Macroeconomic Policy Changes in Argentina at the Turn of the Century

DAMIL, MARIO; FRENKEL, ROBERTO; MAURIZIO, ROXANA

Serie Nuevos Documentos CEDES

CEDES

Lugar: Buenos Aires; Año: 2007 p. 1 - 66

1851-1864

Executive SummaryThis paper presents and analyzes the macroeconomic policies implemented inArgentina in the nineties and in the period that followed the collapse of theConvertibility regime. It also examines the connections between macroeconomicpolicies and the evolution and performance of labor-market variables and someindicators of income distribution and social conditions.Since 1991, the Convertibility Law transformed the central bank into a currencyboard. The legal constraints on the central bank’s ability to autonomously manage themonetary base left domestic liquidity and credit almost fully dependent on the evolutionof the stock of foreign reserves, that is, on the balance of payments results. Themacroeconomic setting of the nineties also combined trade opening with anappreciated exchange rate that resulted in a chronic trade balance deficit and a risingcurrent account deficit. To sustain any positive rate of growth the economynecessitated substantial and increasing external capital inflows.In a first phase of significant financial inflows, the economy expanded while itsvulnerability to foreign shocks increased. The volatility of the international financialconditions confronted by the country was mechanically transmitted to both domesticactivity and employment levels.The unfavorable turn in the external financial situation which took place in 1997-1998, after the Southeast Asian and Russian crises, found Argentina with a high andgrowing current account deficit, an over-appreciated currency, and an evident shortageof policy instruments for dealing with this set of problems, because of the rigidity of themacroeconomic scheme adopted. The country risk premium increased and theeconomy stagnated. The 1999 Brazilian crisis was a significant addition to the series ofnegative shocks. By late 2000 a run against the peso started. It kept going intermitentlythrough 2001 bringing the macroeconomic regime to its final crisis.It is at first sight striking that the crisis and the massive default took place in acountry that for a long time was considered an example of the Washington Consensussuccess. Almost until the end of the nineties, the IMF and most of the financial market’sanalysts considered the Argentinean experience as one of the success stories ofmacroeconomic policy and structural reforms in the financial globalization context. TheArgentinean currency board regime was usually mentioned as an example of a feasible“corner solution” for the exchange rate policy in an emerging market country.An employment cycle was clearly observable in Argentina under convertibility.The aggregate employment rate tended to rise in the early nineties, subsequently goingdown steadily and standing at the end of 1996 well below the 1990 employment rate.Privatizations and fiscal adjustment in the provinces had a bearing on this behavior, butthe heaviest negative impact came from the restructuring and concentration of activitiesin the production of tradable goods caused by trade openness and exchange-rateappreciation.