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Argentina has experienced slow economic growth since the 1940s.

By the mid-1970s long-term growth declined noticeably, and in

the last half of the 1980s the country suffered its longest

period of stagnation in the century. Savings and investment

rates fell precipitously from the mid-1970s until 1989.

Argentines, responding to the unstable macroeconomic

environment, increasingly saved and invested abroad. Labor

productivity fell ang poverty worsened. This economic

performance was tranceable to chronic public sector deficits and

endemic inflation. Public sector deficits in the late 1970s

ranged from 10 to 14 percent of GDP, and in the early 1980s

surpassed IS percent of GDP. After the return to constitutional

democracy in 1983, public demands to control inflation were

translated into four successive stabilization programs. All

failed to eradicate inflation, and each ended in a more virulent

inflation than the one preceding it. The main reason for these

failures was the inability of the stabilization programs to

redress rapidly and permanently the public sector structural

deficit. Structural deficits emerged from the post-war

organization of the economy. Economic policy from the 1940s was

used to propagate rules and transfers favoring the interests of

private groups with access to power. By the early 1980s public

expenditures approached 40 percent of GDP. Unionized labor

benefitted from high wages, guaranteed employment, and rigid

rules governing hiring and dismissals. Industry benefitted from

highly protected markets, tax exemptions through special

promotion regimes, subsidized credit-or effective grants, as

many loans were not collected-subsidized inputs from public

enterprises, and high prices on sales to public enterprises.

Housing contractors and middleclass home buyers benefitted from

enormous public transfers through earmarked taxes and effective

grants through the Housing Bank. Tobacco growers, sugar growers,

the merchant marine, and other small interest groups enjoyed

special tax breaks. Consumers enjoyed below-cost tariffs from

public enterprise and lax collectioll practices. Provincial

governments could avail themselves of costless credit from the

provincial banks, which the central bank reimbursed. The

military enjoyed expanding budgets, especially over 1976-82, as

well as management perquisites in state companies they

controlled. By 1989 subsidies through the budget, tax

exemptions, agriculcural regulations, public enterprise tariffs,

and central bank rediscounts were estimated to amount to roughly

8 percent of GDP--the equivalent of some $8 billion. The growth

of the state and concomitant rents and subsidies, along with the

capital flight provoked by an inconsistent exchange rate policy,

were financed during the late 1970s largely by external

borrowing through the expanding Eurodollar market at low or even

negative real international interest rates. This permitted the

government to run large deficits and sustain a revalued exchange

rate with relatively low levels of inflation in the second half

of the 1970s. An abrupt end to voluntary foreign commercial

credit in the early 1980s and the sudden rise in real

international interest rates provoked a financial collapse and

placed additional pressure on public finances. The situation was

complicated by the South Atlantic War. The loss of external

finance and lack of adjustment meant the treasury had to resort

to increased inflationary finance through monetary creation. The

private sector, in an effort to avoid the resulting inflation

tax, gradually withdrew its resources from the financial system

and reduced its real holdings of currency ; this, together with

the negative effects of inflation on real tax collections, made

Argentina's economy progressively more unstable in the 1980s.