In the Wake of the Crisis. Argentina´s new economic and labour policy directions and their impact

MARTA NOVICK; CARLOS TOMADA; MARIO DAMILL; ROBERTO FRENKEL; ROXANA MAURIZIO

International Institute for Labour Studies

Lugar: Ginebra; Año: 2007 p. 129

978-92-9014-850-0

Macroeconomic policy changes in Argentina at the turn of the century Mario Damill,Roberto Frenkel and Roxana Maurizio This paper presents and analyzes the macroeconomic policies implemented in Argentina in the nineties and in the period that followed the collapse of the Convertibility regime in late 2001. It also examines the connections between macroeconomic policies and the evolution and performance of labour-market variables and some indicators of income distribution and social conditions. Since 1991, the Convertibility Law transformed the central bank into a currency board. The legal constraints on the central bank’s ability to autonomously manage the monetary base left domestic liquidity and credit almost fully dependent on the evolution of the stock of foreign reserves, that is, on the balance of payments results. The macroeconomic setting of the nineties also combined trade opening with an appreciated exchange rate that resulted in a chronic trade balance deficit and a rising current account deficit. To sustain any positive rate of growth the economy necessitated substantial and increasing external capital inflows. In a first phase of significant financial inflows, the economy expanded while its vulnerability to foreign shocks increased. The volatility of the international financial conditions confronted by the country was mechanically transmitted to both domestic activity and employment levels. The unfavourable turn in the external financial situation which took place in 1997-1998, after the Southeast Asian and Russian crises, found Argentina with a high and growing current account deficit, an over-appreciated currency, and an evident shortage of policy instruments for dealing with this set of problems, because of the rigidity of the macroeconomic scheme adopted. The country risk premium increased and the economy stagnated. The 1999 Brazilian crisis was a significant addition to the series of negative shocks. By late 2000 a run against the peso started. It kept going intermittently throughout 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 a country that for a long time was considered an example of the Washington Consensus success. Almost until the end of the nineties, the IMF and most of the financial market’s analysts considered the Argentinean experience as one of the success stories of macroeconomic policy and structural reforms in the financial globalization context. The Argentinean 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 going down 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 behaviour, but the heaviest negative impact came from the restructuring and concentration of activities in the production of tradable goods caused by trade openness and exchange-rate appreciation. The end of the macroeconomic regime of the nineties involved a series of traumatic events, including a huge depression of economic activity, a financial crisis, the partial default of the public debt, a strong devaluation of the peso and a considerable worsening of social conditions in 2001-2002. However, since the second quarter of 2002, GDP has been growing at an impressive rate, between 8 and 9 per cent yearly. The paper shows that domestic factors had the main bearing in explaining the 2002 turning point. The recovery was actually bolstered by the shift in the relative prices caused by the devaluation and also by an adequate set of policies that, despite some flaws and ambiguities, nevertheless succeeded in stabilizing the FX market and domestic prices and recuperating the basic macroeconomic equilibria. Among the many factors behind this recovery, the launching in the second semester of 2002 of an unemployment subsidy programme (the so-called ‘Plan Jefas y Jefes de Hogar Desocupados’) should be underlined. It provided income to about 1.8 million of beneficiaries. An improvement in nominal wages was associated with a rapid fall in unemployment, and was also helped by an official policy consisting in several lump-sum rises in private sector wages determined by decree during 2002-2004. There is significant evidence showing that a depreciated or competitive real exchange rate tends to increase the labour intensity of output, given a certain activity level or growth rate. So, the employment recuperation stimulated private consumption through two effects: on the one hand, by increasing the number of wage earners and, on the other, by contributing to the rise in real wages. The economic recovery has among its main pillars a strong adjustment in the balance of payments current account results and also in the In the wake of the crisis: Argentina’s new economic and labour policy directions fiscal accounts. An utmost step to fiscal consolidation after the crisis was the partial restructuring of the public debt. It involved a significant haircut in the nominal amount of the public financial liabilities, as well as an important reduction in interest rates and a considerable extension of average maturity. The government also captured part of the income effect of the peso devaluation through export taxes that made an important contribution to fiscal consolidation. The paper examines in detail the monetary and exchange rate policies of the post-crisis period, paying also attention to the relationship between the IMF and Argentina after the devaluation and the default. It is argued that the IMF’s support was absent precisely when it would have been more necessary: in the period after the devaluation, when efforts to stabilize the economy were at the centre of the economic policy. Although the new management’s criticisms regarding the support given by the IMF to the convertibility regime were justified, this did not provide a reason for not supporting the post-devaluation stabilization efforts. On the contrary, the self-criticism of the IMF implies an acknowledgement of its own part of the responsibility for the crisis. Therefore, the organization should have been even more committed to the stabilization attempts. Beyond that, the Argentine authorities permanently had to confront the staff in order to defend their diagnosis and preserve their degrees of freedom. At the beginning of 2002, for instance, the IMF exerted pressure asking for a free floating of the peso. When the measure demanded by the IMF was implemented, it was followed by an abrupt rise in the price of the dollar, as it was clearly expectable, and a fast acceleration of inflation. The country got nothing in exchange for that “prior action.” Soon after, a new stabilization programme was implemented that preserved the flotation but introduced interventions in the exchange market, and reinforced some exchange controls aiming at stabilizing the exchange rate. This policy also faced the opposition of the IMF, though in this situation the demands of the institution were not satisfied. The interventions and the control measures that were introduced, in spite of the opposition of the Fund’s staff, turned out to be crucial for the exchange rate and the inflation stabilization. It is clear that had the economic policy followed the orientation that the IMF wanted, the evolution of the economy would have been more in line with what the IMF expected. The implementation of the measures promoted by the IMF would have transformed its implicit diagnosis in a self-fulfilling prophecy. Finally, by the Macroeconomic policy changes in Argentina at the turn of the century end of 2006 the government decided to pay back ahead of schedule the whole outstanding debt owed to the IMF, or close to 10 billion US dollars. By mid 2002, the rise in the price of international currency could be stopped and an appreciation period ensued. The nominal and real appreciation process ended around mid-2003. This was mainly the result of a deliberate policy decision. The preservation of a stable and competitive real exchange rate (SCRER) was gaining relevance in the official policy orientation. The government started to make explicit reference to the importance of preserving a SCRER in the official economic strategy. Although the announcements did not identify a specific policy target, the government — meaning both the central bank and the Treasury- operations in the FX market actually controlled the price of the dollar in a range between $ 2.8 and $ 3.10. This exchange rate policy has been conducted together with a monetary policy based on quantitative monetary targets, which started in 2003. In 2003 the central bank started to face more openly the situation of dealing with two ‘potential’ conflicting objectives: the preservation of a competitive exchange rate by intervening in the FX market and at the same time the attainment of the strict monetary expansion targets announced in the monetary programme. In order to soften the appreciation pressures in the FX market and thus alleviate the central bank’s intervention needs, controls on the capital account were introduced in June 2005. In the recovery period, employment and wages also recovered significantly. The full-time employment rate recuperated all the fall experienced during the Convertibility regime period reaching similar levels to the early eighties. On the other hand, the current total employment rate (without social plans) reached the highest in the available series. There has also been a reduction in the wage gap between the extremes of the distribution that has contributed to the reduction in inequality among workers. One of the factors that have contributed to this process has been the significant incomes policy implemented by the National Government since mid-2002 through lump-sum rises and increments in the minimum wage. In effect, the Gini index of income from main occupation fell 8 per cent between the first semester of 2003 and the first semester of 2006 passing from 0.472 to 0.435. However, despite the reversal in the trend towards greater inequality, the concentration of income is still high due to the high level of income inequality prior to the change of regime. In the wake of the crisis: Argentina’s new economic and labour policy directions