Volume 44, Number 175,
October-December 2013
The Takeover of Soy and Dutch Disease in Argentina:
An Agricultural Curse?
Alicia Puyana and Agostina Constantino

In the basic model of Dutch disease, external booms, brought on by increases in prices in exported products (wheat, corn, coffee, soy, etc.), or due to the discovery of mineral deposits, cause the contraction of commercial or tradable productive sectors (of exportable goods that are not in boom, or importable goods produced nationally that compete with imports). This reduction in activities linked to foreign trade is the result of the appreciation of the real exchange rate, in other words, the growth of the ratio of prices of non-tradable and tradable goods, and the transfer of productive resources (labor and capital) from the latter to the former. These trends are aggravated by the characteristic instability of raw material prices: intense increases and severe contractions that require constant adjustments in spending.

The effects of the natural resources boom on the national economy may be studied in two phases. The first ascertains that its only effect is the increase in demand for labor by the sector in boom, stimulated by greater profitability. As long as the model assumes full employment, this increase in demand for labor raises overall salary levels and leads to a transfer of labor from sectors that are not booming (manufactures and services) to those that are growing. This phenomenon, known as the “resource movement effect,” depresses manufactures, which translates into a price increase as the additional demand is satisfied with imports. In this way the market balance is maintained but with less internal production. This then generates so-called "direct deindustrialization." The discrepancy in the real exchange rate intensifies this effect, sharpening unemployment. "De-agriculturalization" is the phenomenon, corresponding to what was described above, that occurred in oil countries as a result of oil price booms in the 1970s.

In the second phase, two phenomena re-valuate the real exchange rate, that is, the increase in the relative price of service sector goods (non-tradable). First, affecting relative initial prices, the resource movement effect reduces the supply of services by bringing about the transfer of labor to the sector in boom and creating excess demand for services, and as such, an increase in their relative price. Second, if part of the additional income from the boom is spent domestically, and assuming that the services are normal goods (that is, the demand for services increases when income grows), their demand will increase, in a quantity beyond the growth driven by the resource movement effect. This phenomenon is known as the “spending effect.” Together with the “resource movement effect," it generates an excess of demand for services. To restore the market equilibrium, the price of services increases in terms relative to manufactures.

According to the Dutch disease model, economic stabilization results from the process described above, brought on by changes in relative prices. In other words, it assumes that the re-valuation of the real exchange rate, an effect of external boom, is the optimal mechanism to adjust the market in light of an external shock, and therefore, no intervention can be justified. The basic assumptions of this model are the principles of neoclassical theory, starting at an equilibrium situation to arrive to a new one, following a permanent external shock: i) the law of one price; ii) full employment and perfect mobility of factors from one sector to another and iii) perfect mobility of salaries and prices.

This model has severe limitations that are of special relevance to Latin American nations. The assumptions of full employment, flexible prices and competitive markets are not applicable in developing nations, where unemployment and rural and urban under-employment tend to be the norm, as is the case for extreme income concentration and concentration of all forms of capital: productive, financial, human and natural, where the concentration in Argentina is very high and growing. This means that neither the resource movement nor the spending effect operate in the way and as quickly as the theory assumes.

Keynesian and structuralist approaches question the validity of the neoclassical model, especially in its application to developing countries. The former approach believes that the production level is determined by demand and the spending effect could expand the national supply of tradable goods, if there were unused resources before the boom. On the other hand, the structuralist approach goes beyond this and does not accept the validity of the one price and full employment, doubting the power of relative prices to assign resources in an ideal manner. It also emphasizes differences by sector and believes that despite the presence of idle features, the sectorial supply is inelastic to changes in relative prices. In these circumstances a boom could give rise to substantial changes in relative prices but with a limited effect on the economic structure. Furthermore, a real re-valuation, such as the type considered by the conventional model of Dutch disease, could have adverse effects on income distribution by benefitting profiteering sectors and hurting more dynamic sectors.

In the long-term, the evolution of a nation's economy is determined by the effects of external shocks, whether they are positive or negative, on the savings-investment process and on the productive chains of primary activities. For soy exports in Argentina, where production is highly concentrated in few, very large producers and the State only participates through the taxes it collects (on exports of the crop, earnings of producers, real-estate tax, etc.), the productive chains will be weaker (both due to the concentration of the consumer capacity of the large landowners as well as the minimum labor required by the activity) and the final effects will depend on political and institutional factors and the policies designed to absorb the flow of additional resources.

In this sense, it would be justified to protect some sectors of tradable goods, if their social value diverges from their private value, in light of income distribution considerations. The purpose would be to exploit externalities or for learning. In addition, an important series of arguments on the need for a certain degree of state intervention centers on the destabilizing aspects of export price instability, which affects internal investment capacity, and by extension the economic growth rate, as well as the diversification of the productive structure, the employment structural and fiscal revenue.

1 This section is a summary of the first chapter of the book by Alicia Puyana and Rosemary Thorp (1998).

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