 90.9 62.9 89.3 63.2
freedom (31) (7) (29) (4) (4) (23) (12) (73) (13) (74)
Trade 77 58.4 79.4 61.2 77.4 53 77.4 67.4 83.8 69.6
freedom (19) (54) (12) (87) (41) (128) (52) (90) (38) (101)
Fiscal 59.6 80.7 55.7 77.6 56.4 72.4 58.9 71.5 59.2 70.5
freedom (62) (17) (68) (138) (84) (106) (139) (96) (140) (106)
Government 53.9 86.6 56 83.9 61.1 76.5 62.2 81.5 62.8 80.9
size (72) (28) (112) (54) (103) (65) (99) (52) (100) (56)
Monetary 86.7 61.1 87.9 89.8 83.3 94.3 85 71.5 83.7 65
freedom (3) (67) (5) (1) (51) (1) (37) (25) (13) (144)
Investment 7 70 70 70 70 70 70 50 80 50
freedom (8) (7) (11) (10) (16) (18) (14) (50) (8) (50)
Financial 90 50 90 70 90 70 90 30 90 40
freedom (1) (33) (1) (9) (1) (16) (1) (116) (1) (105)
Property 90 70 90 70 90 50 90 30 90 30
rights (1) (16) (1) (26) (1) (45) (1) (4) (1) (30)
Freedom 70 50 88.6 28.1 83 35 88 25 87 29
from (12) (23) (10) (107) (13) (69) (9) (116) (9) (90)
corruption
Labour N/A N/A N/A N/A N/A N/A 81.6 55.9 94.2 52.9
freedom (18) (105) (3) (113)
Source: Heritage Foundation (2008), http://www.heritage.org/research/features/index/. Number in
brackets denotes world ranking. N/A denotes not available.

Kirchner’s term ended in December 2007 when his wife Cristina Kirchner was elected
as Argentina’s second female president. She continued strong economic ties with Hugo
Chavez’s Venezuela and entered into a period of controversy as a result of an attempted
increase of retenciones, a sliding-scale taxation system for agricultural exports,

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

particularly on soybeans. This caused protests throughout the country, which ended by
the rejection of the government’s project in Congress.

4.2 Business freedom

The Index of Business Freedom looks at the ability to start, operate and close a
business. Sources are the World Bank’s Doing Business Study, the Economist
Intelligence Unit and the US Department of Commerce. The index considers the
following variables: number of procedures required to open a business; number of days
it takes to open it and the percent of income per capita that is required to start
operations; number of procedures required to obtain a licence and its cost measured as a
percentage of income per capita; the time and cost it takes to close a business, measured
as a percentage of the business’ possessions in terms of assets and/or cash holdings; and
recovery rate in terms of money when a business closes down (Holmes et al., 2008, p.
42). In 2008 Australia obtained a score of 89.3 percent and ranked 13th in the world,
while Argentina scored 63.2 percent and ranked 74th, after having had an excellent
ranking of 4th in 1999.

Starting a business in Australia has become a comparatively easy affair, taking an

average of two days, as compared to in Argentina where it takes on average 31 days.
This is better than the world average of 43 days and better than that of other Latin
American countries such as Brazil, while Chile and Peru performed better than
Argentina. For Australians the task of opening up businesses has become easier since
1995, when Australia ranked 31st in terms of business freedom. It has become much
easier as a result of government calls to the population to become more entrepreneurial.
This has manifested itself in the reduction of red tape and in the provision of advice and
information about ways to set up a business by government organizations, both federal
and state. For example, the Commonwealth has established several initiatives to provide
guidelines, information and at times financial assistance to open a business.22 Exiting a
business has also become simpler, with the government providing information on rules
and guidelines to be followed. In contrast, opening or exiting a business in Argentina
has become harder since 1995. A major problem is that regulations do not seem to be
applied consistently across the board. However, it is still much simpler than in countries

22
For example, see http://www.business.gov.au/.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

such as Brazil where this task continues to be marred by red tape, bureaucracy and, lack
of transparency and where many businesses are not registered (Bermúdez, 2004).

4.3 Trade freedom

The rationale of this index is to obtain an understanding of the level of trade freedom
experienced by each country. It is compiled using two inputs, namely, the trade
weighted average tariff rate and the non-tariff barriers. To determine non-tariff barriers,
the authors gather both qualitative and quantitative data. A wide range of data is used to
construct the index, and most prominent of these are trade indicators obtained from the
World Bank and the World Trade Organization (Holmes et al., 2008, p. 43). Australia’s
ranking has fluctuated, being better in 1999 than in 2008. In contrast to popular belief,
work by the Reserve Bank of Australia (Andrews and Arculus, 2008) demonstrates that
trade as a proportion of GDP is small compared to other advanced economies. This is
against a background of rapid growth of the Asian economies, driven particularly by
China and India.

Table 4.2: Australian exports

Export volumes Export values Share

Average growth (%) of total (a) (%)
1990s 2000-07 2000 2007
Total exports 8.0 2.4
Resources 7.9 2.6 36.3 46.5
– Coal and
metal ores
and minerals 4.9 5.4 16.2 26.7
– Other
resources 9.1 –0.7 20.1 19.9
Services 8.7 3.0 24.0 22.5
(b)
– Education 14.6 12.9 2.9 5.9
(b)
– Tourism 9.5 –0.4 7.2 5.4
– Other 7.3 1.5 13.9 11.3
(c)
Manufactures 12.0 3.2 17.3 13.9
Rural 7.1 –2.5 18.5 11.1
Source: Reserve Bank of Australia (2008, p. 1). (a) The components do not sum to 100 since the
heterogeneous “other goods” balance of payments category is not shown. (b) Education and tourism
services deflated by the headline CPI. (c) Excludes pharmaceutical exports due to the large degree of re-
exporting activity in this category.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

Table 4.2 shows that in 2000-07 Australia’s exports grew by an average of 2.4 percent,
while during the 1990s the growth had averaged 8 percent. Notable exceptions include
education in the services sector (12.9 percent), reflecting strong demand from India and
China, and coal and minerals (5.4 percent). This growth is also driven strongly by
China’s heavy investment in infrastructure. In turn, the importance of traditional export
partners appears to be in decline. The share of exports in 1999 to the US declined from
11.2 percent to 7.3 percent in 2007, as shown in Table 4.3.

Andrews and Arculus (2008, p. 7) argues that exports are being reoriented towards
developing economies in Asia. However, these grew at only a modest rate between
1999 and 2007 compared to the 1990s. The appreciation of the Australian dollar appears
to have negatively impacted on sectors such as manufacturing and tourism, although
international terrorism might have something to do with this. The rural sector has been
heavily impacted by a drought that has persisted since 2000, and output production has
not seen the levels reached in 1999 (Ortac et al., 2008, p. 8).

Table 4.3: Australian exports of goods and services by destination, current prices,
percent

Average Share of
Share of
annual exports
exports
growth (rank)
2007 1999-2007 1999
Japan 16 7.1 17.2 (1)
China 12.8 24.8 4.1 (7)
United States 7.3 2.5 11.2 (2)
South Korea 7.1 10.5 5.9 (5)
New Zealand 6 5.0 7.5 (3)
United
Kingdom 5.4 6.5 6.1 (4)
India 5.2 24.7 1.7 (13)
(a)
Europe 7.5 6.3 8.5
Other east
Asia(b) 16.7 5.0 21
Source: Reserve Bank of Australia (2008, p. 7, Table 2).

Much of this growth has been driven by the commodity exports sector, but other areas
have suffered. Examples include growth in manufactured exports which experienced a

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

decline in share in global manufacturing trade (Andrews and Arculus, 2008, p. 5). They
maintain that:

developing Asia is likely to affect the structure of the Australian economy for
some time to come. The emergence of China and India should underpin future
growth in Australian resource exports, with current per capita consumption of
energy and minerals in both countries well below that of developed economies.
… climate change may have important implications for the future composition
of Australia’s resource exports (p. 8).

Both Australia’s and Argentina’s distance from key markets also raises the cost of
transport and therefore trade. However, Australia benefits from its proximity to
emerging Asian markets (Withers, 2007, p. 8).

In 1995, Argentina ranked 54th in terms of trade freedom, and its trajectory has
deteriorated considerably since that time. The features that make its trade restrictive are
the non-tariff barriers which have the effect of restraining trade and frustrating
businesses wishing to import and export. There have been some improvements in terms
of port handling and customs processes, but these do not appear to go far enough. A
reason for the slowness of reform might be that the crisis of 1999-2002 still appears to
linger strongly in the minds of decision makers. On a positive note, the depreciation of
the peso in 2002 after 11 years of rigid parity with the US dollar had a positive effect in
terms of the balance of trade, with a sustained period of surplus up 2008.

4.4 Fiscal freedom

Governments potentially have the ability to impose a burden on economic activity by
generating revenue for themselves, mainly through the manipulation of the taxation
system and also by incurring debt, which is ultimately paid off by the taxpayer (Holmes
et al., 2008, p. 45). This index has three quantitative components which are equally
treated and are designed to measure taxation levels. These are the top tax rate, the top
tax rate on corporate income, and total tax revenue as a percentage of GDP. The main
data source is the Organisation for Economic Co-operation and Development (OECD).
Data is also sourced from the Staff Country Report collated and produced by the IMF
and from private organizations such as Ernst and Young and Deloitte (Holmes et al.,
2008, p. 45-6). On this index, Australia had a poorer ranking than Argentina, having
deteriorated from 62nd in 1995 to 140th in 2008. Argentina had a better ranking in
1995, 17th, but fell to 106th, still performing better than Australia.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

The Australian government collects part of its revenues from three forms of income tax:
personal incomes, such as salaries and wages; business income, derived from money
obtained from operating a business; and capital gains, which is collected from the sale
of profits made on shares or property. Australia also has a valued added tax (GST). Tax
revenue as a percentage of GDP stood at 30.9 percent according to the OECD in 2005
and was ranked 27th amongst OECD members, behind Sweden which was ranked first
at 51.3 percent of GDP and Brazil which was ranked 15th at 37.4 percent of GDP.

Australia’s efficient revenue collection has placed it in a favourable position to deal

with the global financial crisis. A reason for this, according to the Reserve Bank of
Australia, is that its net debt has been historically low, and is in a very healthy position
when compared to its G7 counterparts and the OECD average:

Australia’s relatively strong position with significantly lower levels of net debt
projected in 2010 than the G7 countries, even after introducing stimulus measures.
Australia’s projected net debt position across all Governments is estimated to be 1
percent of GDP compared with 48 percent of GDP for the OECD (Di Marco et al.,
2009, p. 5).

In contrast, Argentina’s public debt peaked at 143.5 percent of GDP during the 2002
crisis and declined to 51.5 percent during the second quarter of 2008 (Weisbrot, 2008,
p. 2). Furthermore, Argentina is not as highly taxed as Australia. Its taxation revenue as
a percentage of GDP stood at 27.3 percent in 2006. Taxes are collected from a variety of
sources, including VAT (21 percent over final prices) and wealth taxes. Tax evasion
remains a pervasive problem, particularly since the 1950s:

Ultimately the Argentine state’s increasing impediment to development was driven

by an inability to legitimately fund itself, by a lack of solidarity between the state
and society. The comparison of income taxation clearly demonstrates the differing
experiences of state credibility, and the importance that this had upon the ability of
institutions to positively influence development (Mitchell, 2006, p. 18).

4.5 Government size

Government size is considered by some authors as being a hindrance when it comes to
economic efficiency and its impact on economic development. This particular index is
constructed using a non-linear quadratic equation. The size of government is factored on
government expenditure as a percentage on GDP (Holmes et al., 2008, p. 46).

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

Government expenditures by Australia are relatively high in comparative terms. It

ranked 100 in 2008, compared to Argentina which had a lower ranking of 56.
According to Holmes et al., Australia’s government expenditure as a proportion of GDP
was 35.2 percent (p. 88) compared to Argentina’s at 25.2 percent for 2005. The
proportion of GDP expenditure provided by Holmes et al. is different to that provided
by the Treasury of Australia.

The role of government in Australia has been declining in certain respects. In response
to the rise of the global knowledge economy, Australia under the Hawke/Keating
governments adopted a program of structural readjustment to meet the demands of the
new global architecture. This forced changes in government firms and government
agencies which took the form of privatization. Examples of Australian owned privatized
icons include the Commonwealth Bank, the airline carrier Qantas, and most recently
Telstra, which was privatized in three stages due to political commitments, pressures
and public disquiet. Not all privatizations have been positively received. However, in
comparative terms they have been far more successful than in Argentina, particularly in
areas such as gas, electricity, telecommunications and air travel where the signs point to
decreasing prices and increased productivity mainly due to substantial reductions in
employment levels (Lewis et al., 2006, p. 50).

The Menem government conducted several privatizations of government owned

enterprises, including the steelmaker Sociedad Mixta Siderurgica Argentina (SOMISA),
the shipyard Talleres Navales Darsena Norte (TADANOR), the national
telecommunications company Empresa Nacional de Telecomunicaciones (ENTel) and
the national airline carrier Aerolíneas Argentinas. Since its privatization, the airline has
experienced crises including near closure, the sale of assets and being forced to file for
protection from creditors. Contrast this with the privatization of Australia’s flag carrier
Qantas which, in spite of facing strong competition from other international airlines,
continues to be profitable and competitive even during the global financial crisis. The
fortunes of the privatized companies are varied. Some succeeded while others faced
serious problems due to the financial collapse of 2001-02 and poor administration.
Many of these companies, particularly those that provide public services, are being
heavily subsidized by the state. Galiani et al. (2003) evaluated the efficiency and
distributional impacts of the Argentine privatization program and found that overall it

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

had been a positive outcome at the microeconomic level, providing huge increases in
operating efficiency (p. 43). This was mainly due to improvements in productivity
generated by large layoffs of employees, sometimes as high as 40 percent. Nevertheless,
the Kirchner governments reversed many of the privatizations, including Aerolineas
Argentinas. At the end of 2008 the government seized the private pension funds, which
owned many private corporations due to their investment in capital markets.

4.6 Monetary freedom

The score for this index is based on two factors, namely, the weighted average of inflation
for the most recent three years and price controls. Data is obtained from the IMF’s
International Statistics on-line and the Economist Intelligence Unit, country reports and
country profiles (Holmes et al., 2008, p. 47). Australia’s ranking is high at 13, compared
to Argentina’s poor standing at 144. Much of this low score is due to the policies followed
by the Kirchner governments. Official sources claim that inflation over the period 2005-
07 averaged at 10.2 percent, supposedly declining from 12.3 to 8.5 percent. However, the
credibility of these figures has come under question because the government has
manipulated its data sources in an attempt to reduce contracted obligations tied to
inflation levels. Besides, a main tenet of the economic policy of these administrations has
been to regulate the prices of many goods and services, including electricity, water and
other essential services. There have been price agreements with producers and sellers,
particularly those of industrialized consumer goods, but the consensus is that most
intended reductions have not been achieved. In contrast, Australia’s high ranking is due to
its relatively low inflation rate which averaged 2.8 percent between 2004-05 and 2006-07
(ABS, Cat. no. 6401.0). Strong inflationary pressures have been present of late due to
expansion in Queensland and Western Australia driven by strong commodity demand,
particularly from China and India and other parts of Asia. There are no government
controls on prices, or price fixing agreements with producers and sellers. Only gas and
electricity prices are regulated, with certain forms of price discrimination aimed at
pensioners and people with disabilities.

4.7 Investment freedom

The methodology employed here examines the country’s policies towards foreign
investment and policies that monitor internal capital flows. The index assesses the free
flow of capital, especially foreign capital (Holmes et al., 2008, p. 41). These criteria are

62
 Drifting Apart: The Divergent Development Paths of Argentina and Australia

assessed to determine the health of the country’s investment climate. Australia’s

standing in an international sense is quite impressive, not having fallen from its position
when the index was created. Its current ranking is 8 compared to 50 for Argentina which
has deteriorated considerably from a ranking of 7 in 1995. In Argentina most local
companies may be owned by foreign investors and, as in Australia, domestic and
foreign investors have equal rights to establish and own businesses. In Australia
business investments of more than AU$10 million must be reported to the government
and may be rejected if they fail to meet the test of “national interest23“ There are
limitations to foreign investment in industries including media, banking, airlines,
airports, shipping, real estate and telecommunications. The Australian government
offers incentives to foreign investors, including tax breaks on research and development
investments, streamlined migration programmes, and grants for early stage
commercialization of projects. Australian nationals and residents and foreigners do not
face restrictions to access foreign exchange, and can conduct international payments and
capital transactions. There are no controls on capital repatriation. In contrast, foreign
investors in Argentina face restrictions in a number of sectors, including shipbuilding,
fishing, border-area real estate and nuclear power generation. There are also restrictions
imposed on internet companies. Many foreign firms have been involved in
privatizations, but the public tend to see in them a loss of national control. The
counterpart is the very low level of confidence on the part of foreign investors in
Argentina due to the frequency of economic crises in the country. For nationals, things
are not simple either. Repatriation is subject to controls and flows of capital are
restricted. The global financial crisis provided a good opportunity to reverse this, with
measures being taken to allow the return of funds deposited abroad. Nevertheless, the
sudden seizure of the pension funds led to a flight of capital seeking for more security.

4.8 Financial freedom

This index measures the relative openness of each country’s banking and financial
systems. It is constructed by capturing the extent of state intervention in banks and other
financial services, the ease with which one can open a bank account (both for domestic
use and for foreigners), and government influence on the allocation of credit. The index

23
The national interest is loosely defined as Australia’s goals and ambitions, whether economic,
cultural or national security.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

attempts to capture banking security, as well as independence from government control

(Holmes et al., 2008, p. 41).

The banking sector is crucial in promoting economic growth and stimulating economic
activity. Its primary function is to lend money for business start-ups, to buy a home and
furnish it; to purchase durable goods and services such as cars and pension funds or
superannuation funds; and a place where people can store their savings safely.
Government interference can have considerable bad economic impacts such as
Argentina’s financial policies that led to the corralito debacle of 2001. While the
Argentine peso remained pegged to the US dollar, the fears of a crash, due to the state
of stagnation of the economy, induced a flight of money (earned in pesos and
transformed into dollars) to safer places, draining the resources of the financial system.
By December 2001, the government froze all accounts, allowing only small weekly
withdrawals. This stopped the already weak flow of resources in the economy, leaving
the poorest segment of society in a state of despair. The ensuing riots of both the poor
and the middle class, who felt that their savings had been confiscated by the banks
under the tutelage of government, led to the downfall of the De La Rúa administration.
A period of severe economic hardship ensued, bringing with it strong social and economic
dislocation for the vast majority of Argentines. Contrast this to Australia during the early
1980s. The approach to financial deregulation, which according to the index of financial
freedom maintained a ranking of 1 since 1995, made it the role model of the international
financial sector, compared to Argentina’s poor standing at 105 in 2008.

Up to the 1980s the Australian financial system, as in many other parts of the world,
was heavily regulated. Much emphasis was placed on controls on bank lending, control
of the exchange rate, and exchange controls regulating movements between national and
foreign currencies (Industry Commission, 1991, p. 14). With accelerating globalization,
governments became unable to enforce the system and changes had to be made. In the
first half of the 1980s, the federal government had to respond to forces that were
undermining the system (e.g. large flows of international capital around the world). As a
response to these pressures, the Australian financial system began a process of
deregulation shortly after the election of the Hawke Labor government in 1983.

Pressures on Australia’s financial system came from different directions and included:

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

• International financial markets were becoming more open and there were fewer
restrictions on international capital flows. Combined with more sophisticated
technology, this enabled international capital markets to become more
integrated;
• Control by authorities over the financial system became less effective as the
controlled banking sector shrank relative to the uncontrolled non-bank financial
sector;
• Rather than helping to achieve social and economic objectives, many direct
controls on the financial system were found to be counter-productive. For
example, interest rate controlled housing and small business finance forced
borrowers to seek funds from higher cost alternative sources (Industry
Commission, 1991, p. 14).

Deregulation of the Australian financial system came about following a substantial

review known as the Campbell Committee which reported in 1981. In 1983 the Martin
Review Committee which reviewed the earlier report and made recommendations in
light of the government’s social and economic objectives. Both recommended a
substantial plan of financial deregulation of the financial system. The most important
deregulatory changes proceeded as follows:

• Many banking restrictions were removed in the early 1980s;

• Floating of the Australian dollar occurred in December 1983;
• The Australian Stock Exchange was deregulated in 1984;
• All interest rate controls were removed, except on owner occupied dwellings, in
1985 (Industry Commission, 1991);
• The granting of 16 foreign banking licences in 1985;
• Compulsory superannuation contributions commenced in 1991;
• There was an easing on inward FDI, including the ban of foreign takovers of
major Australian banks and insurance companies (Harper, 2005, p. 5).

These massive changes have transformed Australia’s financial system. The reduction in
regulation and related changes to the financial sector in the 1980s and 1990s saw it
transformed from a heavily regulated and segmented structure into one which is lightly
regulated by world standards. This was also followed by a proliferation of financial
services and products has benefited consumers generally. However, consumers have

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

suffered from malpractices that have occurred in a some sectors within the industry,
particularly in lending (Davidson, 1993, p. 104).

Absorption of these massive changes has not been easy and responses by policy makers
have resulted in some costly errors. Furthermore, the transitional processes from a
regulated to a deregulated market have placed heavy pressures not only on the financial
institutions themselves, but also on their employees.

Nevertheless, the impact of liberalization has been enormous. Effects include:

• Convergence of banking, insurance funds and funds management;

• Increased presence of on-line product offerings;
• Coordination of regulatory practice both nationally and internationally (Harper,
2005);
• Massive expansion of inward FDI to Australia and outward FDI from Australia
(Access Economics, 2004).

Australia’s financial deregulation is perhaps a case study of best practice and an

example to be followed in many parts of the world. An example of this is the recent
crisis in the US house subprime lending market which forced many to lose their homes
and sent financial shockwaves throughout the world. Such loans are very rare in
Australia and the practice is carefully monitored:

Australian banks have faced higher funding costs in the fallout from the US
subprime crisis, but the damage has been relatively light and signs are the
mortgage market here is improving, a top central banker said on Friday.
Speaking at a mortgage conference, Reserve Bank of Australia Assistant
Governor Guy Debelle emphasized the strength of domestic banks, which had
never taken the sort of risks with mortgages that wrought so much trouble in
the United States (Coles and Thornhill, 2008).

The above statement highlights the solidity of Australia’s financial sector. Curiously
enough, Argentina’s financial sector also seems strong, but this is the result of being,
since 2002, completely unlinked to the international financial markets.

4.9 Property rights

This index measures the ability that individuals have to accumulate private property,
protected by clearly defined laws that are enforced and secured by the state. It measures
the ability to accumulate private property, which is seen by the authors as the main

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

determinant of activity in a market economy, and the rule of law is vital to a fully
functioning free-market economy. Well structured, respected and enforced property
rights give citizens the confidence and ability to conduct commercial activities, save
their income and make long-term plans because they know that their income and
savings are safe from expropriation (Holmes et al., 2008, p. 51).

Australia ranks top of the world in terms of property rights. Its score of 90 across all the
selected years suggests that private property is guaranteed by the government and that
the government enforces contracts efficiently and quickly. The justice system is
designed to punish those who confiscate property in an unlawful or deceiving way.
Corruption is nearly non-existent (in comparative terms) and expropriation by the
government or others is very difficult. Protection of intellectual property rights meets or
exceeds world standards. Contracts are secure and enforceable and government
expropriation is most unusual. The rule of law is fundamental to the functioning of
government, and enforcement is even-handed.

In contrast, Argentina received a score of 30 and its ranking was also 30th in the world.
This implies that property ownership is weakly protected and the court system is highly
inefficient. Corruption is widespread and strongly influenced by other branches of
government. Expropriation is possible and occurs. The executive branch influences the
judiciary. Independent surveys indicate that public confidence remains weak, particularly
since the 2001-02 economic crisis. Courts are notoriously slow, inefficient, secretive and
corrupt. Many foreign investors resort to international arbitration. An important violation
of property rights is the piquete, by which protestors take over businesses, causing
extensive losses with no effective punishment by the police or the government. Piquetes
began in the 1990s, in protest against the privatization of YPF and the closure of
workplaces in the south.24 The growing movement gained international prominence as a
result of the economic crisis. It arose out of the frustration of disenfranchised groups of
workers who had lost their jobs as a result of many factories closing and becoming idle. In
some instances, piquetes have turned into aggressive mobs, taking over many demanding
“favours”. Some piquetes have also been taken over by political parties and since 2003

24
Yacimientos Petrolíferos Fiscales was Argentina’s petrol exploration and refinery
corporation. In 1999 Repsol assumed full control, becoming Repsol YPF, popularly known as
YPF.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

many have been coopted by the government which, in return for having them on its side,
gave them freedom to protest without interference.

4.10 Freedom from corruption

Holmes et al. (2008) define corruption as dishonesty or decay. In the context of
governance, it can be defined as the failure of integrity in the system, a distortion by
which individuals gain personally at the expense of the whole. The index is based on
quantitative data that assesses the perception of corruption in the business environment,
government and judicial system (Holmes et al., 2008, p. 41).

The most reliable source for measuring this phenomenon relies on Transparency
International’s Corruption Perceptions Index (CPI) which measures the level of
corruption scores of countries that are also listed in the Index of Economic Freedom. In
creating the index, data is sourced from the CPI, the US Department of Commerce, and
the Economist Intelligence Unit. Australia ranked as the 9th least corrupt country in the
world whereas Argentina ranked 90th (Holmes et al., 2008, p. 53). Corruption is
perceived as minimal in Australia. The least corrupt country in the world in 2008 was
New Zealand. In contrast Argentina suffers from severe problems, and is ranked 93rd
out of 163 countries in the 2006 CPI. It is in the same category as Bosnia-Herzegovina
and Tanzania where corruption is perceived to be widespread. Foreign investors
complain frequently about both government and private sector corruption.

In Argentina, to do business means frequently to have to negotiate details with the

authorities. It is commonly understood that those in charge will make a profit out of
those who request permissions. In the case of public works and other activities funded
by the state, things are even worse, since it is usual to negotiate an overprice much of
which goes to the government officials involved. Historically Argentina has tolerated
that kind of behaviour, but it has become more pervasive and the amounts of money
involved, while unknown, seem to be quite large.

4.11 Labour freedom

Since 2007, the labour freedom index is designed to measure labour market regulations. It
is a composite measure of workers and businesses to interact without restrictions by
governments (Holmes et al., 2008, p. 41). Four quantitative components are weighted as
25 percent of the labour freedom factor: minimum wage, rigidity of hours, difficulty of

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

firing redundant employees, and cost of firing redundant employees. Data comes from the
World Bank, Economist Intelligence Unit and US Department of Commerce (Holmes et
al., 2008, p. 53). Australia’s labour freedom ranked 3rd in the world in 2008, while
Argentina’s ranking was 113th. Australia’s labour market operates under highly flexible
regulations that enhance employment creation and productivity growth. The non-salary
cost of employing a worker can be moderate, and dismissing a redundant employee is
costless. This is the result of the implementation of economic and institutional reforms
occurring over three of decades. As many other economies have experienced fundamental
changes, so has Australia’s, including in its institutions. In Australia, New Zealand and
the UK these were characterized by the decentralization of collective bargaining
structures that began in the early 1980s (Wooden and Sloan, 1998). A common feature of
these countries was that, in relative terms, they had reasonable levels of union
participation in their workforce, and trade unions played an important role in negotiating
wages outcomes for their members, as well as in national policy matters.

The UK began the process of transforming industrial relations after the election of the
Thatcher Conservative government in 1979. The salient features of this process were the
decentralization of pay determination, the growth of plant and individual bargaining,
and the decline in industrial action by unions and their membership (Wooden and Sloan,
1998, p. 197). The changes in New Zealand were far more dramatic, beginning with the
Employment Contracts Act 1991. This had the effect of accelerating the process of
change with the abolition of the award system, and trade unions losing many industrial
and legal rights (Wooden and Sloan, 1998, p. 198). Changes in Australia did not occur
with the same severity and speed. According to Campbell and Brosnan (1999) there was
a gradual process of labour market deregulation, characterized by “slow combustion
rather than Big Bang [the New Zealand experience], and it continues to splutter and
send out sparks” (p. 354). However, the changes have been of a fundamental nature,
particularly in the way in which labour relations have been altered.

Wooden (2001) summarizes five features of the major changes that have occurred in the
Australian industrial relations system over the last 20 years. The first relates to the
spread of enterprise bargaining. The distinctive feature of the system was compulsory
conciliation and arbitration, characterized by independent quasi-judicial industrial
tribunals that had the power to stipulate legally binding awards that were required to be

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

arbitrated or certified by these tribunals (Campbell and Brosnan, 1999, p. 354). This
situation has changed considerably with most bargaining occurring at the enterprise
level and most awards providing a starting point from which wages and other conditions
are negotiated (Wooden, 2001, p. 244). A second significant feature concerns the role
that trade unions now have in the bargaining process of wage determination and
employment conditions. Before 1993, most industrial agreements would have required
union participation. Today, New South Wales is the only jurisdiction where provisions
for non-union agreements do not exist. A third significant change has been the
introduction of legislation (Workplace Relations Act 1996) that gives employers the
flexibility to use individually negotiated employment agreements that can supplement
and/or replace existing awards. Changes to the role of industrial tribunals have also
been a significant aspect of labour market deregulation, much of which has been
designed to diminish their significance and power. Clearly this is a reflection of the
Commonwealth government’s (both Labor and Liberal with the introduction of the
Industrial Relations Reform Act 1993 and Workplace Relations Act 1996) push towards
enterprise-bargaining structures with the end result of ensuring that employers and
employees negotiate workplace arrangements without intervention by unions or other
third parties. Furthermore, the role of the Australian Industrial Relations Commission in
the arbitration of disputes has been reduced considerably, in the sense that it no longer
has the power to impose arbitrated awards, and has been confined to disputes that relate
to matters of awards and where the operation of essential services is in jeopardy
(Wooden, 2001, p. 247). Finally, the changing nature of industrial relations has
impacted significantly on union membership. Since the 1970s the proportion of
employees who are members of a trade union has fallen by 19 percentage points
(Hawke and Wooden, 1998, p. 76). Whether this is entirely due to changes in industrial
relations is difficult to ascertain. It is possible to argue that much of the decline in union
participation has been due to changes in the composition of employment that favoured
industries that would employ a traditionally non-unionized workforce, rather than
changes to the industrial relations system:

the most important changes … being the shifts in the industrial structure of
employment, the relative decline in public sector employment and the relative
growth of casual employment. Our best guess is that the net effect of structural
change was to reduce the overall unionization between 1982 and 1996 by
somewhere between 40 and 45 percent (Hawke and Wooden, 1998, p. 79).

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

More recent data suggests that the proportion of employees who are members of a union
stands at 19 percent (ABS, 2008, Cat. no. 6310.0).

In summary, the Australian experience centres around the fact that enterprise bargaining is
in the process of replacing arbitration as the dominant industrial relations paradigm, with
employers and employees now expected to negotiate working conditions and productivity.
These changes have provided a high degree of labour market flexibility, in spite of some
changes having been made by the recently elected Rudd Labor government.

According to Galiani and Gerchunoff (2003), Argentina’s labour market over the last
century experienced fundamental change and evolution. Whereby initially wages were
mainly determined by the business cycle and the costs of firing and hiring workers
were virtually unimportant, the labour market has evolved to one “characterized by
both explicit and implicit long-term commitments between firms and workers”
(Galiani and Gerchunoff, 2003, p. 122). This has seen the creation of a labour market
where employers and employees experience high levels of regulation which impact
negatively on job creation, productivity increases and flexible employment
arrangements. For example, the non-salary cost of employing a worker is high and the
costs of dismissing a poorly performing employee are also expensive to employers.
Despite attempts by various governments to reform labour regulations, barriers to
increasing market flexibility have not been successful. Galiani and Gerchunoff (2003)
maintain that, as in Australia and New Zealand, labour relations consist of various
forms of agreements at the industry level with the corresponding industry trade union
representatives (p. 133).

Argentine unions also dominate a large portion of the health system. Since labour
unions have adhered openly to the Peronist party, each time this faction has been in
power (18 years in the last quarter of a century) the government gave increasing
competences and attributions to the unions. In 2008 the Supreme Court decreed the
freedom of affiliation of workers to unions of choice, but the powerful Peronist unions
successfully pressured the Kirchner administration to impede the enactment of this.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

4.12 The Human Development Index

In looking at the relative performance of Australia and Argentina, we have compared and
contrasted the Heritage Foundation’s Index of Economic Freedom and each of the ten
indices that comprise it. For each of the indices we find that the performance of Australia
compared to that of Argentina has been much better. As stated earlier, there has been
criticism labelled at the Index of Economic Freedom. However, in comparing these two
nations it can be reasonably argued that, in spite of the limitations stated earlier, Argentina’s
economy and society has lagged in many areas, and in others it has deteriorated.

We now turn to a different index that we can use to compare the relative
performance of Australia and Argentina. The Human Development Index (HDI) is
produced by the United Nations Development Programme (UNDP). It is constructed
on a yearly basis and was first published in 1990. The nation’s ranking of human
development has been reported on a worldwide basis as part of the Human
Development Report. The index was created to compare the progress of human
development between nations and to establish if improvements in countries around
the world have been made. It was created in part as a response to the failings of
other measures of human performance. Todaro and Smith (2009) among other
authors argue that measuring poverty is a complex undertaking. Comparative
measures such as the Gini coefficient and, in particular, poverty lines are incomplete
instruments in their capacity to capture the complexity of poverty between nations.
In many aspects, poverty lines as measures of human development performance can
become meaningless or not very accurate instruments of measuring comparative
performance across nations. For example, they tend to possess strong judgmental
and cultural elements in how they define poverty. Also, differences arise due to
variations in the share of income spent on food by different groups and in different
locations. Another limitation is that the relationship between calorie intake and
income and consumption are not necessarily the same across nations. For example,
is a person in the south of Brazil who eats more meat (which is more expensive and
a greater source of protein) better off in health terms than a person in the north of
Brazil who has a diet based on beans, rice, vegetables and less amounts of beef?
Finally, another limitation of poverty lines is that they do not capture other
dimensions of welfare such as health, life expectancy, access to public goods, clean
water, literacy or other forms of education.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

In response to these limitations, the UNDP appointed the Pakistani economist Mahbub ul Haq
as Project Director to develop the HDI in 1990. In this project he was assisted by Gustav
Ranis and an advisory team of Keith Griffin, Meghnad Desai, Pietro Garau, Nobel Prize
winner Amartya Sen and other prominent economists and academics. Each year, the index
places emphasis on a specific issue of global importance. For example, in 2007-08 the Human
Development Report considered the theme: “Fighting climate change: Human solidarity in a
divided world”. Human development was defined in the initial report as:

a process of enlarging people’s choices. In principle, these choices can be

infinite and change over time. But at all levels of development, the three
essential ones are for people to lead a long and healthy life, to acquire
knowledge and to have access to resources for a decent standard of living. If
these essential choices of living are not available, many other opportunities
remain inaccessible … Human development has two sides – the formation of
human capabilities, such as improved health, knowledge and skills – and the
use people make of their acquired capabilities (UNDP, 1990, p. 10).

Human development has become a broader concept over the years, including economic,
political, ethnic, social and environmental sustainable freedoms. The HDI measures the
average achievements in a country in three basic dimensions of human development:

• Longevity, as measured in terms of life expectancy at birth;

• Knowledge and education, as measured by the adult literacy rate and the
combined primary, secondary and tertiary gross enrolment ratio;
• The standard of living, as measured by the natural logarithm of GDP per capita
at purchasing power parity in US$ (Todaro and Smith, 2009, p. 49).

The index has undergone a number of changes, particularly in its calculation. A major
advantage is that it can show that a country is doing better than expected at low levels of
income, and that large gains in income may not necessarily achieve improvements in
living standards (Todaro and Smith, 2009, p. 51).

The HDI report is prepared and launched yearly as part of the UNDP. The 2007 report
was launched in Brasilia on 27 November 2007. Its theme was “Fighting climate
change: Human solidarity in a divided world”. Most of the data used is derived largely
from 2005 or earlier, thus indicating an HDI for 2005. Not all UN member states choose
to or are able to provide the necessary statistics.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

The HDI ranges from 0 to 1. The more developed the country is, the closer it is to 1. A
below 0.5 is considered to represent “low development”, whereas a HDI of 0.8 or more
is considered to represent “high development”. Both Australia and Argentina have
consistently been ranked as high human development countries. Since 1994 Australia
improved 11 places in its ranking, while Argentina lost two, although it has oscillated in
the 30s throughout.

Table 4.4: Human Development Index (HDI), various years

Year Australia Argentina

Rank Index Rank Index
1975 N/A 0.851 N/A 0.790
1980 N/A 0.868 N/A 0.804
1985 N/A 0.880 N/A 0.811
1990 N/A 0.894 N/A 0.813
1994 14 0.931 36 0.884
1995 15 0.934 36 0.836
1997 7 0.922 39 0.827
1998 4 0.929 35 0.837
1999 2 0.936 34 0.842
2000 5 0.939 34 0.844
2001 4 0.939 34 0.849
2002 3 0.946 34 0.853
2003 3 0.955 34 0.863
2004 3 0.957 36 0.863
2005 3 0.962 38 0.869
Change 1994-2005 11 3.3% -2 -1.7%
Change 1975-2005 N/A 13.0% N/A 10.0%
Source: Human Development Report (various years). N/A denotes ranking not available.

Over a longer period (1975-2005) the HDI improved by 10 percent for Argentina and
by13 percent for Australia. This contrasts with a decline of 1.7 percent for Argentina
between 1994 and 2005, while for the same period Australia improved by 3.3 percent.
This indicates that in relative terms, and according to the measures that the index
captures, the quality of human development has improved for Australia but declined to
some extent for Argentina. The main explanation is that Australia’s steady economic
growth is benefiting the population at large, whereas Argentina’s stop-start growth
behaviour is having an adverse impact.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

5. Conclusions
What have we learned from this exercise? At least two clear lessons can be drawn. One
is that Argentina has been left behind while Australia moves ahead steadily. The second
is that in many non-cultural and non-institutional aspects, the nations remain quite
close.

So, going back to the counterfactual analysis promised in Chapter 1, given the
proximity between Argentina and Australia in a certain number of real economic
aspects, the differences in performance have to be attributed to the non-similarities
between them, that is, to cultural and institutional aspects.

It could be interesting to determine the turning points in the relation between the two
countries. Of course, even if it were easy to pinpoint a date, it could be that the
divergence arose from a build-up of small effects that became evident at that point.
Nevertheless, by the end of the Second World War their development paths became
evidently different.

To attribute the poor performance of Argentina relative to Australia to cultural factors

can be misleading. In Argentina already in the “good” times the rule of law was seen as
a burden. The “Mediterranean” culture, shared by Argentina, has not precluded the
growth and development of nations like Italy or Spain. On the other hand, the very
example of those nations has shown that the disruptive elements of their cultures were
tamed by two elements. One was the adherence to an institutional framework, shared by
the rest of Western European nations. The other was the steady substantial support in
resources flowing down from their more affluent partners (mainly Germany). Of course,
the former aspect was a condition for the latter.

In the case of Argentina, then, when no further steady inflows of foreign resources
came, unlike what happened in the era of close partnership with the British Empire, it
was due to the lack of trust in the nation’s institutions. This, in turn, was because it
remained stuck in an institutional matrix paradigm that does not allow the development
of institutions to operate efficiently. In other words, Argentina lacked a set of
socioeconomic conditions that provide the foundations to develop relatively quickly and
well over a period of time – such things as freedom to trade (including labour freedom),
low or non-existent levels of corruption, well defined property rights, a method of

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

enforcing property rights, respectable governance procedures and low levels of arbitrary
government intervention.

This institutional paradigm arose, in turn, in response to the heavy challenges of the
Great Depression and the Second World War and became the trademark of a military-
led program of development, initiated by Juan Perón but followed in other guises by
many administrations until 1983. Then, the democratic regime tried to fix the system,
with sporadic successes followed by serious downturns.25

The full-hearted adoption of an open-access institutional matrix seems to be a

precondition for a more successful design of policies. Even so, as the current
international financial crisis is showing, pure institutional hygiene is a necessary but not
sufficient condition of success (cf. the case of Iceland). A balancing act is called for to
resume, if it is still possible, a sustained path of development in Argentina. On the one
hand, the right institutional setting must be implemented. On the other, Argentina has to
find its place in the world, particularly articulating a strong export economy in
partnership with its customers.

25
At time of writing, many of the good results reported in previous chapters are going back to
normal.

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 Drifting Apart: The Divergent Development Paths of Argentina and Australia

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