18/07/2022

Federalism, Politics and Development

Argentina has had two cycles of economic development. The first, starting with the national organisation, focused on agricultural production and exports and an early industrial development. It resulted in exponential growth that can be explained by the country's integration into international trade, when it experienced its first globalisation through the expansion of the agricultural frontier and massive immigration. There was no income tax or co-participation system. The national state was basically funded by taxes on foreign trade and the provincial states by indirect taxes. 

The following paragraph from a paper by historian Paula Alonso illustrates the nature of the federal political game of the time: (sic)... The federal system and the indirect election of the president granted a fundamental role to provincial governors, who generally controlled politics in their district by securing representation in the Electoral College. In turn, with the institutional, administrative and military resources, the president was in a position to exert great influence over those who controlled provincial politics, and whom the president needed to manage national politics, congressional representation and the presidential succession... (1)

Aside from the inevitable political conflicts of a changing society and a nation in the process of consolidation, the political system in place was not dysfunctional to the economic growth model.

As a political, business, cultural and financial centre and a gateway for immigrants, the city of Buenos Aires grew at a phenomenal rate, as did the provincial interior and the provinces of Cordoba and Santa Fe, which were the bases of agricultural expansion. The cycle culminated with the crisis of the 1930s and the Second World War. 

The second cycle of Argentine economic development followed the paradigm of import substitution industrialisation (ISI). 

Given the inevitability of import substitution due to the disruption of trade, the continuity of the ISI required public policies. In the first stage, this was done through import tariffs that facilitated easy substitution industrialization; i.e., that which did not require large capital and technological investments. Foreign investment also profited from the protected market. In the second, more difficult substitution stage - steel, cellulose and paper, petrochemicals - the ISI required more elaborate policies and significant subsidies. 

From the beginning of the ISI, factories found their market and migrant workers were employed in large urban concentrations. The process fed back on itself with more market and more factories to supply it. This is what drove the growth of Greater Buenos Aires: between the 1947 and 1960 censuses it reached 5.9% cumulative annual growth, and between 1960 and 1970 it reached 3.6%. When the model reached exhaustion, the population growth slowed down and the Buenos Aires Metropolitan Area and other inner cities became the main locus of poverty. Thus, inner cities were left in a state of chaos where the disadvantages of agglomeration outweighed its benefits: insecurity, poverty, unemployment, drug trafficking, pollution, lack of services, disputes over land use, and marginality.

Under the ISI, public management was the exclusive responsibility of the national government: mainly customs tariffs, reduction (or elimination) of national taxes, subsidies and credits for companies.

Regional policies were also a national matter: subsidies were given for the establishment and operation of industries in backward provinces. The demands of provincial politicians concentrated on lobbying for such schemes. This model of regional industrial settlement was abandoned all over the world because it did not create permanent productive networks, but rather, the post-operational benefits consolidated industries that were sustained by these subsidies. Then, the lobbies in defence of the privileges used the workers of the subsidised companies as hostages to sustain the systems. As a remnant of this model, Tierra del Fuego's regime still survives.

From the mid-1970s onwards, the country abandoned all economic development policies, while in the leading countries new paradigms were established, until in the 21st century, economic development became knowledge-based: research, development and innovation (R+D+I), based on science, technology and creativity and - above all - on the speed of circulation of innovation in the productive fabric. The centrality of knowledge means that global competition, in economic, geopolitical and military terms, is ultimately a competition between education systems.

Development management became multi-tier, and the provincial and municipal levels became the critical ones. The reason is simple: the innovation process in large corporations is in-company, but the technological strengthening of SMEs - integrated into the value chains of large companies - and the dynamics of the creation of new companies (start-ups) gained crucial importance. The new stakeholders in development are local clusters that bring together companies, the school system, science and technology centres and local states. All of this is integrated with national policies at the service of these networks.

Argentina's difficulty in assimilating the new paradigms is due to the fact that most of Argentina's provinces are "hybrid regimes" - as defined by Carlos Gervasoni - "provinces that combine formally democratic institutions with some democratic procedures and clearly authoritarian practices...". These provinces, with smaller populations, live off remittances from the nation and/or oil or mining revenues. They are - in Gervasoni's words - revenue-seeking provinces. (2)

The authorities in these provinces have no motivation to manage their development or to improve their education, because their governability depends on votes from below and cash flowing from above. The most effective way to preserve power is to use the funds to expand public employment, subsidies, and public works "to be noticed" at the time of the election. This logic is functional to the national government because the provinces are over-represented in the National Congress: their loyalty is a requirement for national governability.

The governments of the provinces of Córdoba, Santa Fe and Mendoza, with complex productive networks and an autonomous civil society, respond to social demands with development policies and better education, although, in the absence of national policies, they lack a decisive element: the presence of the national government in the "multi-tier" management of development. They are at odds with regions that rely on the national level through funding, investments and institutional frameworks to support their competitiveness.

The province of Buenos Aires, despite being the most productive in the country, is hostage to the explosive Buenos Aires Metropolitan Area, whose mayors respond to a logic similar to that of the provinces with their hybrid regimes. It is a province without development and education policies such as those of Córdoba, Santa Fe or Mendoza.

The incentives of the federal political system hinder Argentina's development in accordance with the paradigms of the 21st century. They also inhibit territorial cohesion and the decentralisation of Buenos Aires and Greater Buenos Aires in favour of a more even demographic distribution throughout the territory.

(1) Cf. Paula Alonso. La política y sus laberintos, Partido Autonomista Nacional entre 1880 y 1886. In: La vida política en la Argentina del siglo XIX, armas, votos y voces. Compiled by Hilda Sábato and Alberto Lettieri. Fondo de Cultura Económica. 2003

(2) Cf. Carlos Gervasoni. Hybrid Regimes Within Democracies: Fiscal Federalism and Subnational Rentier States. Cambridge University Press, 2018. Democracies and Authoritarianism in Argentine Provinces. Contributions to the debate, 2018.

Luis Rappoport is an economist and professor at the Universidad Nacional de General Sarmiento. He is specialized in Economic Development and, particularly, in the institutional problems of development management.  He is a member of the Argentine Political Club.