Wine Industry Upgrading in Argentina: Why Did San Juan Lag Behind Mendoza?

The following is a guest post by Pierre Ly, Assistant Professor of International Political Economy (IPE) at the University of Puget Sound.  Please see his full bio at the end of this post!

If you like wines from Argentina, you have probably heard the following story. Up to 1990, Argentina mostly produced high volume, low quality wine destined for the domestic market. Then, starting in the 90s, the Argentine wine industry improved significantly, moving to embrace modern winemaking and grape growing techniques to produce fine wine for export. Soon, the country grabbed a share of major markets. If you are interested in economics, you may also know all this happened in a tough political and economic context. Argentina was in a period of hyperinflation and economic crisis in 1989 when President Carlos Menem was elected, and his administration engaged in market reforms. It was in this context that throughout the 90s, the wine industry came out of a crisis and experienced the significant improvement that brought us, among other things, the beloved Argentine Malbec.

The study presented today, a fascinating 2007 paper by political scientist Gerald McDermott, unpacks the details of this story. The author focuses his analysis on the fact that improvements took place primarily in Mendoza province, while producers in the province of San Juan lagged behind. In both regions, the wine industry was operating in the context of market liberalization but the study shows us that provincial

governments chose to build incentives for improvement in the industry differently. The author argues that the divergence between the wine industries of Mendoza and San Juan came from differences in local government policy responses to the crisis. Broadly speaking, San Juan used a more top down approach where the local government remained isolated from socio-economic groups while providing tax and investment incentives. By contrast, Mendoza encouraged cooperation between different interest groups by promoting participatory decision making.

Methods

This study is based on fieldwork by the author in Argentina between 2003 and 2005, during which he engaged in open ended interviews with local experts, people with various positions in the wine trade and policy makers. The resulting data is qualitative, and is supplemented with evidence from trade reports and past academic studies, both in English and Spanish.

The author uses a comparative case study method, examining the public and private institutions that shaped the evolution of the wine industry starting in 1990. Since the key argument is that Mendoza became a leader thanks to more inclusive and participatory governance than San Juan, the first step in the analysis consists in discussing why other types of arguments cannot, at least on their own, explain the divergence. After all, more important factors could explain what happened. For example, what if Mendoza simply has inherently better climate and soils for quality wine grapes? For example, in “Wine Myth and Reality,” Benjamin Lewin suggests that San Juan, “with its warmer climate is best known for

producing large volumes of low quality wine” and maybe some “decent reds for everyday drinking” (Lewin, 2010, p 327). However, McDermott makes a convincing case that politics matters at least as much (if not more) than terroir in this case. First, both San Juan and Mendoza have a great variety of microclimates. Second, improvements in the industry took place even in parts of Mendoza initially regarded as having rather substandard terroir. Further, the author shows that Mendoza did not have a clear advantage over San Juan in terms of economic, political and knowledge/scientific resources.

The Importance of Cooperation and Collective Action

San Juan’s policy approach toward wine industry upgrading consisted primarily of a system of taxes and subsidies. This was meant to provide incentives to plant fine wine grapes and attract investment. Plantings and investment happened, but upgrading to quality wine did not follow. In the author’s view, the reason was that the top down approach in San Juan mostly exacerbated existing conflicts of interest, while government policies in Mendoza promoted cooperation between multiple private and public stakeholders. In Mendoza, farmers and wineries were encouraged to form cooperatives, and all were invited to participate actively in the reform process. This created regular discussion opportunities through which different actors could learn from each other to solve common problems and innovate. McDermott explains that this was especially important in the early stages of upgrading, as individual producers and growers each experiment with new methods in viticulture and all aspects of winemaking. At this stage, learning happens in small increments, in a specific context or terroir, and improvement is time consuming. For successful upgrading and building a reputation, then, it is best if knowledge gets disseminated. In San Juan, the author argues, policies failed to promote cooperation and as a result, knowledge diffusion was hindered. In Mendoza, regular discussion between all players, thanks to the more participatory form of governance, made learning, and hence upgrading, more effective.

The case studies in the paper are full of fascinating details of actual policy debates in each region, and I will just give a couple of examples here to help understand the more general argument above.

One telling example is the different paths each provincial government took to privatize its struggling local state-owned winery. In San Juan, in the mid-1980s, the government simply sold off the company to investors and ignored the complaints of local grape growers and wineries. The resulting private winery ended up collapsing and the government adopted a system of investment incentives to restructure agricultural sectors. By contrast, in Mendoza, the government

consulted first with local producers and growers, which helped build trust, and the company was transformed into a federation of cooperatives. This model would turn out to be well suited to promote the cooperation necessary for successful upgrading. In fact, the fact that Mendoza’s government consistently approached private actors and gave them reasons to participate in shaping reforms and new institutions helped plant the seeds of future cooperation.

A striking example of the lack of public-private cooperation in San Juan is the failed attempt in the late 1990s to emulate Mendoza’s successful jointly governed export agency, ProMendoza. Collaboration between private actors was not forthcoming either, as conflicts of interests hindered the adoption of new production techniques and access to consultants for small firms.

By contrast, participatory governance in Mendoza helped build many crucial resources such as records of best practices, training programs, and access to consultants. Of course, this was not easy, as heated debates took place on many controversial issues. But the fact that the joint governance built in local institutions made it possible for actors with sometimes diverging interests to achieve compromises. According to McDermott, learning and collaboration are crucial for upgrading in any industry, and especially in wine.

Conclusions

This paper is important because it invites us to rethink some tempting quick generalizations in the overwhelming presence of Malbec from Mendoza at the store. The author notes that seeing the success of Mendoza, even San Juan policy makers themselves recognized the top down approach had not worked and they have changed course. With the right institutions in place, producers in San Juan can make the most of the best match between high quality grape varieties and terroirs. In fact, around the time this study was published, a report on Jancis Robinson’s website mentioned San Juan Syrah and “recent investment seeing a switch to higher altitudes and quality wines.” (link: (http://www.jancisrobinson.com/articles/20070731_5/layout/print.html)

Mendoza’s participatory model has since been applied to other regions in Argentina and it will be interesting to see how the institutions help the industry deal with current challenges and continue to innovate. In any case, this paper invites us to explore all that the wines of Argentina have to offer, beyond what is most visible. I can foresee some dinners with a bottle of San Juan Syrah next to a Mendoza Malbec.

Source: McDermott, Gerald. 2007. The Politics of Institutional Renovation in Economic Upgrading: Recombining the Vines that Bind in Argentina”. Politics and Society, Sage 35: 103-143

Journal link: http://pas.sagepub.com/content/35/1/103.abstract

About the Author:

Pierre Ly is Assistant Professor of International Political Economy (IPE) at the University of Puget Sound. His courses include international economics, the role of NGOs in economic development and The Idea of Wine, a course about globalization viewed through the lens of wine. His upcoming research project examines industrial upgrading in the Chinese wine industry.