"La convertibilidad argentina: origen, apogeo y crisis" - Cavallo, parte 1

Name: "La convertibilidad argentina: origen, apogeo y crisis" - Cavallo, parte 1
Uploaded: 2016-05-12T18:10:32.000Z
Duration: 2 h 24 s

Introduction to the Meeting

Overview of Participants

The meeting features Domingo Cavallo, a prominent figure in Argentine economics, who has held various significant positions including Minister of Economy and Foreign Relations.

Cavallo completed his doctorate in economics at Harvard in 1982 and later served as President of the Central Bank of Argentina.

Format of the Discussion

The format is structured as an interview led by Guido Sandleris and Ernesto Sharovsky from the Universidad de Itela. They will focus on two main periods: 1989-1996 and 2001, followed by audience questions.

Context of Economic Changes in 1989

Initial Government Involvement

Cavallo discusses his entry into government under Menem's administration starting with the Ministry of Foreign Relations before moving to the Ministry of Economy. He reflects on the challenges faced during this transition period leading up to 1991.

Personal Background Influencing Policy

After returning from postgraduate studies, he established an institution for economic research funded by local businesses, which allowed him to build a team focused on public policy discussions across Argentina.

Economic Challenges Faced

Persistent Inflation Issues

Cavallo highlights that Argentina was grappling with persistent inflation lasting over four decades, alongside a lack of productive investment and technological backwardness affecting both public and private sectors.

Need for Structural Reforms

He emphasizes that these issues stemmed from poorly organized economic structures and inadequate regulatory frameworks that had developed over time, necessitating comprehensive reforms to address them effectively.

Political Engagement and Influence

Role in Legislative Processes

His experience as a national deputy (1987-1989) allowed him to engage with key political figures within Menem's circle, where he advocated for necessary economic reforms based on his insights into Argentina's realities at that time.

Collaboration with Key Figures

Cavallo mentions working closely with Guido Ditela to present their vision for Argentina’s future economy during legislative sessions, which attracted attention from Menem’s advisors seeking innovative economic strategies.

Advisory Role During International Engagement

Supporting Menem's European Trip

Argentina's Global Relations and Economic Strategy

The Need for Re-establishing International Ties

The speaker emphasizes the importance of rethinking Argentina's relationship with the world, highlighting past isolation from trade and investment flows.

Upon Menem's presidency in July 1989, there was a need to improve Argentina’s global standing and financial relationships.

Formation of Governmental Roles

Menem appointed key figures: Jorge Triaca as Minister of Labor and the speaker as Minister of Foreign Affairs, indicating a strategic team approach to economic and foreign relations.

The speaker initially considered the role of President of the Central Bank but insisted on its independence from the Ministry of Economy, which led to his appointment in foreign affairs instead.

Diplomatic Engagements and Economic Reform

The collaboration between the speaker and Guido Ditela was crucial for establishing strong ties with U.S. government entities like the Treasury Department.

Negotiations with Brazil were initiated to create a common market, addressing international security concerns that previously strained relations.

Nuclear Non-Proliferation Efforts

Agreements were made between Argentina and Brazil regarding nuclear non-proliferation, fostering regional stability by eliminating fears of an arms race.

These diplomatic efforts contributed to improved international perceptions of Argentina as a responsible nation in terms of security.

Challenges in Economic Management

Transitioning from Foreign Affairs back to Economics was prompted by previous ministers' failures to address hyperinflation effectively.

Economic Reforms and the Convertibility Plan

Initial Challenges in Economic Leadership

The Ministry of Public Works faced challenges during the privatization and economic reform processes, with key figures like Herman González and Javier González Fraga at odds over inflation strategies.

The speaker was deeply involved in the Gulf War while serving as Foreign Minister, which led to a request from Menem to take charge of the Ministry of Economy.

The speaker emphasized the importance of coherent appointments within the ministry, gaining full freedom to assemble an effective economic team.

Formation of a Coordinated Economic Team

Collaboration with Guido Itela at the Ministry of Foreign Affairs facilitated coordinated efforts towards economic goals.

A significant turning point occurred in early 1991 when discussions began around a convertibility plan aimed at stabilizing Argentina's economy amidst hyperinflation.

Conceptualizing the Convertibility Plan

Questions arose about whether the convertibility plan should be temporary or permanent as a means to combat hyperinflation.

In late 1989, there was widespread panic regarding potential devaluation, leading to public unrest and long lines for fuel due to anticipated price hikes.

Strategic Proposals Amidst Crisis

While recovering from surgery, the speaker advised Herman González on addressing imminent financial crises related to fixed-term deposits set to mature soon.

Roque Fernández proposed the Bonex Plan as a solution; however, he had left his position at Banco Central prior to its implementation.

Implementation Challenges and Political Dynamics

Despite proposing that Bonex be paired with a convertibility plan for stability, internal disagreements led to its dismissal by key decision-makers.

Throughout 1990, ongoing discussions focused on how best to tackle inflation without viewing stabilization as an end goal but rather as a prerequisite for broader economic reforms.

Establishing Conditions for Stability

The speaker viewed stabilization not just as an objective but essential for creating rules that would integrate Argentina into global markets and facilitate fiscal management.

Upon assuming office, immediate efforts were directed toward establishing conditions necessary for launching a comprehensive convertibility plan through legislative discussion rather than executive decree.

Collaborative Efforts Towards Economic Reform

A small team worked diligently on drafting legislation informed by historical precedents like Argentina's conversion box established in 1890 during another crisis.

Legislative Process and Economic Insights

Overview of Legislative Actions

The project of law was prepared and sent to Congress on March 14, shortly after the speaker assumed office on February 1.

The law was discussed in both chambers of Congress and approved by March 28, with implementation starting on April 1.

Sources for Economic Planning

The primary influences for creating the convertibility plan were not just theoretical knowledge but also Argentina's historical experiences, particularly from 1890.

Real-world conditions significantly shaped the approach taken towards economic reform.

Public Response to Inflation

During periods of high inflation and hyperinflation, people began using the dollar instead of the national currency (austral), indicating a shift in trust towards foreign currency.

Individuals would immediately exchange australes for dollars, reflecting a lack of confidence in their own currency.

Establishing a New Currency

A new currency backed by dollars was proposed to align with what citizens had already adopted as a solution to inflation.

The speaker emphasized that while there may be multiple economic equilibria, the dollar emerged as the most trusted medium for transactions during inflationary times.

Institutional Framework Over Price Levels

The focus was on establishing an institutional framework around currency rather than merely fixing price levels; this included backing the new currency with dollars.

There was an intention to suggest that the Argentine peso could eventually surpass the dollar in value.

Market Dynamics and Monetary Policy

Initial valuation of the Argentine peso against dollars was left to market forces without restrictions on capital movement.

A controversial decision was made to instruct the Central Bank to issue necessary pesos/australes to eliminate floating debt without prior explanation due to its complexity.

Managing Market Reactions

Concerns arose about excessive money issuance leading to panic among financial circles, prompting warnings about potential devaluation.

This led to significant dollar withdrawals from banks; however, measures were taken quickly to stabilize market confidence through legal reserve requirements.

Stabilization Efforts Post-Crisis

Following immediate actions taken by banks, within days $600 million were recovered against $300 lost previously due to panic selling.

A fixed rate of 10,000 australes per dollar was established based on available reserves which helped stabilize expectations amidst hyperinflation concerns.

Economic Stabilization and Political Consequences

Transition from High Inflation to Stability

In March 1990, inflation was still at 5000% annually, but by March 1991, the economy began functioning with stable prices. This shift led to a significant reduction in inflation over several months, eventually reaching zero.

The stabilization of the economy had profound political implications; figures like Dualde and Kirchner initially hesitated to pursue gubernatorial candidacies but changed their minds once economic stability was achieved.

Election Dynamics in 1991

The elections of 1991 were unexpectedly won by Menem's party despite initial predictions of disaster for Peronism. Polls indicated a potential loss across provinces earlier that year.

Menem strategically scheduled elections in certain provinces (Río Negro, San Luis, San Juan) to maximize his chances of winning. He anticipated losses in Río Negro but secured victories elsewhere.

Impact of Convertibility on Elections

The success of convertibility became evident as it allowed for electoral victories; this trend continued until 1997. Politicians recognized that a fixed exchange rate could be advantageous during hyperinflationary periods.

However, nominal prices are rigid downwards; adverse shocks can lead to competitiveness issues if the currency remains pegged without adjustments.

Competitiveness Concerns and Future Strategies

By October 1992, concerns about industrial competitiveness arose. A proposal for transitioning to a basket of currencies faced market resistance leading to a temporary run against the peso.

There was an ongoing debate about whether convertibility should be permanent or transitional; while convertibility aimed for permanence, the fixed exchange rate with the dollar was not intended as such.

Dolarization vs. Convertibility

Initial discussions included ideas around dollarizing the economy; however, there were reservations due to Argentina's diverse trade relationships compared to Mexico’s reliance on the U.S.

The speaker advocated for creating an Argentine currency backed by dollars rather than outright dollarization. This approach aimed at fostering confidence and credibility within national monetary policy frameworks.

Long-term Economic Integration Perspectives

There was optimism regarding regional integration with Brazil and South America potentially leading towards a common currency similar to the Euro model.

Concerns about excessive appreciation of the dollar were mitigated by low productivity levels in Argentina at that time; expectations were set that productivity growth would lead to peso appreciation instead.

Exit Strategy Considerations

Monetary Policy and Currency Fluctuations

The Dynamics of Floating Currencies

The transition from the British pound to the US dollar led to the floating of the Singapore dollar, which experienced appreciation and depreciation due to normal fluctuations rather than a monetary crisis.

Argentina had an opportunity for dollarization in 1997 after overcoming the tequila crisis, attracting significant capital inflows that could have stabilized its economy.

There was substantial liquidity in 1997; however, political resistance from exporters, bankers, and provincial governors prevented allowing the peso to float.

Allowing the peso to float would have enabled inflation targeting by the Central Bank, but political climate did not support this necessary change.

Lessons from Peru's Monetary Policy

Despite being highly dollarized, Peru successfully implemented a floating convertibility regime without facing major issues during economic crises.

Argentina could have followed Peru’s example; even with potential devaluation risks during crises like those in Russia and Brazil, it wouldn’t have been perceived as a systemic failure.

Critique of Indexation Policies

A critical error made was prohibiting indexation in 1997. Milton Friedman suggested suspending it temporarily instead of banning it outright.

Prohibiting indexation led to long-term contracts being denominated in dollars rather than pesos, increasing vulnerability to currency fluctuations.

Missed Opportunities for Economic Reform

If contracts had allowed for indexation in pesos, transitioning from fixed exchange rates to floating rates could have been more feasible.

By late 1998 and early 1999, external conditions worsened with capital outflows due to global crises; thus opportunities for reform diminished significantly.

Alternative Currency Strategies

On January 1st, 1999, introducing a basket of currencies (including euros and reais alongside dollars) could have provided stability against fluctuating exchange rates.

This strategy would allow Argentina's currency value adjustments based on multiple currencies rather than solely relying on the dollar's performance.

Economic Challenges and Labor Market Dynamics in Argentina

Unemployment Trends from 1990 to 1994

The period between October 1990 and October 1994 saw a significant increase in unemployment, nearly doubling from 6% to 12%. This raises questions about the underlying causes of this trend.

There was an expectation that unemployment would correct itself through wage reductions, increased productivity, and investment. A more flexible labor regime was also suggested as necessary for improvement.

Causes of Unemployment Increase

The rise in unemployment leading up to the Tequila Crisis was attributed not to currency convertibility or exchange rate delays but rather to comprehensive reforms and modernization processes during that time.

In the 1980s, average labor productivity decreased by 25%, while gross product fell by 10%. Despite a rise in employment by 15%, productivity issues persisted, indicating inefficiencies within the workforce.

Economic Recovery and Employment Elasticity

Although there was substantial economic growth in the early '90s (1991-1993), employment growth remained low due to recovering productivity levels; a mere increase of 2% in employment resulted from a 10% rise in product output.

Many workers were engaged in low-productivity activities, particularly within state enterprises, which hindered immediate re-employment opportunities during recovery phases. Flexible labor regimes were proposed as solutions for fostering new business creation.

Labor Regime Reforms

Efforts were made to reform labor regulations for small and medium-sized enterprises (SMEs) but faced opposition from unions regarding easing dismissal restrictions. A proposal included replacing these with better unemployment insurance systems.

Fiscal pressures from international financial institutions like the IMF delayed crucial reforms intended to improve tax structures related to labor costs, impacting job creation negatively. These reforms began but were interrupted due to external pressures around March '95.

Training Programs and Their Impact

Emphasis on retraining programs became essential for facilitating workforce reintegration into various sectors; initiatives like the "Programa Joven" aimed at providing practical training for youth who had not completed secondary education proved beneficial yet needed expansion.

Over 200,000 young individuals benefited from such programs; however, it was argued that more extensive efforts should have been implemented across similar initiatives to address rising unemployment effectively during this period.

Effects of the Tequila Crisis on Employment

The Tequila Crisis significantly contracted Argentina's economy as capital flight ensued due to fears of devaluation following Mexico's crisis; this led to a loss of approximately 25% of reserve stocks amidst heightened economic instability.

Understanding Central Bank Limitations and Fiscal Discipline

The Role of the Central Bank

The Central Bank's inability to issue currency freely was not fully understood, emphasizing the need for fiscal balance and avoiding excessive debt during that period.

Lessons from the Tequila Crisis

The Tequila crisis taught misleading lessons, such as the belief that the U.S. government acts as a lender of last resort to resolve any financial panic, and that convertibility offers protection against economic shocks.

Political Implications Post-Crisis

Surviving the Tequila crisis had positive effects; however, it also created a false sense of security among politicians regarding their ability to manage future crises effectively.

Political Spending Behavior

Politicians globally tend to believe they can solve societal issues through government spending, leading them to consistently seek more funds for expenditure.

Budgetary Reforms in Argentina

A significant reform post-crisis was reinstating budget discussions in Congress, which involved extensive debates on fiscal planning and accountability.

Fiscal Management and Transparency

Establishing Financial Order

From 1991 onwards, Argentina implemented structured budget discussions in Congress, ensuring budgets were presented timely and approved before new fiscal years began.

Laws Promoting Fiscal Responsibility

New laws introduced mechanisms for transparency and restrictions on spending increases, contributing to improved fiscal order within the country.

Addressing Hidden Debt Issues