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CEPAL CEPALREVIEW REVIEW 77 • AUGUST 77 2002 25 Growth, instability and the convertibility crisis in Argentina José María Fanelli Centro de Estudios de Estado The Argentine economy is currently going through the y Sociedad (CEDES), Buenos Aires deepest and most prolonged recession of the postwar period: [email protected] a devastating panorama that contrasts vividly with its significant growth in 1991-1998. In this article we will analyse the macroeconomic dimensions of the crisis which led to the abandonment of convertibility. Firstly, we will identify some structural weaknesses of the Argentine economy that are a source of macroeconomic instability. In particular, we will study the role of the imperfect access to international capital markets, the limited openness, the lack of financial depth and the nominal and policy rigidities, as well as the role of the errors in expectations and volatility. Secondly, we will examine the sequence of disturbances (shocks) in 1998-1999, concluding that the simultaneity of many of them aggravated their effects and that, under the convertibility régime, the economy was not prepared to face such consequences. Finally, we will briefly outline the policies that the country should apply in order to restore macroeconomic and financial stability. GROWTH, INSTABILITY AND THE CONVERTIBILITYAUGUST CRISIS2002 IN ARGENTINA • JOSÉ MARÍA FANELLI 26 CEPAL REVIEW 77 • AUGUST 2002 I Introduction The Argentine economy is currently undergoing the capacity is roughly the same as in late 1998, when the deepest and longest recessionary process of the postwar recession began. We frequently hear people saying period. This process began in late 1998 and, as time “How can this be happening if there was no war that passed and the successive stabilization attempts failed, destroyed our productive capacity!” the agents increasingly perceived that the country was In a nutshell, if we were to assume that per capita entering the obscure realm of economic depression. The GDP can be explained by the level of per capita physical consequences of this process are proving to be and human capital accumulated, we would not be able devastating. In December 2001 the democratically to explain the situation in Argentina. It is therefore elected President was forced to resign and the obvious that explaining the present situation implies convertibility regime that had been introduced in 1991 explaining why valuable resources are not being fully was abandoned. The expected growth rate for 2002 is employed. But not only this. In the case of Argentina it –15% and inflation is on the rise. The peso has lost is also crucial to explain why the rate of utilization of two-thirds of its value against the dollar since the these resources is so low and why the situation has lasted replacement of the currency board regime with a so long. In other words, the problem is not only floating system. Almost half of the population is now recession but depression. We cannot ignore the fact that living under the poverty line (in 1998 the proportion of the unemployment rate is approaching a quarter of the poor was 28%), and the country has defaulted on its labour force and that between the third quarter of 1998 debt. and the second of 2002, the quarterly GDP series This dismal picture contrasts sharply and strikingly registers thirteen quarters with no growth. with the 1991-1998 period, when the economy grew In this paper we will argue that the rate of utilization by more than 41% and there was a substantial of resources is currently so low because the institutional privatization-led process to modernize the infrastructure and contractual infrastructure of the economy collapsed in the context of a programme of structural reforms. In as a result of the abandonment of the currency board. 1991-1998 Argentina was considered to be one of the Under such circumstances, it is very difficult to define most successful emerging economies, and the property rights properly and precisely. Hence, a favourable investor sentiment permitted the country to considerable proportion of agents have no incentive to place a significant amount of bonds in foreign capital put the available resources to their best use. markets. In 2001, Argentine bonds accounted for as Three factors are key to understanding why the much as a quarter of J.P. Morgan’s benchmark index of disorganization of economic institutions was so emerging-market bonds. widespread. The first has to do with the characteristics The contrast between the 1991-1998 and 1999- and time-sequence of the shocks that hit the economy 2002 periods has created a bizarre situation that is in 1998-1999. From 1998 on, Argentina was hit by a difficult for the population to grasp: real GDP in 2002 series of shocks which severely affected its will be 30% lower than in 1998, but the productive competitiveness and financial position. These shocks include a fall in the prices of its exports and in the terms of trade, a tightening of external credit markets, the appreciation of the U.S. dollar, and the devaluation of This study was prepared for the conference on Financial Stability and Development in Emerging Economies, organized by real in Brazil. In addition, a fiscal shock occurred the Forum on Debt and Development (FONDAD) as part of the because of the political cycle. The second factor has to Initiative on International Financial Governance, jointly sponsored do with the particular features of the Argentine fiscal, by the Ministry of Foreign Affairs of the Netherlands, the monetary and financial regimes, which helped to Nederlandsche Bank, the International Development Research amplify the consequences of the shocks. Under Centre (IDRC), the Economic Commission for Latin America and convertibility, the available set of counter-cyclical the Caribbean (ECLAC), the International Monetary Fund (IMF) and the United Nations Conference on Trade and Development instruments was extremely limited. Prices and wages (UNCTAD). were not sufficiently flexible, and the fiscal regime was GROWTH, INSTABILITY AND THE CONVERTIBILITY CRISIS IN ARGENTINA • JOSÉ MARÍA FANELLI CEPAL REVIEW 77 • AUGUST 2002 27 rigid (especially in terms of the relations between the Second, the interactions between the Argentine Federal Government and the provinces) and subject to economic structure and the shocks to which the country political influences. The third factor is that the currency is exposed frequently give rise to “perverse” effects. board had been in force for more than ten years and Specifically, such interactions result in stochastic data- had gained credibility after having passed the test of generating processes that are unstable (i.e., subject to the Tequila Effect in 1995. Hence, private contractual frequent and unexpected structural changes) and relations had to adapt largely to the rules of the currency volatile. This means that the potential for inconsistent board. This was especially so with regard to dollar- expectations and the occurrence of “big errors” does denominated contracts. The dollarization of financial not arise from agents’ lack of sophistication, but from instruments introduced additional constraints, in so far the inherent complexity and instability of the processes as real depreciation would increase the financial that the agents must “model” in order to forecast the vulnerability of firms and make the financial position future evolution of the variables of interest to them,1 of banks more fragile. all of which facts have consequences on the agents’ But even if we successfully explain why and how economic behaviour. Among the most important factors convertibility and the shocks that occurred resulted in for understanding the Argentine experience are the the present crisis, we must still wonder why Argentina shortening of contracts’ maturities and the adopted such a system and why the country was so incompleteness of financial markets. exposed to the specific configuration of shocks that Third, some features of the economic structure help occurred. These questions trigger an array of others: to amplify the consequences of shocks. Three features Why did Argentina choose a system as rigid as a may be emphasized in this respect: the type of currency board in the first place? Why were contracts international integration, the rigidities affecting nominal dollarized? Why were foreign investors so foolish as to variables and the policies followed, and the lack of buy long-term bonds from a country that would default financial depth. Indeed, the absence of fluctuation- a few years later? Why was the IMF so involved with dampening factors is particularly apparent in the present and supportive of the country’s policies under circumstances. The financial crisis, the fall in national convertibility? In order to answer these questions it is income and political uncertainty gave rise to powerful necessary to examine some specific characteristics of destabilizing forces. Without significant offsetting the Argentine economy that played a critical role in mechanisms other than those of the market, the generating the macroeconomic disequilibria and economy is now in a state of depression. adjustment dynamics that are typically observed. We This paper analyses the macroeconomic consider that the following characteristics are of crucial dimensions of the Argentine crisis. Our discussion importance in this respect. above suggests that structural features play an important First, “very big” errors in expectations seem to be role. Consequently, section
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