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Applications of the Monetary Approach to the Balance of Payments - JI- 113361 -Economic Public Disclosure Authorized L iberalization and Stabilization Policies in Argentina, Chile, and Uruguay Public Disclosure Authorized Applications ofthe Monetary Approach to the Balance of Payments Public Disclosure Authorized edited by Nicolas Ardito Bar] Mario I. Blejer Luis Landau Public Disclosure Authorized AWorld Bank Sympositni Economic Liberalization and Stabilization Policies in Argentina, Chile, and Uruguay A World Bank Symposium Economic Liberalization and StabilizationPolicies in Argentina, Chile, and Uruguay Applications of the Monetary Approach to the Balance of Payments Edited by Nicolas Ardito Barletta Mario I. Blejer Luis Landau THE WORLD BANK Washington, D.C., U.S.A. Copyright © 1983by the International Bank for Reconstruction and Development / THE WORLD BANK 1818 H Street, N.W., Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing May 1984 The views and interpretations in this book are those of the contributors and should not be attributed to the World Bank or to its affiliated organizations, to the International Monetary Fund, or to any individual acting on their behalf. Editor James E. McEuen Book design Brian J. Svikhart Cover design George P. Parakamannil Library of Congress Cataloging in Publication Data Main entry under title: Economic liberalization and stabilization policies in Argentina, Chile, and Uruguay. (A World Bank symposium) Includes bibliographical references. 1. Monetary policy-Southern Cone of South America- Addresses, essays. lectures. 2. Balance of payments- Southern Cone of South America-Addresses, essays, lec- tures. 3. Southern Cone of South America-Economic policy-Addresses, essays, lectures. 4. Economic stabilization-Southern Cone of South America-Addresses, essays, lectures. 1. Ardito Barletta, Nicolas. ll. Blejer, Mario 1. 111.Landau, Luis, 1936- IV. World Bank. V. Series. HG81O.S68E36 1984 339.5'098 83-25958 ISBN 0-8213-0305-8 Contributors The affiliations shown are those at the time of the symposium, May 21-22, 1982. Nicolas Ardito Barletta Rudiger Dornbusch Vice President Professor- of Economics Latin America and the Caribbean Department of Economics Regional Office Massachusetts Institute The World Bank of Technology Leonardo Auernheimer Sebastian Edwards Associate Professor of Economics Assistant Professor of Economics Department of Economics Department of Economics Texas A&M University University of California, Los Angeles Mario I. Blejer Carlos Elbirt Economist Country Economist Research Department Country Programs Department II International Monetary Fund Latin America and the Caribbean Guillermo A. Calvo Regional Office Professor of Economics The World Bank Department of Economics Jacob A. Frenkel Columbia University David Rockefeller Professor Krishna Challa of International Economics , . ~~~~~~~~~Departmentof Economics Senior Operations Officer Uerty ofCco Projects Department University of Chicago Latin America and the Caribbean and Regional Office Research Associate The World Bank National Bureau of Economic Research Vittorio Corbo Joseph Grunwald Professor Senior Associate Instituto de Economia Foreign Policy Studies Program Pontifical Catholic University of Chile The Brookings Institution Jose Maria Dagnino Pastore James A. Haofson Economic Consltant DeProfessorof Economics (Buenos Aires, Argentina) Brow enty and Brown University Professor Arnold C. Harberger Argentine Catholic University Professor of Economics Jaime DeMelo Department of Economics Economist University of Chicago Development Research Department Linda M. Koenig The World Bank Assistant Director Western Hemisphere Department International Monetary Fund v vi CONTRIBUTORS Luis Landau Jose B. Sokol Senior Economist Country Economist Office of the Regional Vice President Country Programs Department II Latin America and the Caribbean Latin America and the Caribbean Regional Office Regional Office The World Bank The World Bank Enrique Lerdau Pablo T. Spiller Director Assistant Professor of Economics Country Programs Department II Department of Economics Latin America and Caribbean University of Pennsylvania Regional Office Vito Tanzi The World Bank Director Rolf Luiders Fiscal Affairs Department Managing Director International Monetary Fund Empresas BHC Sim6n Teitel (Santiago, Chile) Economic Advisor Arturo Meyer Economic and Social Developmaent Senior Economist Department Country Programs Department II Inter-American Development Bank Latin America and the Caribbean John Williamson Regional Office Senior Fellow The World Bank Institute for International Economics Guy Pierre Pfeffermann Roberto Zahler Chief EconomistChief Economist ~~~~EconomicRbroZhe Affairs Officer Office of the Regional Vice President Economic AffairsiofcrCommission for Lat;in America! Latin America and the Caribbean Latin American Institute Regional Office for Economic and Social Planning The World Bank United Nations Larry A. Sjaastad Professor of Economics Department of Economics University of Chicago and Professor Graduate Institute of International Studies (Geneva, Switzerland) Contents Contributors v Definitions xi Preface xiii Nicolas Ardito Barletta An Overview xv Mario I. Blejer and Luis Landau Scope of the Symposium xv Organization of the Volume xv Sumnmary of the Issues Addressed xvi Acknowledgment xviii Part I. The Conceptual Framework 1. Recent Economic Policies of the Southern Cone Countries and the Monetary Approach to the Balance of Payments 3 Mario I. Blejer The Framework of the Monetary Approach 3 The Monetary Approach in the Short Run 5 Economic Policy in the Southern Cone 6 Fiscal and Commercial Policies 7 Exchange Rate Policy: The "Tablita" 7 Implementation of Economic Policy 8 Concluding Remarks 10 References 11 2. Economic Liberalization and Stabilization Programs 12 Jacob A Frenkel The Sequencing of Economic Liberalization 12 Stabilization Programs: Gradual versus Drastic Measures 15 Basket Pegging 16 References 1 7 Part II. Recent :1perience in the Southern Cone 3. Assessment of an Anti-inflationary Experiment: Argentina in 1979-81 21 Jose Maria Dagnino Pastore The Context 21 The Experiment 22 The Process 26 Real Exchange Rate Appreciation and Balance of Payments Deterioration 26 The Financial Crisis and the Measures of July 1980 28 High Real Interest Rates and the Business Sector 31 The Results 32 The Implementation 34 vii viLU CONITENTS The Model 35 Limitations and Shortcomings of the Model 36 The Social Reform 37 Conclusions 37 References 38 4. Commentary on Recent Experience in the Southern Cone 39 Argentina Jose Maria Dagnino Pastore 39,51 Leonardo Auernheimer 44 John Williamson 49 Guillermo A. Calvo 52 Vito Tanzi 55 Joseph Grunwald 56 Chile 56 Vittorio Corbo 56 Sebastian Edwards 63 Rolf Lulders 66 Linda M. Koenig 69 Uruguay 70 Pablo T. Spiller 70 A Regional View 72 Roberto Zahler 72 References 79 Part III. Evaluation and Lessons from Experience S. Liberalization and Stabilization Experiences in the Southern Cone 83 Larry A. Sjaastad Background 84 The Model for Economic Stabilization 85 Outcome: The Argentine Experience 86 Introduction of the Plan del 20 de Diciembre 88 Fiscal Deficits in Argentina 90 Political Uncertainty in Argentina 91 Outcome: The Chilean Experience 91 The Role of External Shocks 95 The Chilean Interest Rate Problem 96 Some Lessons and Implications for Policy 99 Notes 101 References 102 6. The Nature, Costs, and Benefits of Economic Stabilization-Liberalization Programs in the Southern Cone 104 Sim6n Teitel The Nature of Recent Eoonomic Policy 104 The Background and Regional Context 104 Costs and Benefits of Recent Economic Policy 105 Concluding Remarks 107 References 108 7. Policy Implications of the Monetary Approach and of Experiences in the Southern Cone 109 James A. Hanson Relevance of the Monetary Approach to the Balance of Payments 109 The Southern Cone Experiences: The Problem of Consistency 109 CONTENTS : Variations in the Exchange Rate 111 Real Interest Rates 111 The Sequence of Liberalization: Trade or Capital Markets First? 113 Notes 115 References 115 8. Commentary on Evaluation and Experience 116 Rudiger Dornbusch On the Monetary Approach and Its Applications 116 On Alternative Policies 121 On the Real Exchange Rate and the Current Account 122 On Devaluation 123 On Asset Prices 123 On the Sequence of Economic Liberalization 123 Concluding Statement 124 Guillermo A. Calvo On Devaluation 124 On the Real Interest Rate 125 On the Flexibility of Policy 125 On the Sequence of Economic Liberalization 125 On the Fixed Exchange Rate and Exchange Insurance 126 John Williamson On Asset Prices 127 On the Monetary Approach and Its Applications 127 On Capital Inflows 128 On the Sequence of Economic Liberalization 128 On Alternative Policies 129 Vittorio Corbo On Asset Prices 130 On the Real Exchange Rate 130 On Devaluation 131 Jcse Maria Dagnino Pastore On the Moretary Approach and Its Applications 132 On the Real Exchange Rate and Exchange Insurance 133 On the Real Interest Rate 133 On the Sequence of Economic Liberalization and Stabilization 134 Arnold C. Harberger On the Monetary Approach and Its Applications 135 On the Real Exchange Rate 138 On the Real Interest Rate 139 On Devaluation 139 On the Money Supply 140 On Asset Prices 140 On Economic Interdependence 141 On Unemployment 141 On Currency Reform 142 On Gradual versus Drastic Measures 142 On TJruguay in May 1982 142 Enrique Lerdau On the Monetary Approach and Its Applications 143 On the Consequences of Economic Liberalization and Stabilization
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