Institutions and Endowments: State Credibility, Fiscal Institutions and Divergence, Argentina and Australia, C
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Institutions and Endowments: State Credibility, Fiscal Institutions and Divergence, Argentina and Australia, c. 1880-1980 Andrew Hunter Mitchell For the Degree of Doctor of Philosophy London School of Economics and Political Science, University of London August 2006 1 Abstract The thesis compares Argentine and Australian fiscal systems from the late nineteenth to the late twentieth centuries. It uses institutionalist and endowments approaches to evaluate the importance of state credibility and taxation on long run economic development. After rapid convergence in the early twentieth century, Argentina and Australia clearly diverged in the latter twentieth century. Divergence emanated from different institutional experiences, which ultimately originated from dissimilar experiences of state credibility. State credibility is the extent to which society trusts the state to act in its interests. Fiscal institutions are a clear and comparable measure of state credibility over time as they frankly express underlying political economy. As Argentina and Australia were once similarly successful settler economies with comparable geographic prospects for development, the comparison promises to transcend geographically deterministic explanations for development. Geography primarily consists of factor endowments and location. In fact Argentina was better placed to succeed in geographic terms than Australia. Yet Australia, not Argentina, secured the status of a developed country. Australia and Argentina exemplify the relative insignificance of geography in shaping development. Divergence resulted from a failure of Argentine institutions to generate sufficient space for negotiation and compromise, and a ‘latent civil war’ was entered from the 1930s until the early 1980s. A key finding of the thesis is that divergence in fiscal institutions, especially differing capacities to embed progressive systems of direct taxation was crucial to divergence in development. This finding is based upon the discovery of new evidence and the harmonisation of fragmented time series which enable comparison over a long period of time. Argentina and Australia took different paths in the latter half of the twentieth century due to distinct institutional environments and their legacies for social consensus and development. 2 Table of Contents Page Introduction 8 Chapter One: The Fiscal Roots of Argentine and Australian Divergence 16 Chapter Two: Political Economies of Argentina & Australia 61 Chapter Three: A Broad Comparative Fiscal History 119 Chapter Four: Public Goods, Public Credit, & State Credibility 166 Chapter Five: The Crux of Divergence, Income Taxation 232 Conclusion 277 Statistical Appendix 292 Sources 361 3 List of Figures & Tables (outside Appendix) Figures 1.1 Australian Exports by Value, 1861-1985 36 1.2 Proportion of Total Land Area according to holding size, Australia 1910-11, Argentina-Pampa 1914 40 1.3 Proportion of Total Land Holdings according to holding size, Australia 1910-11, Argentina-Pampa 1914 40 1.4 Concentration of Land Ownership in Buenos Aires Province, hectares 41 1.5 Argentine GDP per capita and Population relative to Australia, 1870-2001 44 1.6 Argentine GDP per capita relative to selected countries, 1900-2001 48 1.7 Australian GDP per capita relative to selected countries, 1870-2001 49 1.8 Growth in GDP per capita, selected countries, compound interest rates 51 1.9 Exports relative to GPD, Argentina and Australia, 1900-1996 52 1.10 Argentine Exports relative to Australian Exports per capita, US$, 1948-2002 53 3.1 Federal Revenue to GDP, Argentina and Australia, 1884-1982 135 3.2 Government Expenditure to GDP, Argentina and Australia, 1884- 1982 137 3.3 Budget Deficits to GDP, Argentina and Australia, 1884-1988 139 3.4 Argentine Export Taxation as a % of Federal Revenue, 1864-1993 141 3.5 Direct Taxation as a % of Revenue, Argentina and Australia, 1880- 1982 147 3.6 Indirect Taxation as a % of Revenue, Argentina and Australia, 1880-1982 147 3.7 Sources of Argentine Taxation, 1864-1993 151 3.8 Sources of Australian Taxation, 1850-1982 152 3.9 Disaggregated Argentine State Expenditure, 1863-1993 157 3.10 Disaggregated Australian State Expenditure, 1850-1982 158 3.11 Rural versus Urban direction of Australian Public Expenditure, 1860-1975 160 4.1 Argentine Railway Mileage, 1857-1910 175 4.2 Open Railway Track, Argentina and Australia, 1871-1911 175 4.3 New Argentine Road Construction per annum, km, 1933-68 181 4.4 Loss on Argentine State Enterprises, as a % of Federal Deficit, 1950-61 189 4.5 State Enterprises as a % of Total Argentine State Expenditure, 1960-88 190 4.6 Sources of Total Australian State Revenue, 1850-1962 197 4.7 Australian Public Goods Provision, Primary Producers & State 198 Enterprises 4.8 Debt per capita in US$, Argentina and Australia, 1883-1971 203 4.9 Public Debt to GDP, Argentina and Australia, 1870-1982 205 4 4.10 Debt Servicing as a % of Expenditure, 1863-1971 207 4.11 External Debt to Exports, Argentina and Australia, 1900-71 208 4.12 Real Government Bond Yields, Argentina and Australia, 1900-72 210 4.13 Internal Debt, Argentina and Australia, 1901-71 212 4.14 Total Annual British Investment Flows to Argentina and Australia, 1865-1914 215 4.15 British Investment in Australia, 1865-1914, 5 year moving average 216 4.16 British Investment in Argentina, 1865-1914, 5 year moving average 217 4.17 Argentine Public Bond Spread over Australia, 1870-1935 218 4.18 Budget Deficits to Revenue, Argentina and Australia, 1880-1982 220 4.19 Annual Debt + Monetary Increase/ Budget Deficits, Argentina and Australia, 1921-80 221 4.20 Balance towards Money Creation out of Annual Debt + Monetary Increase, Argentina and Australia, 1921-71 222 4.21 Currency Annual Growth Rates, Argentina and Australia, 1884- 1974 223 4.22 Argentine Seigniorage as a % of Deficit Financing, 1929-72 223 4.23 Annual CPI in Logs (base of 10), Argentina and Australia, 1935- 2003 224 4.24 Australian Annual Growth in Tax & Debt, 1852-1982 226 4.25 Argentine Annual Growth in Tax & Debt, 1865-1980 226 4.26 Argentine Federal Revenue & Debt to GDP, 1884-1985 227 4.27 Australian Federal Revenue & Debt to GDP, 1850-1982 228 5.1 Income Taxation as a % of Revenue, Argentina and Australia, 1915-92 258 5.2 Dependence of Income Tax on top quarter of income taxpayers and proportion of population paying Income Tax, Argentina and 261 Australia, 1932-44 5.3 Dependence of Income Tax on top quarter of income taxpayers and proportion of population paying Income Tax, Australia, 1915-70 263 5.4 Taxable Income and Income Tax Paid to GDP, Argentina and Australia, 1935-52 264 5.5 How Few? Dependence of Income Taxation on Wealthy Elites, 1932-44 265 5.6 Average Income Tax Rates, Inflation, & Evasion, Argentina and Australia, 1932-70 268 5.7 Balance between Average Income Tax Rate & GDP Growth, Argentina and Australia, 5 year moving averages, 1916-70 270 5.8 Balance between Income Tax revenue growth and Average Income Tax Rates, Argentina and Australia, 5 year moving averages, 1933- 272 62 5.9 Argentine Bracket Creep in real terms, 1932-62 273 Tables 2.1 Use of the Argentine Federal Intervention Clause 71 3.1 War Expenditure of the first three national Argentine 128 administrations 5 Acknowledgements I owe a special debt of gratitude to my parents, whose generous financial support was crucial to completing the thesis. Colin Lewis is an exceptional supervisor, without whose hard work, insights and constructive criticism this thesis would be far less, if at all. His editing skills are truly gifted and remarkably thorough. My wife Marissa supported me emotionally throughout, enjoying our relocations to Argentina and Australia, tolerating endless discussions of the thesis without complaint, and improving many of the ideas contained within. I am also grateful to the many people in the Department of Economic History at the London School of Economics whose kind and constructive criticisms were highly beneficial – particularly Tim Leunig, Janet Hunter, and Chris Vellacott. Thanks also to the exceptionally friendly and helpful staff of the Tornquist library in the Central Bank of Argentina, who went out of their way to make research there a real pleasure. Finally this thesis is dedicated to Luke Hahn Mitchell, whose birth in the month before final completion of the thesis has been an incredible gift, and who kindly gave his parents an exceptional amount of sleep by all accounts. It goes without saying that all of these people improved the thesis, and none of them bear any responsibility for faults. 6 ‘Australia’s total area is roughly similar to that of Brazil’s … but Brazil’s soil is more than twice as fertile. … Brazil abounds in large rivers … whereas Australia is very poor in waters and soil fertility, with only one river of medium size. … Nonetheless Brazil not only has a much inferior level of productivity than Australia, but is also much poorer in production, income, industry, wealth, culture and political and intellectual liberty. … [Yet] Brazil has a constitutional government under the most able monarchy, … with more than three centuries of colonisation, while Australia has not even been colonised for a century! … How will the generally backward Latin populations, superstitious and ignorant, with so many physical and moral obstacles to progress, ever compete with the noble, intelligent, strong, free and industrious Anglo-Saxon and Germanic races? Only with good and progressive governments, such as we [Argentina] and Brazil have today, will we approach the degree of freedom, skill and culture that they display. … This inferiority is not due to race or character. Fortunately it is due solely to a complete lack of intellectual and moral liberty, and of political, scientific, and industrial education.’ (Newton and Llerena 1882), Volume V, pp.322-4 ‘No deus ex machina translates endowments into political outcomes. Were it so, Argentina would be as rich as the United States; and Hong Kong, Japan, and South Africa would never have become rich.’ (North, Summerhill et al.