Argentine economic reform under way

Fundamental changes in thinking about economic policy are evident in Argentina, says Domingo Cavallo, the countrys minister of the economy.

Taking a historical perspective, he notes in a report he co-authored on Latin America that in the second half of the nineteenth century and in the early twentieth century, Argentina enjoyed great prosperity and stability. But the countrys fall from grace began in 1929. For the most of the next 60 years, Argentina was ruled by a succession of civilian and military governments that were either misguided or weak. Economic policies were heavily interventionist: tariffs were raised to provide protection from foreign competition, government boards were set up to regulate all aspects of commerce and economic issues tended to be settled politically rather than through the marketplace.

In 1983, things began to change. Argentina suffered a major economic and political collapse, following a military defeat. The civilian government of President Raul Alfonsin that was then elected was unable to achieve radical reform, and the economy continued to deteriorate. By the time the Alfonsin government fell in 1990, inflation was at 200% a month.

Cavallo notes that under the next administration, led by President Carlos Menem, the needed economic reforms began to take hold. Notably, the government has made a beginning on privatization and on reducing public expenditures, drastically reduced or eliminated tariffs on most imports and transformed the Central Bank into what is virtually a currency board, which, together with the fact that the currency is now backed by gold or foreign exchange, has helped restore faith in the austral.

Argentinas reforms remain unfinished, Cavallo points out. In particular, there is concern that inflation remains at 1.5% a month down from 200% but still at a rate that will rapidly undermine competitiveness with the austral virtually tied to the U.S. dollar. Moreover, the privatization program is only half complete.

Nevertheless, he adds, several critically important changes have occurred, most notably that politics is no longer the key to making money in Argentinas economy.

From a recent issue of Survey, a publication of the International Monetary Fund.