The limits to redistribution in small open economies: the case of Argentina

Abstract

The specialized literature on the political economy of income redistribution in Argentina usually focuses on economic limits. It discusses the incompatibility between redistributive policies and the external balance or their effect on the long-term growth rate. However, less attention has been paid to the political resistance exerted by the winners of international trade to sharing their gains and to the role of financial integration. In this paper, we develop a model, framed in the modern revival of Classical theory, of a small open economy with differential rent to account for these factors. First, we include interests as an income category to assess the impact of financial integration. Second, we introduce the concept of ‘political stalemate’ – the resistance of productive classes to economic policies that go against their economic interest. We show how financial integration and the political resistance of landowners are behind the failure of income redistributive policies in favor of workers. In this context, we analyze the necessary economic and political conditions for such policies to succeed.