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Restoring Economic Growth in Argentina

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Restoring Economic Growth in Argentina マーク色指定C10M100Y100 JBICI Research Paper No. 27 Restoring Economic Growth in Argentina January 2004 JBIC Institute Japan Bank for International Cooperation JBICI Research Paper No.27 Restoring Economic Growth in Argentina January 2004 JBIC Institute Japan Bank for International Cooperation JBICI Research Paper No. 27 Japan Bank for International Cooperation (JBIC) Published in January 2004 © 2004 Japan Bank for International Cooperation All rights reserved. This Research Paper is based on the findings and discussions of the JBIC. The views expressed in this paper are those of the authors and do not necessarily represent the official position of the JBIC. No part of this Research Paper may be reproduced in any form without the express permission of the publisher. For further information please contact the Planning and Coordination Division of our Institute. Foreword About two years have passed since Argentina faced the onset of what Dr. Cline calls the 3D economic collapse: default, devaluation, and depression. In 2002 the country’s GDP contracted by 11 per cent, the worst on its record. Despite the substantial depreciation of the peso, however, hyperinflation was successfully avoided. And more recently the economy has shown a substantial recovery, particularly in the manufacturing sector. On the other hand, there has been no significant progress in the banking sector reform, which is listed by Dr. Cline as a key challenge for immediate future. Furthermore, the prospects remain opaque for the sovereign debt restructuring, which Dr. Cline deems crucial for reestablishing Argentina’s credit reputation and eventual capacity to return to credit markets. After the introduction chapter, the Chapter 2 of this paper surveys the arguments on the main cause of the 3D collapse. Dr. Cline admits importance of the three factors cited by many analysts: inadequate fiscal adjustment, overvaluation of the peso under the currency board system, and a series of external shocks. However, he concludes that the main culprit was the vicious cycle of domestic political shocks and the loss of external confidence in Argentina’s economy, in a “political shock, multiple equilibrium” framework. He also examines the role the International Monetary Fund played in the crisis from a well-balanced perspective. Chapter 3 briefly reviews the main economic and policy developments in 2002. In Chapter 4, Dr. Cline lists four immediate challenges; avoiding high inflation, refurbishing the financial sector, restructuring government debt, and maintaining the social safety net. Chapter 5 first indicates medium-term baseline economic outlook, and then proceeds to explore and propose the medium and long-term strategies for restoring sustainable economic growth. Those strategies are concerned with six sectors: fiscal reform including reform of the provincial revenue sharing system, exchange rate regime, trade policy, foreign direct investment policy, labor market reform, and political institutions. Japan Bank for International Cooperation, by the initiative of its Country Economic Analysis Department, financially supported this study, along with the World Bank※ and General Motors Corporation. It is my pleasure to introduce this paper as one of the JBIC Research Paper series. I am convinced that this paper will ※ This paper has also been published as the World Bank Policy Research Working Paper No. 3158. i serve as a valuable guidepost for everyone exploring the cause of the Argentine 3D collapse and/or strategies for restoring sustainable growth. January 2004 Shozo Kitta Executive Director JBIC Institute ii Restoring Economic Growth in Argentina* William R. Cline** Center for Global Development and Institute for International Economics June 2003 * This study was prepared under the auspices of Economics International, Inc. The author is grateful for financial support from General Motors Corporation, the Japan Bank for International Cooperation, and the World Bank. For helpful discussions during the preparation of the manuscript, he thanks Daniel Artana, Juan Luis Bour, Emilio Cardenas, Javier Finkman, Miguel Kiguel, Minister of Economy Roberto Lavagna, Daniel Marx, Guillermo Mondino, former central bank president Pedro Pou, central bank president Alfonso Prat-Gay, Andrew Powell, and Federico Sturzenegger. For comments on a previous draft, he thanks Emilio Cardenas, Mario Gutierrez, Javier Finkman, Daniel Marx, Atsushi Masuda, Guillermo Perry, Andrew Powell, Luis Serven, Mario Teijeiro, Edwin M. Truman, and John Williamson. None of these individuals is responsible for any shortcomings remaining in this study. **Joint Senior Fellow. Dr. Cline has previously been Deputy Managing Director and Chief Economist for the Institute of International Finance (1996-2001), and Senior Fellow, Institute for International Economics (1982-1995) and Brookings Institution (1973-1981). iii Contents Foreword ･････････････････････････････････････････････････････････････････ i Contents ･････････････････････････････････････････････････････････････････ iv List of Tables･････････････････････････････････････････････････････････････ vi List of Figure･････････････････････････････････････････････････････････････ vi Summary ･･･････････････････････････････････････････････････････････････S-1 Chapter I. Introduction ･･････････････････････････････････････････････････1 Chapter II. Origins of the crisis ･･････････････････････････････････････････4 2.1 Principal diagnoses ･･････････････････････････････････････････････4 2.2 Fiscal imbalance and debt sustainability ･･････････････････････････7 2.3 The currency board and overvaluation ････････････････････････････13 2.4 External shocks･････････････････････････････････････････････････23 2.5 Political shocks ･････････････････････････････････････････････････27 2.6 Role of the IMF ･････････････････････････････････････････････････32 Chapter III. A year in perdition: 2002････････････････････････････････････38 3.1 Overview ･･････････････････････････････････････････････････････38 3.2 Output and inflation ････････････････････････････････････････････39 3.3 The external sector･･････････････････････････････････････････････41 3.4 The deposit freeze and pesification ･･･････････････････････････････43 3.5 Fiscal performance ･･････････････････････････････････････････････45 3.6 Monetary policy･････････････････････････････････････････････････46 Chapter IV. Immediate challenges ･･･････････････････････････････････････49 4.1 Avoiding high inflation ･･････････････････････････････････････････49 4.2 Refurbishing the financial sector ･････････････････････････････････52 4.3 Restructuring government debt ･･････････････････････････････････59 4.4 Maintaining the social safety net ････････････････････････････････67 Chapter V. Strategies for the longer term ･････････････････････････････････70 5.1 Baseline prospects for growth and principal challenges ･････････････70 5.2 Fiscal reform ･･･････････････････････････････････････････････････72 5.3 Reforming provincial revenue sharing ････････････････････････････82 5.4 Exchange rate regime ･･･････････････････････････････････････････85 5.5 Trade policy ････････････････････････････････････････････････････92 iv 5.6 Rules of the game for foreign direct investment ････････････････････97 5.7 Labor market reform ･･･････････････････････････････････････････99 5.8 Political institutions ･･････････････････････････････････････････ 101 Chapter VI. Conclusion ･･･････････････････････････････････････････････ 105 Annex A. Conditions for fiscal sustainability ･････････････････････････････ 107 Annex B. The Analytics of restructuring government debt ･････････････････ 109 Annex C. Evaluating the 2001 megaswap ････････････････････････････････ 111 References ･････････････････････････････････････････････････････････････ 113 v List of Tables Table 1 Long-term growth in international perspective ････････････････････2 Table 2 Standard of living indicators･････････････････････････････････････3 Table 3 Main causes of Argentina’s economic collapse: alternative diagnoses 5 Table 4 Fiscal indicators, consolidated government････････････････････････9 Table 5 Primary surplus required for fiscal sustainability under alternative conditions ･････････････････････････････････････････････････････12 Table 6 Composition of Argentina’s federal government debt ･･････････････60 Table 7 Depth of haircut under alternative assumptions ･･････････････････65 Table 8 Structure of federal government finances, 2001-02････････････････73 Table 9 Federal tax revenue as a percent of GDP･････････････････････････74 Table 10 International experience with the VAT ･･････････････････････････75 Table 11 Government spending by function,2002 ･･････････････････････････77 Table 12 Government spending in major Latin American economies ････････79 Table 13 Primary government spending by function, Argentina and Chile ･･･80 Table 14 Sectors in which MERCOSUR common external tariff exceeds or falls below the average by 3 percentage points or more difference from average common external tariff ･････････････････････････････････95 List of Figure Figure 1 Inflation in Argentina ･････････････････････････････････････････3 Figure 2A Monthly exchange rate depreciation and inflation, 1985-88 ･･････14 Figure 2B Monthly exchange rate depreciation and inflation, 1989-92 ･･････15 Figure 3 Real effective exchange rate, CPI deflated･･････････････････････18 Figure 4 Current account balance as percent of GDP ････････････････････19 Figure 5 Trade prices and terms of trade ･･･････････････････････････････25 Figure 6 Spreads above US treasury bonds
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