The Four Types of Economies And The Global Imbalances

The great midcentury economist Simon Kuznets is said to have said (this is one of those lines that’s too good to abandon just because it may have been apocryphal) that there are four kinds of countries: developed countries, underdeveloped countries, Japan, and Argentina.

The interesting thing is that since he said it, the “Japan” category has really melted away. Japan led the path in showing how an underdeveloped country could become a developed one, but countries like Singapore, South Korea, and Taiwan have also walked down that path and China and others look to be doing the same. But Argentina really still is a land unto itself. Here’s a story, for example, about Argentina’s aspirations to engage in a little export-led growth through the aviation sector which seems natural in some ways since Argentina is adjacent to Brazil which has already done this. Except after several paragraphs of talking about how a former Lockheed Martin plant is going to build planes for the Argentine military that they hope will later be exported elsewhere, you get down to this:

Plans are also afoot for Argentina to enter into cooperation with Brazilian aircraft maker Embraer. Current trade tensions between the neighbors have put the project on the back burner.

The good old back burner. And this rather than anything related to the oil industry is the problem with nationalizing a Spanish-owned oil company. When the president of your country has to say things like “I am a head of state and not a hoodlum” your foreign direct investment projects tend to stay on the back burner. It’s very much an illustration of the problem with extractive political institutions.

But I think it also sheds some light on the fabeled “global imbalances.” China is so large and was formerly so poor that its advance from poverty-stricken to low-middle-income has really fueled the worldwide growth picture. At the same time, its per capita GDP is still only half of Argentina’s and whatever you might say about Argentine political dysfunction and lack of strong property rights it’s not a dictatorship run by the Communist Party with little pictures of Mao Zedong on its money. It’s actually extremely understandable that people would like to avoid the kind of “exproportion risk” involved in keeping all your eggs in that particular basket. Yet at the same time if you could somehow ignore these risks, China seems like the place where the good investment opportunities are. The combination of the two can tie the worldwide flow of capital into knots.