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Stabilization and Its Discontents: Argentina's Economic Restructuring in the 1990S

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Stabilization and Its Discontents: Argentina's Economic Restructuring in the 1990S World Development Vol. 27, No. 3, pp. 477±503, 1999 Ó 1999 Elsevier Science Ltd All rights reserved. Printed in Great Britain 0305-750X/99 $ ± see front matter PII: S0305-750X(98)00152-1 Stabilization and its Discontents: Argentina's Economic Restructuring in the 1990s MANUEL PASTOR JR. University of California at Santa Cruz, USA and CAROL WISE * Johns Hopkins University, Washington, USA Summary. Ð This paper assesses the Argentine stabilization and market reform strategies since 1989. We argue that Argentina may be penned in by its own success: exchange rate targeting quelled in¯ation but the resulting real appreciation has limited export and employment growth; microeconomic reforms raised eciency but have threatened in- come distribution and hence political stability; exclusive styles of policy-making helped enact reform but have led to corruption and policy insensitivity and contributed to rising social discontent. We close by suggesting how a ``second generation'' of reforms could tackle these issues and spread the proceeds of reform to a wider segment of the Argentine public. Ó 1999 Elsevier Science Ltd. All rights reserved. 1. INTRODUCTION President with a market-reassuring economics Ph.D. from the University of Chicago. More Until not so long ago, Argentine economy minister fundamentally, it appeared that the country Domingo Cavallo was fond of saying, ``Argentina is had made the transition from sole reliance on Mexico two years later''. When, in late December, the credibility of just a handful of ocials to a the shockwaves of the Mexican devaluation caused a deeper faith in the macroeconomic laws now fall in the Buenos Aires stockmarket and an upsurge governing Argentina's economy. in demand for US dollars, Cavallo changed his tune. ``Argentina,'' he said, ``is not Mexico''. Latin Ameri- can Weekly Report, January 12, 1995. * The authors thank the North-South Center at the University of Miami, the US Institute of Peace, the On July 26, 1996, Argentina's ¯amboyant Social Science Research Council, and the Fulbright economics minister, Domingo Cavallo, was Commission in Buenos Aires for funding the research on summarily removed from oce by Argentina's which this article is based. Maria Barboza, Julie Jacobs, equally ¯amboyant President Carlos Menem. Rachel Rosner, and Walter Weaver provided excellent With the ocial announcement coming late on research assistance. Special thanks to Fernando Flint, a Friday afternoon, markets had little time to whose help and support in Buenos Aires contributed react to the departure of an ocial who had greatly to our ®eld work; to Adolfo Canitrot for hosting been the architect, and self-styled guarantor, of this project at the Instituto di Tella in Buenos Aires; and the famed ``Convertibility Plan'' responsible for to Carol Graham, Fernando Flint, Robin King, Victoria delivering Argentina from the throes of hyper- Murillo, Bill Smith, Nestor Stancanelli, and two anon- in¯ation. Yet as the next business week opened, ymous referees for their thoughtful comments. An the peso held its value and stocks actually rose. earlier version of this paper (under the same title) was In the short-run, this favorable reaction sig- published as Agenda paper 31 by the University of nalled a positive assessment of Cavallo's re- Miami North-South Center (Coral Cables, FL: May placement by a low-key former Central Bank 1998). Final revision accepted: 21 September 1998. 477 478 WORLD DEVELOPMENT But should Argentina be celebrating a sort of agree that, in light of the prevailing high in- ``end of history'' Ðor at least its own history of ¯ation, there was little alternative to the erratic policy cycles, chronic macroeconomic Convertibility Plan when it was adopted, but instability, and prolonged bouts of social and argue that the resulting appreciation has likely political turmoil? While the Convertibility Plan dampened the potential for export and em- purged the economy of in¯ation, and fostered a ployment growth. Section 3 reviews the key return to growth, particularly as pent-up de- microeconomic initiatives that were undertak- mand surged through the economy during en in conjunction with the convertibility sta- 1991±1994, there have also been some clear bilization plan and elaborates on the main pitfalls to this strategy. Most obvious has been dimensions of distributional stress (including a sharp appreciation of the exchange rate, underperforming labor markets, increasingly which has worked against the country's full unequal household incomes, and growing dis- realization of its export potential and may parities in the performance and asset base of make it dicult to sustain higher growth into small and large ®rms); we then review the the medium term. A major symptom of this politics of the reform process, noting that the dilemma is the precarious rate of unemploy- Menem administration's autocratic and insu- ment, which in Buenos Aires had increased to lated style of decision-making, especially when around 13% by 1994 and then skyrocketed to combined with the uneven distribution of 20% in the wake of Mexico's 1994 peso crisis. bene®ts from new policies, has worked against While the labor market has improved since, the need to broaden the social base for reform. much of the available work is now temporary, The conclusion sketches strategies to address and underemployment remains a serious today's shortcomings, with speci®c attention problem. Not surprisingly, social tensions are on the macro, micro, institutional, and politi- again running high in Argentina, with public cal dimensions. concern over hyperin¯ation giving way to the fear of ``hyperunemployment,'' and opposition politicians making gains in recent political contests. 2. MACROECONOMIC STABILIZATION: In this essay, we assess the Argentine exper- CONTEXT, STRATEGIES, AND iment and speculate on its future prospects. OUTCOMES While the growth and in¯ation results may have been impressive, there are worrisome employment and distributional trends which Argentina has always been a country with moderate are more than transitional costs related to growthÐbelieving that spectacular growth and riches market restructuring. Rather, they have re- are right around the corner. And when a good year sulted from the failure to coordinate micro and comes, the Argentines say, ``ah-ha, here comes the life we have been waiting for and so deserve''ÐDaniel macro reforms, that is, to oset rigid manage- Heyman, Sta Economist, UN Economic Commis- ment of ®scal and exchange rate policy under sion for Latin America and the Caribbean, Buenos the Convertibility Plan with programs designed Aires.2 to help economic agents adjust to the addi- tional simultaneous challenges of trade liberal- (a) In¯ation, convertibility, and growth ization and privatization. As a result, Argentina needs what Michel Camdessus, the 1989 marked a dramatic break with Argen- head of the International Monetary Fund tina's past. For the ®rst time ever, a demo- (various years) (IMF) has termed a ``second cratically elected president from one political generation'' of reforms,1 especially a more co- party was succeeded by a democratically elect- hesive set of market-supporting strategies and ed president from another party (McGuire, far more attention to repairing the distribu- 1995, p. 200). Unfortunately, this positive po- tional stresses and political strains that have litical transition occurred in the midst of the been part and parcel of Argentina's contem- country's worst economic crisis; as newly porary political economy. elected President Carlos Menem took oce in The remainder of this essay develops these July, the monthly in¯ation rate soared to 197% arguments as follows. Section 2 analyzes and (see Figure 1).3 Given the urgency of the crisis, critiques the macroeconomic stabilization the President reached beyond the working class program that began with the implementation and populist roots of his own Peronist backers of Cavallo's Convertibility Plan in 1991. We in the Partido Justicialista (PJ) and sought STABILIZATION AND ITS DISCONTENTS 479 Figure 1. Argentine monthly in¯ation, 1982±97. the support of business interests and the This new set of rules also enhanced the private middle classes in the eort to tame skyrocketing sector's in¯uence over the economy: if local in- prices. vestors were displeased with the course of eco- At ®rst, the Menem team moved gradually nomic policy, the exodus of their resources via on the macroeconomic front, launching a capital ¯ight could trigger a destabilizing reces- ``Bunge and Born Plan'' named after the sion.7 To bring the private sector more ®rmly on county's largest transnational ®rm whose ad- board in facilitating the process of disin¯ation, visors had helped to design it.4 The moderately the government initially asked leading compa- heterodox program, which relied on the same nies to ``voluntarily'' engage in price restraint. As sort of price controls as had been implemented the currency gradually stabilized, so did prices. under Alfonsõn's Austral Plan, unraveled By May 1991, monthly in¯ation had tapered quickly when the government was forced to down to around 3% and by 1992, the monthly carry out a large step devaluation in December average was less than 1.5%. By 1994, annual in- 1989. At this time, all price controls were ¯ation was less than 4%. eliminated, and the currency was allowed to On the ®scal side, the Menem administration ¯oat. Not surprisingly, in¯ation exploded once had inherited a public sector de®cit that averaged again in the ®rst quarter of 1990; thereafter, 9% of GDP through the 1980s.8 Because the in¯ation slowed, albeit to a still worrisome rate Convertibility Plan excluded the possibility of of 11% a month.5 domestic credit creation, the central government In January 1991, Domingo Cavallo was ap- was under intense pressure to keep its ®scal house pointed as Economics Minister and soon in order. Fortunately, the Menem administration launched the now famous Convertibility Plan.
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