Eleven Years Later: What Went Wrong in Argentina
Cavallo, Domingo, Harvard International Review
"Argentina has entered a period of growth that will last for many years--perhaps decades. Two crucial factors will facilitate this continued growth. First, the rate of investment is increasing--I expect that it will reach 22 or 23 percent of the gross domestic product (GDP) in the near future. During the 1980s, it fell to levels as low as 12 percent and has now recovered to around 18 percent. Second, productivity is also increasing. For example, the marginal relation between product and capital--the increase in productivity over investment--is recovering strongly ... We have before us, I believe, many years of rapid growth like that of the Southeast Asian countries in the 1970s and 1980s. Like postwar Germany, France, and Japan, Argentina is in the process of stabilizing and taking advantage of the opportunities the world economy offers. We will increase our productivity and assert ourselves in the global economy." "Secrets of Success: Argentina's Blueprint for Economic Prosperity" Fall 1994
As part of the innovative symposium, "Predicting the Present," I have been asked to respond to the above quotation from my interview, "Secrets of Success: Argentina's Blueprint for Economic Prosperity," in the Harvard International Review, Fall 1994 issue. In 1994, when I gave this opinion, Argentina was completing four years of impressive growth and successful stabilization. At the beginning of 1995, Argentina was shocked by the Mexican Crisis that provoked a sudden stop in capital inflows and a deep recession. Nevertheless, by the beginning of 1996, Argentina was recovering very rapidly and its economy grew steadily until 1998. Overall, from 1991 to 1998, Argentina's GDP expanded at 6 percent per year, with the investment rate reaching 22 percent of GDP in 1998 and productivity growth averaging 3.8 percent per year. Inflation had disappeared from the Argentine economy. Until that time, events evolved exactly as I had predicted in mid-1994.
As it emerges from the rest of the interview, my reasoning behind this prediction was the "reform of the rules of the political game." Answering the second question in the interview, I described what it meant. "In Argentina, a country that has suffered decades of serious economic and institutional disorder, this transformation occurred at many levels. It has led into a focus on integration into the world economy. Private companies have replaced public enterprises, subjecting businesses to competition and professional regulatory agencies. The state has limited its activities to essential functions, resulting in a thorough deregulation of capital, labor, and goods and services markets."
Popular support and political leadership had been crucial. "Public support was fundamental to the success of the reforms. The dramatic hyperinflationary experience had left its mark on the people. Fearful of uncontrolled inflation, Argentines, for the first time, started to value stability. This popular support, combined with political leadership, gave us momentum for extensive reform. In three years we achieved what took Chile ten years under a dictatorship and Mexico six to eight years under the strict political control of the [Institutional Revolutionary Party]."
Made possible by the immediate success of the stabilization program know as the "Convertibility System," Argentine economic reforms included both significant cuts in government expenditure and a tax reform that would improve tax administration and remove distortions on relative prices created by some taxes. If Argentina had not created clear rules of the game for the currency and wage that remained unprotected against currency depreciation and inflation, none of the reforms could have been implemented. Therefore, the Convertibility System became the political and economic cornerstone of the overall economic reform program.
The Interplay of Domestic and External Shocks
The Brazilian Crisis of February 1999, and its predecessor, the Russian Crisis of August 1998, did not have such an immediate impact on Argentina as the Mexican Crisis of 1995 did, but their negative effects were longer lasting and much more damaging for the performance of its economy. …