Stabilization and its Discontents: Argentina’s Economic ...€¦ · The conclusion sketches strategies to address today’s shortcomings, with speciﬁc attention on the macro,

Stabilization and its Discontents: Argentina's

Economic Restructuring in the 1990s

MANUEL PASTOR JR.University of California at Santa Cruz, USA

and

CAROL WISE *

Johns Hopkins University, Washington, USA

Summary. Ð This paper assesses the Argentine stabilization and market reform strategiessince 1989. We argue that Argentina may be penned in by its own success: exchange ratetargeting quelled in¯ation but the resulting real appreciation has limited export andemployment growth; microeconomic reforms raised e�ciency but have threatened in-come distribution and hence political stability; exclusive styles of policy-making helpedenact reform but have led to corruption and policy insensitivity and contributed torising social discontent. We close by suggesting how a ``second generation'' of reformscould tackle these issues and spread the proceeds of reform to a wider segment of theArgentine public. Ó 1999 Elsevier Science Ltd. All rights reserved.

1. INTRODUCTION

Until not so long ago, Argentine economy ministerDomingo Cavallo was fond of saying, `Àrgentina isMexico two years later''. When, in late December,the shockwaves of the Mexican devaluation caused afall in the Buenos Aires stockmarket and an upsurgein demand for US dollars, Cavallo changed his tune.`Àrgentina,'' he said, `ìs not Mexico''. Latin Ameri-can Weekly Report, January 12, 1995.

On July 26, 1996, Argentina's ¯amboyanteconomics minister, Domingo Cavallo, wassummarily removed from o�ce by Argentina'sequally ¯amboyant President Carlos Menem.With the o�cial announcement coming late ona Friday afternoon, markets had little time toreact to the departure of an o�cial who hadbeen the architect, and self-styled guarantor, ofthe famed ``Convertibility Plan'' responsible fordelivering Argentina from the throes of hyper-in¯ation. Yet as the next business week opened,the peso held its value and stocks actually rose.In the short-run, this favorable reaction sig-nalled a positive assessment of Cavallo's re-placement by a low-key former Central Bank

President with a market-reassuring economicsPh.D. from the University of Chicago. Morefundamentally, it appeared that the countryhad made the transition from sole reliance onthe credibility of just a handful of o�cials to adeeper faith in the macroeconomic laws nowgoverning Argentina's economy.

World Development Vol. 27, No. 3, pp. 477±503, 1999Ó 1999 Elsevier Science Ltd

All rights reserved. Printed in Great Britain0305-750X/99 $ ± see front matter

PII: S0305-750X(98)00152-1

* The authors thank the North-South Center at the

University of Miami, the US Institute of Peace, the

Social Science Research Council, and the Fulbright

Commission in Buenos Aires for funding the research on

which this article is based. Maria Barboza, Julie Jacobs,

Rachel Rosner, and Walter Weaver provided excellent

research assistance. Special thanks to Fernando Flint,

whose help and support in Buenos Aires contributed

greatly to our ®eld work; to Adolfo Canitrot for hosting

this project at the Instituto di Tella in Buenos Aires; and

to Carol Graham, Fernando Flint, Robin King, Victoria

Murillo, Bill Smith, Nestor Stancanelli, and two anon-

ymous referees for their thoughtful comments. An

earlier version of this paper (under the same title) was

published as Agenda paper 31 by the University of

Miami North-South Center (Coral Cables, FL: May

1998). Final revision accepted: 21 September 1998.

477

But should Argentina be celebrating a sort of`ènd of history'' Ðor at least its own history oferratic policy cycles, chronic macroeconomicinstability, and prolonged bouts of social andpolitical turmoil? While the Convertibility Planpurged the economy of in¯ation, and fostered areturn to growth, particularly as pent-up de-mand surged through the economy during1991±1994, there have also been some clearpitfalls to this strategy. Most obvious has beena sharp appreciation of the exchange rate,which has worked against the country's fullrealization of its export potential and maymake it di�cult to sustain higher growth intothe medium term. A major symptom of thisdilemma is the precarious rate of unemploy-ment, which in Buenos Aires had increased toaround 13% by 1994 and then skyrocketed to20% in the wake of Mexico's 1994 peso crisis.While the labor market has improved since,much of the available work is now temporary,and underemployment remains a seriousproblem. Not surprisingly, social tensions areagain running high in Argentina, with publicconcern over hyperin¯ation giving way to thefear of ``hyperunemployment,'' and oppositionpoliticians making gains in recent politicalcontests.

In this essay, we assess the Argentine exper-iment and speculate on its future prospects.While the growth and in¯ation results mayhave been impressive, there are worrisomeemployment and distributional trends whichare more than transitional costs related tomarket restructuring. Rather, they have re-sulted from the failure to coordinate micro andmacro reforms, that is, to o�set rigid manage-ment of ®scal and exchange rate policy underthe Convertibility Plan with programs designedto help economic agents adjust to the addi-tional simultaneous challenges of trade liberal-ization and privatization. As a result,Argentina needs what Michel Camdessus, thehead of the International Monetary Fund(various years) (IMF) has termed a ``secondgeneration'' of reforms,1 especially a more co-hesive set of market-supporting strategies andfar more attention to repairing the distribu-tional stresses and political strains that havebeen part and parcel of Argentina's contem-porary political economy.

The remainder of this essay develops thesearguments as follows. Section 2 analyzes andcritiques the macroeconomic stabilizationprogram that began with the implementationof Cavallo's Convertibility Plan in 1991. We

agree that, in light of the prevailing high in-¯ation, there was little alternative to theConvertibility Plan when it was adopted, butargue that the resulting appreciation has likelydampened the potential for export and em-ployment growth. Section 3 reviews the keymicroeconomic initiatives that were undertak-en in conjunction with the convertibility sta-bilization plan and elaborates on the maindimensions of distributional stress (includingunderperforming labor markets, increasinglyunequal household incomes, and growing dis-parities in the performance and asset base ofsmall and large ®rms); we then review thepolitics of the reform process, noting that theMenem administration's autocratic and insu-lated style of decision-making, especially whencombined with the uneven distribution ofbene®ts from new policies, has worked againstthe need to broaden the social base for reform.The conclusion sketches strategies to addresstoday's shortcomings, with speci®c attentionon the macro, micro, institutional, and politi-cal dimensions.

2. MACROECONOMIC STABILIZATION:CONTEXT, STRATEGIES, AND

OUTCOMES

Argentina has always been a country with moderategrowthÐbelieving that spectacular growth and richesare right around the corner. And when a good yearcomes, the Argentines say, `àh-ha, here comes the lifewe have been waiting for and so deserve''ÐDanielHeyman, Sta� Economist, UN Economic Commis-sion for Latin America and the Caribbean, BuenosAires.2

(a) In¯ation, convertibility, and growth

1989 marked a dramatic break with Argen-tina's past. For the ®rst time ever, a demo-cratically elected president from one politicalparty was succeeded by a democratically elect-ed president from another party (McGuire,1995, p. 200). Unfortunately, this positive po-litical transition occurred in the midst of thecountry's worst economic crisis; as newlyelected President Carlos Menem took o�ce inJuly, the monthly in¯ation rate soared to 197%(see Figure 1).3 Given the urgency of the crisis,the President reached beyond the working classand populist roots of his own Peronist backersin the Partido Justicialista (PJ) and sought

478 WORLD DEVELOPMENT

the support of business interests and themiddle classes in the e�ort to tame skyrocketingprices.

At ®rst, the Menem team moved graduallyon the macroeconomic front, launching a``Bunge and Born Plan'' named after thecounty's largest transnational ®rm whose ad-visors had helped to design it.4 The moderatelyheterodox program, which relied on the samesort of price controls as had been implementedunder Alfons�õn's Austral Plan, unraveledquickly when the government was forced tocarry out a large step devaluation in December1989. At this time, all price controls wereeliminated, and the currency was allowed to¯oat. Not surprisingly, in¯ation exploded onceagain in the ®rst quarter of 1990; thereafter,in¯ation slowed, albeit to a still worrisome rateof 11% a month.5

In January 1991, Domingo Cavallo was ap-pointed as Economics Minister and soonlaunched the now famous Convertibility Plan.Passed quickly by the Argentine Congress intoformal legislation, the Plan obliged the CentralBank to: (i) back up a ®xed exchange rate byagreeing to convert national currency into for-eign exchange at that rate; and (ii) calibrate themonetary base to the level of foreign currencyassets. Like the approach that evolved in Me-xico during 1987±94, a key assumption was thata ®xed exchange rate, when coupled with im-port liberalization, would provide an e�ectivecontrol against domestic price hikes. Moresigni®cantly, by removing discretion frommonetary creation, convertibility sought toimpose the sort of macroeconomic disciplineonce provided by the historic gold standard.6

This new set of rules also enhanced the privatesector's in¯uence over the economy: if local in-vestors were displeased with the course of eco-nomic policy, the exodus of their resources viacapital ¯ight could trigger a destabilizing reces-sion.7 To bring the private sector more ®rmly onboard in facilitating the process of disin¯ation,the government initially asked leading compa-nies to ``voluntarily'' engage in price restraint. Asthe currency gradually stabilized, so did prices.By May 1991, monthly in¯ation had tapereddown to around 3% and by 1992, the monthlyaverage was less than 1.5%. By 1994, annual in-¯ation was less than 4%.

On the ®scal side, the Menem administrationhad inherited a public sector de®cit that averaged9% of GDP through the 1980s.8 Because theConvertibility Plan excluded the possibility ofdomestic credit creation, the central governmentwas under intense pressure to keep its ®scal housein order. Fortunately, the Menem administrationhad moved, even prior to Convertibility, toeliminate tax evasion, improve tax administra-tion and compliance, and curtail rampant publicspendig. Legislative reform centered on increas-ing tax revenues on income, a sizeable increase inthe value-added tax (from 13% to 18% ± subse-quently raised again to 21% in March 1995 as an`èmergency measure'' but never reduced as the``tequila crisis'' subsided) and the construction ofa regulatory framework for the privatization ofstate-owned companies and assets.

The impacts of these monetary and ®scal re-forms on growth were initially positive. As canbe seen in Figure 2, the ®rst two years of theprogram prompted a bouyant recovery, withgrowth sustained at a slightly more moderate

Figure 1. Argentine monthly in¯ation, 1982±97.

STABILIZATION AND ITS DISCONTENTS 479

pace in 1993±94. In regional terms, Argentinaposted the second fastest growth rates for thisperiod in Latin America, and the Argentinerecipe was pronounced a success both at homeand abroad. In light of the extreme policyswings and political economic decline that hadcharacterized the country throughout the post-war era, it appeared that Argentina had ®nallyturned a necessary corner.

(b) All that glitters is not (the) gold (standard)

Or had it? By late 1994, some investors and®nancial analysts were again expressing con-cern about Argentina, particularly with regardto the rising value of the peso. In the aftermathof hyperin¯ation, it is typical for price move-ments to take time to completely stabilize; in

this case, it took until 1994 before domesticin¯ation fell more or less in line with interna-tional in¯ation.9 As a result, the real currencyvalue steadily increased over the period, butespecially in the earlier higher-in¯ation years.This pattern is evident in Figure 3, which showsthe average annual real exchange rate.10 Dis-counting the upward surge in 1989Ðhyperin-¯ation episodes are often associated with asharp decline in the value of the local curren-cyÐwe can see that, by 1993, Argentina's realexchange rate had settled to about half of thevalue that it had held during most of the periodfollowing the 1982 debt crisis.11 While this levelmay be a misleading benchmarkÐthe earlierperiod was characterized by high in¯ation, lowgrowth, and signi®cant uncertaintyÐthe dra-matic shift in the peso's value did present achallenge to economic balance.12

Indeed, both the rising value of the peso andthe steady increase in GDP (and hence de-mand), were soon felt in the trade balance. InArgentina, export sales have often been a ``ventfor surplus'' rather than a primary goal of do-mestic producers. As can be seen in Figure 4,exports were indeed brie¯y ``crowded out'' bythe 1991±92 resurgence in demand within thedomestic economy, and then grew moderatelythereafter.13 What was most striking in thetrade sector was the dramatic surge in imports:during 1990±94, the dollar value of importsswelled by more than 400%. The trade balancecorrespondingly moved from a US$8.6 billionsurplus to a US$4.2 billion de®cit, a shift on theorder of 7% of GDP.

The medium-term sustainability of such largede®cits depends on whether those investors

Figure 3. Real exchange rate in Argentina, 1982±97.

Figure 2. GDP growth in Argentina, 1982±97.


who provide the o�setting capital ¯ows believethat trade surpluses are likely in the future. Ifinternational investors are rational, the pres-ence of a de®cit may therefore be a sign ofcon®dence; however, it is useful to recall thatequally rational ®nanciers may simply be tak-ing advantage of high post-stabilization interestrates while maintaining a short position thatwill allow an easy exit. It is crucial, then, thatde®cit countries try to attract longer-term ¯owsand to steer their enhanced supplies of foreignsavings away from current consumption andtoward the expansion of productive capacity.

What was the nature of ®nancing and theinvestment/consumption balance in post-stabi-lization Argentina? Figure 5 indicates the dra-matic, though uneven, increase in portfolio

investment; the huge in¯ow in 1993 partly re-¯ects a spate of privatizations of state-heldcompanies, including the state-owned oil com-pany, YPF (de la Balze, 1995, p. 93; Grosse andYanes, 1996). Nonprivatization FDI increasedmodestly and there also seems to have been asubstantial return of ¯ight capital during thisperiod.14 Overall, the pattern suggests a mix ofboth permanent and more short-term ¯ows.

The government squirreled away a signi®cantportion of the currency in¯ow, allowing re-serves to increase dramatically through 1994.Part of the reason for this was that the gov-ernment still needed to fully back the currency;as Williamson (Williamson, 1995, p. 9) notes,the Central Bank initially had full cover interms of gross reserves but not in terms of net

Figure 5. Foreign direct and portfolio investment in Argentina, 1982±97.

Figure 4. Exports, imports, and trade balance in Argentina, 1982±97.


reserves (see Figure 6) and did not achieve thelatter until 1992. After this, reserve accumula-tion continued, partly to provide for remone-tization in the wake of falling in¯ation and theconsequent increase in demand for real liquid-ity.

With regard to the investment/consumptionbalance, we should note that consumption up-swings in the wake of stabilization may simplyre¯ect consumer con®dence in future income(Tanner, 1997).15 Still, investment increases,particularly in export capacity, are key to fu-ture trade supluses. In Figure 7, we plot con-sumption, investment, and imports as apercentage of GDP. As can be seen, consump-tion was indeed on the upswing during 1990±94, increasing by nearly ®ve percentage pointsover this period. Both the import and invest-

ment ratios however, rose even more dramati-cally, each increasing by about 10 percentagepoints during 1990±94.

While the import boom was worrisome,Figure 8 shows that imports of capital goodsand accessories rose from around a third oftotal imports in 1990 to nearly 44% in 1994. Ofcourse, consumer goods rose dramatically aswell, going from below 10% of imports tonearly 25%; the relative loser in the importboom was intermediate goods; one reason mayhave been that ®nal goods imports displacedold import-substitution industries, hurting®rms which had been signi®cant importers ofparts for assembly.16

In any case, investment was a key componentof both GDP and import growth over the pe-riod. While some of the documented burst in

Figure 7. Consumption, investment, and imports as a percentage of GDP in Argentina, 1982±97.

Figure 6. International reserves in Argentina, 1982±97.


capital spending was due to pent-up demandÐdriven by low interest rates, a favorable ex-change situation, and the need to rebuild cap-ital stockÐthe government had clearly met itsobjectives of enhancing private investment.Still, some observers worried that the bulk ofinvestment was devoted to the nontradeablesector,17 while others argued that low value-added agricultural products continued todominate Argentina's exports.18

Meanwhile, as can be seen in Figure 9, theeconomic recovery did little to alleviate thesharp rise in unemployment, which hit 13% inBuenos Aires in late 1994.19 To some extent,increasing labor market dislocation re¯ected apositive development, as companies stream-

lined their operations in response to new liberaleconomic incentives, and labor productivityincreased dramatically.20 But, in light of Ar-gentina's historically low levels of unemploy-ment, and the context of economic boom thatprevailed until 1995, the 1994 jump in thenumber of unemployed was both alarming andpolitically problematic.21

By 1994, with unemployment rising, an ap-preciated peso dampening export growth, in-vestment still below its 1980 level, and capitalaccumulation distorted toward nontradeables,some began to worry about the medium-termviability of the Argentine strategy. In Decem-ber of that year, one multilateral banker ob-served that ``there actually is no `model' beyond

Figure 9. Unemployment in Argentina, 1982±97.

Figure 8. Composition of imports ± Argentina, 1990 and 1994.


the adjustment plan which Cavallo introducedin 1991. Argentina should start thinking hardabout what it will do next.''22

(c) The 1995 ``crack'' and beyond

Before Argentine policy makers had a chanceto address these challenges, the ConvertibilityPlan itself had come under attack.23 In the ®rstfew months that followed the December 1994Mexican currency crisis, over US$8 billion ex-ited from Argentina, an amount equal to about18% of all deposits in the domestic bankingsystem. As Domingo Cavallo observed in Au-gust, 1995, ``the fall in deposits between Janu-ary and April was similar to that of the crack of1929.''24 Publicly, the government reacted byholding a ®rm line on its quasi-gold standard;quietly, rules were bent to prevent a massiverecession. The Convertibility Plan included a``loophole'' which allowed the Central Bank tohold up to one-third of its assets as dollar-de-nominated government debt, and the bankmoved quickly to purchase such debt in orderto inject new dollars into the system. Previouslysteep reserve requirements in the privatebanking system were also cut by half, allowingfor an expansion in liquidity.

The above measures helped to slow the de-cline in GDP, but investment and employmentcontinued to plummet through 1995 (see Fig-ure 10), with unemployment in Buenos Aireshitting 20.2% in May of that year. By the end of1996, output had more or less recovered its pre-crisis level,25 but unemployment had declinedby just 2±3 percentage points; moreover, per-

manent jobs actually fell by nearly 6% over thecourse of that year and the employment im-provement came from a dramatic increase intemporary positions (EIU, 1997, p. 19).26 In1997, GDP rose a startling 8.2%; while this waswelcome news, a sizeable trade de®ct resultedand the employment e�ects were relativelyweak. Not until October 1997 did unemploy-ment in Buenos Aires drop below 15% andnational unemployment below 14% (see Fig-ure 9), still above the pre-crisis level. Estimatessuggest that half of the new jobs created weretemporary, and many worry that both thecomposition of trade, with the biggest exportincreases in primary products with little value-added, and the yawning commercial de®citswill constitute a bottleneck for future job cre-ation.27 Portfolio investment also reboundedthrough 1996 and 1997; while this reassuredsome, it led others to wonder whether Argen-tina was again becoming vulnerable to the va-garies of international capital markets.

Still, the major achievement of this adjust-ment period was the maintenance of credibility:the government had (more or less) stuck withConvertibility and had been willing to su�er theemployment consequences and other costs. Ofcourse, the key policy issue is whether stayingthis particular course simply saddled Argentinawith an `òvervalued'' exchange rate whichleaves the country vulnerable to yet anothercrisis. In short, should Argentina have used the``cover'' of the tequila crisis to devalueÐandnot having done so then, should it considerdepreciation possibilities now?

The answers to these questions depend, inpart, on whether the currency was or is actuallyovervalued. Argentine policy-makers naturallyreject any notion that the peso is overvaluedÐas well they should since public statements tothat e�ect by high o�cials are likely to trigger astampede from the currency. These same policy-makers argue that the currency was initiallyundervalued and further note that the exchangerate is validated by steady capital in¯ows.Morever, they suggest, improving productivityby Argentine labor is superior to depreciation asa tool for achieving export competitivenessÐand there has indeed been a signi®cant increasein industrial output per worker, partly becauseof employment downsizing.28 These explana-tions would perhaps be more convincing if theydid not resonate so closely with those recited byMexican technocrats prior to that country's1994 crash; moreover, beyond the gamesman-ship in which policy-makers are afraid of

Figure 10. Growth of real GDP, consumption, and in-vestment in Argentina, 1982±97.


``talking down'' the currency, lies a more seriousdebate about the behavior of the real exchangerate in a poststabilization economy.

As Dornbusch and Simonsen (1987) note,®xing the nominal exchange rate can cause realappreciation when inertial forces lead to a slowdisin¯ation. If economic agents belive that thereal appreciation will bring future problems,they are likely to step up current consumption, atrend which merely exacerbates the pressure onde®cits and hence increases the likelihood of aneventual meltdown (Guidotti and VeÂgh, 1997).29

Yet it is hard to know whether a high currencyvalue (or even a consumption boom) are prob-lems while one is still in the midst of stabilization:as Uribe (1997) suggests, real appreciation canoccur even with ¯exible exchange rates, primar-ily because the in¯ation tax falls more heavily onnontradeable goods and its decline forces a shiftin relative demand (and hence relative prices)away from tradeables.30 Thus, distinguishingwhether appreciation is an equilibrium phe-nomenon which re¯ects a natural and positivecourse of events, or the result of a poor (and re-versible) exchange rate policy, can be di�cult.

Here, we take a simple approach based onthe methodology developed by Goldfajn andValdes (1996) in their study of currency ap-preciation episodes in 93 countries during1960±94. Gathering monthly data on the Ar-gentine exchange rate for the last 37 years(from January 1960 to August 1997), we cal-culated an `èquilibrium'' (or purchasing powerparity) real exchange rate, as well as deviationsfrom this equilibrium value.31 Our results sug-gest that the Argentine peso was modestly un-dervalued when Cavallo took o�ce, butcrossed a 25% appreciation threshold (abovethe equilibrium rate) less than two years later.

Goldfajn and Valdes note that of the 71 casesthey studied that crossed this threshold, lessthan 5% returned to within 5% of the equilib-rium real exchange rate without a nominal de-valuation; instead, most governments switchedfrom a ®xed to a ¯oating rate, and in 90% oftheir cases, more than half of the movementback to equilibrium was done by currency de-preciation and not price shifts.32 Since 1970,every time Argentina crossed this threshold formore than two months, the deviation from thereal exchange rate continued to the point of a®nancial explosion. In the current episode, thethreshold was crossed in a sustained fashion andthis was subsequently followed by a modestdownward trend; thus, the e�ect has been one ofa ®nancial ``simmer,'' rather than a full-blown

crisis. While this may, to some degree, re¯ectequilibrium processes a la Uribe (1997)Ðandwhile ``both theory and evidence suggest thatreal appreciation is an unavoidable product oflowering in¯ation'' (Calvo and VeÂgh, 1994, p.44)Ðthis is still a worrisome pattern.

One substitute for a ¯exible exchange ratewould be a ¯exible labor market. If wages ad-justed easily, as per theoretical models, thenthere might be no need to employ the relativelyblunt tool of depreciation. But, as detailed be-low, progress on this microeconomic front hasbeen erratic and thus the burden of adjustmenthas fallen heavily on employment. While somemight argue that restoring the tool of depreci-ation would simply postpone necessary labormarket ¯exibilization, seven years of footdrag-ging in ®nalizing a comprehensive package ofnew labor market regulations does suggest atrend of strong resistenceÐand the changingpolitical climate, which has begun to favorthose more worried about labor incomes evenas the ruling party may become more depen-dent on its union supporters, is probably notconducive to reform. In the meantime, Argen-tina has the worst of both worlds: its hands aretied by rigid exchange rate rules and labormarket ¯exibilization remains stymied by po-litical deadlock.

There is little doubt that Cavallo had littlechoice but to ®x the peso against the dollar atthe outset of his tenure as Economics Minister:in the wake of hyperin¯ation, the ConvertibilityPlan o�ered a highly visible and essential signalof the government's commitment to ®scal andmonetary discipline.33 It is also likely that de-preciation in the context of the ``tequila shock''would have squandered hard-won gains inpublic con®dence. Over time, however, theMenem administration has perhaps hung toomuch of its credibility on the exchange rateanchor, and at the expense of cultivating amuch broader range of con®dence-enhancingsignals within the country's economic and po-litical institutions.34 It is to these broader in-stitutions that we now turn.

3. THE MICROECONOMIC SCENARIO:THE POLITICAL ECONOMY OF

ADJUSTMENT

It is not so much a question of having con®dence inthe market, as it is of creating markets. (Bernardo


Kosako�, Sta� Economist, UN Economic Commis-sion for Latin America and the Caribbean, BuenosAires)35

� � � we support the model, but we do not want to beburied by it. (Jorge Blanco Villegas, President of theUni�on Industrial Argentina)36

(a) Microeconomic initiatives

So far, we have focused on the macroeco-nomic stabilization strategy devised by theMenem administration. Yet the government hasalso been engaged in an ambitious program ofmicroeconomic reforms, including trade liber-alization, privatization, and deregulation. Inthis section, we review both the microeconomicinitiatives and the distributional stresses they, inconjunction with the prevailing macroeconomicstrategy, have triggered. We then turn to thepolitics of reform, focusing on the changingbene®ts and costs of the administration's styleof closed and autocratic decision-making.

(i) Trade liberalization

Like many Latin American countries sincethe late 1980s, Argentina has pursued its tradeliberalization goals unilaterally, through themultilateral Uruguay Round, and within asubregional context (Berlinski, 1996; Tussie,1996; Wise, 1998). In 1988, Argentina ®rstopened slowly with considerable pressure and®nancial support from the multilaterals, build-ing in part on the bilateral integration thrustwith Brazil that began in 1986. The reductionof tari� and nontari� barriers was then esca-lated in 1990±91 as Argentina followed in Me-xico's footsteps, seeking to link tradeliberalization with a ®xed exchange rate as thecenterpiece of a stabilization strategy. At thesubregional level, Argentine o�cials havecommitted to further liberalization and dereg-ulation under the Mercosur customs union(which includes Argentina, Brazil, Paraguay,and Uruguay, and Chile and Bolivia as asso-ciate members) that was launched on January1, 1995 (Guira, 1997).

By April 1995, Argentina's average tari� washalf of what it had been in October 1989, andsome progress had been made in reducing thedispersion rate around the tari� (Artana andNavajas, 1995, p. xiv).37 Meanwhile, one stan-dard measure of opennessÐexports and im-ports as a percentage of GDPÐhad risen fromless than 17% in 1990 to over 30% by 1996.38 AsFigure 4 indicated, the growth in this trade

ratio was lopsided: exports nearly doubled over1990±95, but imports jumped fourfold over thissame time period.

While most economists would endorse Ar-gentina's increased trade and outward orienta-tion as key to expanding growth and incomes(Edwards, 1995, ch. 5), Argentina has experi-enced an extended lag in the realization ofemployment gains. While some of this is due toexchange rate as well as labor market rigidity, itis important to note that the country's com-mercial expansion has been dominated by lowvalue-added exports of agricultural and energyproducts. Indeed, low value-added natural re-source exports jumped from about 25% of allexports in 1989 to 34% in 1994, suggesting thelimited progress that has been made in shiftingto the kinds of high value-added exports nec-essary for triggering future income and jobgrowth (Edwards, 1997; Toulan and GuilleÂn,1997, p. 402). In regional terms, Argentina iscertainly not alone in facing this need to gen-erate higher value-added economic activities,which are essential for improving a givencountry's level of development. Policy-makershave responded to this challenge by granting arange of tax incentives to those producers whocan credibly demonstrate an increase in theirexport capacity (de la Balze, 1995, pp. 117±122). The lackluster response of higher value-added exports to such policies appears to be amatter of other crosscutting incentives whichfavor production for the domestic market, es-pecially the appreciated peso. In this sense,there has been a lack of coordination betweenmicro and macroeconomic strategies.

Other structural factors have worked againsta trade-led reactivation of employment. Thetop conglomerates in the main tradeable sectorshave indeed increased e�ciency and consoli-dated their assets and ties with foreign capital,but in a highly capital-intensive and concen-trated manner. By 1994, the 30 largest export-ing ®rms controlled 55% of all exports, and injust four sectors (petroleum, foodstu�s, steelproducts, and motor vehicles) (Toulan andGuilleÂn, 1997, pp. 406±407). The bigger ®rmshave not been the major employment genera-tors: whereas the country's 500 largest ®rmsaccounted for about 30% of GDP in 1994, thesetop companies employed just 20% of theworkforce. Meanwhile, during 1984±94, thetotal number of manufacturing establishmentsthat employed 11±50 workers fell by 21%, asdid the number of employees in these samesized companies (FIEL, 1996, p. 140).


The basic problem is that most of the smalland medium-sized ®rms that form the core ofthe country's traditional industrial base lackfull access to the technology, skills, and marketinformation that would enable them to partic-ipate more fully in the new market economy.39

Since these ®rms have traditionally accountedfor the majority of jobs created, the resultingsqueeze has contributed directly to the growingunemployment challenge. A special di�cultyhas been the limited availability of reasonablypriced credit with which to ®nance moderniza-tion: in late 1996, large companies in Argenti-na's highly segmented credit markets reportedpaying 8±10% interest on business loans, whilesmaller ®rms paid between 15% and 30% inte-rest.40 Equally important has been the lack ofintegrated ties between small and large ®rms,links which in East Asia and elsewhere haveprovided the large exporters with service inputsand ¯exibility and bene®tted the small ®rmsthrough increased demand.

Interestingly, one of the most importantfactors in Argentine export growth has notbeen liberalization per se but rather trade en-hancement under the elaborate set of rulesgoverning Mercosur, as well through specialarrangements with Brazil in sectors such asautos. Partly as a result, the share of Argentineexports going to Brazil rose from 5.9% in 1985,to 11.5% in 1991 at the beginning of the Con-vertibility Program, to nearly 28% by 1996(CEP, 1997, p. 54); indeed, the increase in Ar-gentine exports to Brazil accounted for nearlytwo-thirds of the entire increase in exportsduring 1991±94, and the improvement in Ar-gentina's trade balance with Brazil accountedfor a full third of the trade adjustment over thedi�cult 1995±96 period.41 In one of the mostdynamic growth sectors, the motor vehiclesindustry, higher levels of intraindustry tradehave resulted as much from the two countries'balancing requirements as from competitivespecialization and economies of scale (Biel-schowsky and Stumpo, 1995, p. 159; Mondinoand Roca, 1997, pp. 189±192).

Some have worried that both the overallMercosur pact and the growing Argentine±Brazil relationship has simply diverted tradeaway from more competitive trade partnersoutside of this subregional scheme (Yeats,1996). Others have suggested that the overalltrend within Mercosur is one of trade creation(Sep�ulveda and Vera, 1997, pp. 9±10); becauseMercosur is still riddled with numerous excep-tions, any attempt to resolve this debate em-

pirically remains problematic.42 In any case,Argentina does seem to have settled into apattern in which trade is dominated by onemain trading partner (Brazil) and in just onesector (autos) (Toulan and GuilleÂn, 1997, pp.404±406).43 It is not clear that the situation isimproving: for example, Argentina's exports tothe European Union expanded by 2% in 1996while exports to Brazil grew by slightly morethan 20%, and the divergence was likely worsein 1997.44 The risks of this excessive reliance onone partner have become clear as Brazil's at-tempt to counter the negative e�ects of the 1997currency disruptions in Asia has quickly re-sulted in a burgeoning de®cit for Argentina.

(ii) Privatization45

By the late 1980s, it was estimated that Ar-gentina's approximately 400 state-owned com-panies accounted for 7% of domestic GDP and21% of total gross investment. At the sametime, the combined losses of the 13 largestpublic ®rms were US$4 billion in 1989, re¯ect-ing the extremely low levels of productivitywithin the government enterprise sector. Within¯ation running at 5000% that same year, andpublic opinion rebelling against the low qualityof goods and services provided by state com-panies, the newly inaugurated Menem admin-istration seized the opportunity to act againstlongheld preferences for state ownership inArgentina. Two laws were immediately passedin 1989, the Economic Emergency Law and theState Reform Law, which together enabled thegovernment to quickly begin unloading state-held assets.

This legislation initially authorized the Pres-ident to place trustees in charge of the state®rms for up to one year, with the broad man-date to begin selling o� as much as possible,and by whatever means necessary. Assets wererapidly sold across all economic sectors,including airlines, oil companies, steel, petro-chemicals, insurance, banks, telecommunica-tions, and postal services. The positive impacton the ®scal balance, particularly in the crucialyears of 1991 and 1992, can be seen in Fig-ure 11 (the huge privatization yield from the1993 sale of the state oil company was notapplied to the ®scal accounts for that year,which would have shown a large divergencebetween government revenues with and withoutprivatization).46 The overall receipts have beenimpressive: during 1990±94 the federal govern-ment raised nearly US$10 billion in cash and


absorbed an even larger amount of publicbonds from the market. Since this boom peri-od, the pace of privatization has slowed con-siderably. The receipts for 1995±96 wereapproximately US$640 million, representingthe sale of a handful of ®rms in the hydro-electric sector, and one large petrochemicalenterprise.47

Given the context of high in¯ation, the ur-gent need to reduce the ®scal de®cit, and thegeneral public dissatisfaction with state ®rms,there is no doubt that the time had come for theArgentine state to shrink the government en-terprise sector. Still, while the privatizationprocess has been praised for placing Argentinain the vanguard of Latin America's market re-formers, public sentiment sees privatization asa main factor in the country's high rates ofunemployment.48 The data tell a slightly dif-ferent story: because state ®rms have tradi-tionally accounted for just 3±4% of thecountry's total employment (de la Balze, 1995,pp. 88±89), any recessionary impact ofprivatization on the real economy may have asmuch to do with the pace and manner in whichassets have been transferred from public toprivate hands, with the key being whether suchtransfers achieve the e�ciency and productivitygains that can attract further investment andlay the groundwork for employment expansionand sustainable growth over the long-run.

Recent research on the politics ofprivatization in Argentina suggests that whilethe successes of the privatization drive havebeen notable, so too have the failures (Chud-novsky et al., 1995; Saba and Manzetti, 1997).

On the upside, the auction of assets rangingfrom ports to gas and petrochemical plants hasattracted world class investors who, in con-junction with various local consortia, have in-troduced those standards, know-how, andtechnologies most conducive to increasedcompetitiveness. In particular, the widespreadprivatization of Argentina's public servicesholds strong potential for improving the qualityof those nontradeable inputs which are essen-tial for supporting exports and growth.

On the downside, in its rush to balance thebudget and produce some concrete results inthe eyes of wary investors and in¯ation-wearyvoters, the government rode roughshod oversome of the basic principles that have under-pinned the privatization process elsewhere. Forexample, not all state ®rms went to the highestor most sophisticated bidder, and the barrageof sales in the early 1990s was made in theabsence of a proper regulatory framework toprevent the emergence of costly private mo-nopolies in such sectors as telecommunicationsand the airlines industry (Gelpern and Harri-son, 1992).49 To date, foreign majority controlof assets and technical expertise has been therule, with domestic partners relegated mainly tothe lower level administrative functions of pri-vatized ®rms. But more to the point, the gen-erous inducements o�ered thus far to foreignbidders and their Argentine partners have yetto foster a more dynamic pattern of productionand investment geared toward the externalmarket. In a survey of 28 privatized companieswhich represent nine di�erent individual sec-tors, Chudnovsky et al. (1995, p. 99) found that

Figure 11. Fiscal performance in Argentina, 1990±97.


only two had adopted an outward export ori-entation (a meat-processing ®rm and a manu-facturer of gear boxes), while the research anddevelopment activities of all but a handful ofrespondents were basically nil. The picture ismore of oligopolistic rent-seeking than of dy-namic enterpriseÐand the potential negativeimpacts for employment are clear.

(iii) Deregulation

The mass of regulatory reforms that havebeen legislated since July 1989 representsnothing short of a revolution. Across sectors,®scal and administrative barriers to competi-tion have been removed, and the Argentineeconomy is now a considerably more stable andcost-e�ective environment for conducting ev-eryday business transactions (de la Balze, 1995,pp. 99±104). Moreover, while foreigners havebeen granted the same rights and treatment asnational investors since 1979, sectoral restric-tions and prior authorization procedures havebeen recently streamlined; indeed, Argentina'sFDI laws are now so liberal that inscriptioninto the national Registry of Foreign Invest-ments is optional (AgosõÂn, 1995, p. 12).50

The one area where deregulation has pro-ceeded more erratically is within domestic labormarkets. Admittedly, the President has showngreat political acumen in maintaining organizedlabor's backing while simultaneously disman-tling a statist model that many of his own laborconstituents within the Peronist Party (PJ) stillhold dear. One cost has been an unwillingnessto tackle various distortions in Argentina's la-bor markets, most of which originated duringthe heyday of Peronism in the 1940s.

In theory, fuller wage/employment ¯exibilityshould speed up sectoral adjustments, allow fora more e�cient allocation of resources, ame-liorate unemployment, and relieve the pressureon the exchange rate (Pessino, 1997; WorldBank, 1996a, p. 55). Unions and employershave not been completely rigid: de facto ``¯ex-ibilization'' strategies have included everythingfrom the incorporation of productivity andwork reorganization clauses into collectivebargaining contracts; to the purchase by theunions of struggling ®rms in the representedsector; to union management of employee-owned stock of privatized state enterprises(Murillo, 1997, pp. 80±87).51 Yet union forceshave resisted signi®cant changes in o�cial leg-islation, partly because they do not want tosend the formal signal of free market surrender

that business desires, and labor's key role in theMenem coalition has allowed this sector toblock reform. The result has been higher laborcosts (including nonwage labor costs that runas high as 50% of gross wages in Argentina, ascompared to 30% for the OECD countries) andcontinuing di�culties in hiring and dismissal,both of which have contributed to today's highlevels of un- and underemployment, and to the¯ight of some workers and producers into theinformal economy.52

The government has made some headway inlegislating new rules on health insurance andworkers' compensation. The more di�cultchallenge has been a reduction in payroll taxesand the replacement of severance payments fordismissed workers by an unemployment insur-ance scheme based on individual capitalizationaccounts with payroll deductions. The sever-ance issue is particularly important: since ®rmsare required to provide one month's wages foreach year's service in the event of a dismissal,they become extremely reluctant to hire. A 1995law allowed for temporary employment butlegislation proposed by President Menem in1998, partly in response to union pressures,would `èviscerate'' this act.53 The politicalopposition inching toward power is not likelyto reverse this situation since much of theirappeal is based on public concerns about thedeterioriation of wage and employment condi-tions. As a result, full labor market reform stillseems far o�.

Another pressure point in the regulatory re-form process has been the government's mixedrecord in constructing e�ective oversightmechanisms for newly privatized ®rms nowproviding such services as water/sewerage,telecommunications, natural gas, and electricalpower. Again, the high presence of foreign in-vestors in the privatization of public utilities(37% over 1992±95) re¯ects both the pro®t-ability conditions that were built into thetransfer clauses and the captive nature of thedomestic market (Chudnovsky et al., 1995, p.40). The crucial role for public policy in over-seeing the quality and price competitiveness ofprivate service delivery under such circum-stances has not been lost on the Menem ad-ministration.

Yet the regulatory bodies designed for thistask have varied greatly in their e�ectiveness(Urbiztondo, 1997, pp. 13±28). At one end ofthe continuum are the gas (ENARGAS) andelectricity (ENRE) commissions, which regu-late numerous service providers, are funded


autonomously, and fall under Congressionaljurisdiction; at the other end are the telecom-munications (CNT) and water/sewerage(ETOSS) commissions, which are the target ofintense lobbying by 1±2 large ®rms, funded byrevenues that sometimes carry questionablepolitical ties, and are subject to frequent ad-ministrative interventions by the President andother local o�cials. The latter pattern has cre-ated lucrative opportunities for corruption,which sheds light on the numerous scandalsthat have surrounded the Menem administra-tion since its inception (Saba and Manzetti,1997).54

(b) Distributional outcomes in the reformprocess

While market reform inevitably creates win-ners and losers, it also holds out the promise ofdistributional improvements. In theory, liberaltrade regimes can generate new demand forlow-skilled labor; meanwhile, a reduction in therealm of government should deter rent-seekingand favoritism toward elites. In practice, how-ever, most of Latin America's market reformershave experienced distributional deterioration inthe process of liberalization, marked by sizabletransfers of wealth toward the top incomedeciles. Argentina is no exception.

Figure 12 illustrates the shift in income dis-tribution over the course of the Convertibilityprogram, (up until October 1997, the last pe-riod for which we have data), making use of atwice-a-year household survey collected for theGreater Buenos Aires area (which accounts for

almost 40% of the population, and more than50% of national GDP). We plot two measuresof income distribution: the percent of incomereceived by the top 20% of households relativeto the bottom 40% of households, and thepercent of income received by the top 10%relative to the bottom 10%. While there is somevolatility, both measures show a pattern ofworsening distribution over the course of theperiod.55

A detailed breakdown of the evolution oflabor market trends since 1991 helps to explainsome of this distributional worsening. By May1993, the unemployment rate of blue-collarworkers, those most likely to be at the bottomof the distributional hierarchy, was four timesthat of university-trained professionals. Whilepart of the employment di�culties for lessskilled workers were a result of the country'srigid labor laws, another reason has been thatthe boom in nontradeable sectors like ®nancialservices has favored workers with much higherskills.

Adding to the distributional problem hasbeen a continuing concentration of assets onthe business side. Even as the 1995 recessionprovoked higher unemployment and risingrates of bankruptcy throughout the economy,Argentina's top 200 companies increased theirsales and pro®ts that same year by 11% and30%, respectively.56 The restructuring of the®nancial system, particularly in the wake of thetequila shock, also resulted in asset concentra-tion; while few banks went under in the midstof the 1995 crisis, many were absorbed bylarger, more solvent banks and by late 1996, the

Figure 12. Income distribution in Argentina, 1990±97.


number of banks had fallen from over 200 to148.57

Another distributional tension has arisenwith regard to the relationship between thecentral government and the provinces. Until1995, local governments had not been subjectedto the same ®scal discipline as that imposed onthe federal government. This was partly be-cause the early period of growth generated ahealthy increase in the local tax base.58 More-over, provincial o�cials often forced province-owned banks, not subject to convertibilityregulations, to extend credit. Finally, even inthe midst of sharp cuts at the federal level, thecentral government actually increased itstransfers to the provinces by nearly 2% of GDPduring 1990±92. Overall, from 1990±95, federalresource transfers to the provinces more thandoubled (Gibson and Calvo, 1997, p. 8). In theface of such largesse, local-level state reformwas postponed.

When the 1995 recession hit and the federalsurplus declined, however, provincial budgetsquickly fell into a state of ®scal crisis. As theprovincial de®cit rose to US$3 billion in 1995(slightly over 1% of GDP), the provinces ®nallyquickened what had been an exceedingly slowpace in the realm of privatization; since pro-vincial banks were a prime target for suchprivatization, the option to borrow locally wasnow foreclosed to provincial o�cials.59 With®nances tightening, local o�cials postponedpayments to suppliers, state employees, andpensioners (World Bank, 1996b). Social tensionpercolated, then exploded; in May 1997 alone,there were more than 40 incidents of localprotest, including road blocks and clashes withthe police.

In many other countries with similar distri-butional stresses, including Bolivia, Chile, andMexico, governments have devised short-term``safety net'' strategies to soften the pains ofadjustment and win political support for re-form (Graham, 1994). Because of the bouyantgrowth rates from 1991±94, the ®scal stringencyimposed by the Convertibility Plan, and the``hands-o�'' management approach of theCavallo team, the government rejected this sortof strategy; moreover, the ®scal aspects of theConvertibility Plan probably made distribu-tional pressures more severe as the governmentbecame more dependent on the regressiveVATÐwhich accounted for 45% of all taxescollected in 1996Ðto help cover the de®cit(EIU, 1997, p. 13). In 1995, with recession andthe full impact of economic restructuring sink-

ing in, the President ®nally put aside earlier®scal concerns and launched a social plan.Since this was also an election year, Menembegan selectively targeting compensation to-ward valued constituents (Weyland, 1997, pp.21±22). The transparency of the ploy and itstiming was lost on few citizens.60

(c) The politics (and anti-politics) of reform

Until 1995, the Menem administration ap-peared to have accomplished the nearly im-possible task of winning over one of theregion's most ®esty electorates, while at thesame time launching the most far-reaching setof economic reforms in the country's history.Despite the lack of a safety net strategy togarner political support for market adjustment,the alarming jump in unemployment in 1994,and the steep recession that followed from theMexican crisis, the President won re-election toa second term in 1995. Yet in 1996, the rulingparty lost the ®rst open elections for the mayorof Buenos Aires and the country began to ex-perience a string of militant general strikes. Byearly 1997, support for Menem in nationalpublic opinion polls had plummeted to just10% and in October of that year, a coalition ofopposition forces managed to defeat Menem'sparty in mid-term Congressional elections.

Understanding Argentina's political dynam-ics requires that we analyze, ®rst, why Menemenjoyed such an extended period of support,and then why it evaporated. One oft-cited fac-tor was simply the willingness of the public, inthe wake of very high in¯ation, to tolerateausterity in exchange for price stability and thepromise of future economic gains (Starr, 1997).Yet, as Corrales (1998) notes, high in¯ation isnot necessarily a ``trampoline to heaven''Ðthechaos of price hikes is as likely to breed con¯ictand more in¯ation as it is to create the implicitor explicit cooperation necessary to halt theprice spiral. Of course, once the in¯ation slowsand the evidence of success is in, the tolerancefor austerity is likely to rise (at least for awhile). Still, there were several key politicaltactics which also helped sustain some degree ofsupport for reform.

The ®rst was the masterful overhaul ofMenem's Partido Justicialista (PJ) such that theparty's mass base has expanded and diversi®edwhile the in¯uence of traditional Peronist tradeunions has diminished greatly.61 By exploitingthe party's weak rules for leadership turnoverand its historically strong ties to the country's


working classes, Menem seized the leadershiprole, replaced the PJ's typically populist agendawith his own program of market reform, andwas thereby able to draw a larger business andmiddle class segment into the party. He alsomanaged to maintain organized labor's loyaltyin spite of its outright marginalization withinthe party, due most likely to the latter's lack ofother political alternatives.62

The second tactic involved playing o� con-stituents in Argentina's urban centers againsttheir compatriots in the country's less devel-oped provinces. As noted above, the provinceshad largely been spared the pain of ®scal ad-justment until 1995, at which point the tequilashock forced the federal government's hand. AsGibson and Calvo (Gibson and Calvo, 1997, p.7) explain, ``Peronism's seeming invincibility atthe polls...was due not to organized labor in themetropolis, but to its ties to clientelistic andtraditional networks of power and mobilizationin the periphery.'' Hence, a winning electoralcoalition was maintained nationally by thephasing of harsh adjustment measures to theregions at a much later point. As noted above,central government transfers to the provincesactually increased while the urban centers weresubjected to a tight ®scal shock; moreover,during 1989±94, although the federal govern-ment workforce was cut by 77%, public sectoremployment in the provinces held steady. Theforce with which ®scal retrenchment is nowhitting the regions, where public employmenthas traditionally been more of a mainstay,sheds light on why social protest has eruptedlater and with such vehemence in the periphery.

Finally, like many other heads-of-state inLatin America of the 1990s, Menem reliedheavily on executive decrees in order to over-come lingering anti-market sentiments withinCongress and the wider political arena (Teich-man, 1997). Executive decrees have been uti-lized, for example, in the raising of taxes andthe revision of tax laws, the modi®cation ofpublic and private contracts, the setting of thetrade regime, and the structure of labor lawÐdecisions which typically require broader inputand consensus (LoÂpez, 1997).63 The previousAlfonsin administration issued just eight de-crees of ``necessity and urgency'' during its en-tire tenure; in contrast, between July 1989 andDecember 1993 more than 12,000 executivedecrees and 308 decrees of ``necessity and ur-gency'' were passed, the latter comprising thecore of the reform program (LoÂpez, 1997, p.15).

Given the measured success of these tactics,what explains the sharp drop in political sup-port? In a recent study, Stokes (1996, p. 508)argues that an `ìntertemporal'' response (``nopain, no gain'') to the sacri®ces invoked bymarket adjustment can eventually shift to a``distributional'' response (``my pain is yourgain'') on the part of voters, even those whohave been traumatized by hyperin¯ation:

. . .support for reforms began high among all classesand remained relatively high among the rich but de-clined notably among the poor. . .no one was willingto su�er catastrophic losses, such as unemployment,on the promise of future prosperity or with the excuseof ghosts of the past (Stokes, 1996, pp. 516±517).

The ``distributional moment'' has come inArgentina. The Radical Party victory in theJune 1996 Mayoral election in Buenos AiresÐwhere Menem's party garnered only 18% of thevoteÐre¯ects the distinctly distributional moodthat had settled in among urban voters worriedover whether they would actually see some lightat the end of the economic tunnel. The prov-inces followed suit in the October 1997 mid-term elections, where the Peronists lost controlof their majority standing in the lower house ofthe Chamber of Deputies.64 While this loss, inand of itself, has not seriously impaired Men-em's ability to govern (Perry, 1997), it is evidentthat Menem's previous political tactics for gar-nering support have now run into di�culties.

The reworking of the Peronist party hasworn thin, as the party's traditional base con-stituency within organized labor is all butconsumed with its own immediate economicsurvival. The arrival of market reform in theprovinces has provoked a political backlashamong those who thought they had escaped theinevitable pain of adjustment. The President'sstrong reliance on legislative decrees has un-dermined executive legitimacy, as many ofthese earlier decisions have become enshroudedin charges of corruption. Both the business andlabor sectors have come to oppose an almostpurely autocratic decision-making style, withpoints of con¯ict centering on Menem's re-peated circumvention of Congress, frequentlyin de®ance of the Constitution, and his readyresort to other underhanded tactics, such as thestacking of the Supreme Court with membersguaranteed to support executive-level policydirectives.65

To its credit, the Menem team took com-mand of a shipwrecked economy, imposedeconomic rationale on a society that had long


been accustomed to ``storming the state,'' andin the process secured the longest politicalhoneymoon since the Peronist era. As e�ectiveas this style may have been for initiating andimplementing market reforms, the successfulconsolidation of the reform process will requirethe development of technocratic expertise andpolitical skills beyond just the EconomicsMinistry and the o�ce of the executive. Meet-ing the challenges of distributional improve-ment and increased public accountability isnow imperative for the next phase of marketreform in Argentina.

4. CONCLUSION: THE NEXT PHASE FORARGENTINA

There is no relation between unemployment and eco-nomic policy. (Domingo Cavallo, Latin AmericanWeekly Report, August 3, 1995).

What is this dollar to peso, one-to-one? The rest ofLatin America is laughing at us... This has been anact of inhumanity over the last six years. They havedestroyed the technical schools, destroyed education,destroyed the base of the future. They will be judged(Anonymous Businessman, Buenos Aires, July 1996).

Rodrik (1991) has sketched an analyticalmodel of the reform process which provides auseful framework for assessing the medium-term sustainability of a program like Argenti-na's. According to Rodrik: (a) reforms must betechnically sound enough to produce the de-sired economic result and hence the basis for anew coalition; (b) technocrats must be su�-ciently insulated so that short-term lobbyingpressures can be withstood until the reformtakes full e�ect; and (c) the ``winners'' from thereform e�ortÐwho may not have been an ob-vious interest group at the beginning of theprocessÐmust be persuaded or induced to de-velop a collective voice to maintain the newpolicy regime.

In our view, Argentina's track record may beproblematic on all three counts. With regard totechnical coherence, the government's ability toeliminate in¯ation and restore growth is testi-mony to both the design and implemention ofConvertibility. But while these broad medium-term macroeconomic outcomes are positive, thestrategy has discouraged investment in theproduction of manufactured exports and al-lowed market forces to breathe new life intosectors, such as services, that o�er little to

recuperate the tradeables sector; whileprivatization boosted the ®scal co�ers over1990±94, the subsequent ®scal deterioration in1995 and 1996, and the only modest publicsector recovery in 1997, suggest the continuingneed for ®scal reform; while liberalization hasgenerated a welcome increase in labor produc-tivity, unemployment has lingered at depres-sion-era levels and the e�ects on overallcompetitiveness have been quite mixed.

As for Rodrik's second notion of insulatingtechnocrats to ®lter out societal pressures dur-ing the initiation of market reforms, it appearsthat the Menem administration has goneoverboard in two respects. First, by issuingmore emergency presidential decrees than thetotal number issued by all constitutional pres-idents in the past 130 years (Teichman, 1997, p.27), Menem secured his program, but also ef-fectively silenced the kinds of debate and inputthat would now be useful as the reform pro-gram moves into the medium term. Second,hindsight has gradually shown that the Menemteam was perhaps too friendly with, or not in-sulated enough, from Argentina's powerfulprivate sector conglomerates (e.g., Techint,Compa~n�õa del Plata and the Perez CompancGroup), all of whom have bene®tted dispro-portionately in the 1990s (Teichman, 1997,p. 31).

This excessive identi®cation with wealthyinterests, a seeming lack of concern about theemployment and distributional consequences ofreform, and an early determination to foregosocial policy has also done little for Rodrik'sthird step: expanding the ``winners'' circle inArgentina in order to consolidate the politicalbase. The Menem team rightly prides itself onhaving purged the country of its self-destructivepopulist past. Indeed, perhaps the most tellingaspect of the October 1997 mid-term electionswas the emphasis of the winning oppositioncandidates not on populist-style expansion buton the need for a second round of social andinstitutional reforms (especially anti-corruptioninitiatives) to correct for past shortcomings,and better facilitate the country's adjustment toa market economy.66 Such a strategy however,has still not been articulated by those at thecenter of the o�cial policy making apparatus.

Argentina, in short, needs a ``second phase''or ``second generation'' of reforms at the levelof the macroeconomy, the microeconomy, stateinstitutions, and social policy. At the macro-economic level, the two crucial issues are ®scalpolicy and exchange rate management. With


regard to the former, the Menem administra-tion has made some important headway in in-creasing tax compliance, simplifying the taxstructure, and modernizing the country's bud-getary process (Artana and Navajas, 1995). Atthe same time, however, Argentine ®scalspending in the 1990s has followed a procyclicalpatternÐexpanding during the good times andabruptly contracting when bad times set inÐjust the reverse of what was needed, for exam-ple, during the 1995 economic downturn.Moreover, ®scal policy in the 1990s has clearlybeen manipulated for political purposes, mostobviously in the provinces. A second phase®scal reform requires that policy makers shiftto a countercyclical strategy, decrease the reli-ance on the regressive VAT, tighten the ad-ministration and collection of increased directtaxes on income, and resist the excesses of po-litical spending that marked the last two na-tional elections.67

As for exchange rate policy, since the im-plementation of the Convertibility Plan in 1991,Argentina has de®ed conventional wisdomwithin the economic community which favors amore ¯exible approach to currency manage-ment (Corden, 1994 p. 304; Edwards, 1995).Despite the rigid policy options intrinsic to thecurrency board, growth and export rates havebeen more than respectable, and the recoveryfrom the tequila shock more rapid than ex-pected. Yet, given Argentina's comparativelyrich factor endowments and the continuing re-sistence to full ¯exibilization of the labor mar-ket, we are left to wonder whether the countrycould better maximize its economic potentialthrough the adoption of a more ¯exibleexchange rate strategy. In terms of a second-phase exchange rate policy, at least two addi-tional points recommend a more ¯exible ap-proach.

First, while strict ®scal policy enabled Ar-gentine o�cials to survive the tequila crisis withthe Convertibility Plan intact, this adjustmentwas facilitated by the bending of the rules onreserve requirements, and by the simultaneousexpansion of Brazilian demand for Argentineproducts. Now, as the continued turmoil inAsian currency markets reverberates throughthe Southern Cone, the Brazilian economy hascontracted, and forecasters have negativelyadjusted their projections concerning Argenti-na's current account balance and growthprospects. This leads into the second point:Convertibility's two remaining stabilizationtools, high interest rates and wage and em-

ployment compression, also seem less of anoption in the current economic environment.Hence, it is at least worth contemplating a more¯exible second phase exchange rate strategyÐparticularly since the seriousness of Argentina'scommitment to a market economy is nowwidely understood and need not be perma-nently tethered to one nominal value or evenone particular sort of exchange rate regime.

On the microeconomic front, the importantpoint is that market reform in and of itself isnot a development strategy. As Chile found outthe hard way in the early 1980s, market-sup-porting policies, including selective interven-tions, are needed to promote an outwardorientation and a stronger foothold in inter-national markets.68 Even in free-trading Me-xico, which has had its own share of problemsin implementing an outward-oriented develop-ment model based on higher value-addedmanufactured exports, there has never been anydoubt as to the government's intention topursue such a strategy or its willingness tosupport such outward-oriented producers(Pastor and Wise, 1997, pp. 429±440).

In Argentina, a second phase will require thatmarket reforms actually build toward an out-ward-oriented model. The speci®cs of such astrategy need not include a retreat from tradeliberalization. Indeed, a con®dence-enhancingsecond phase trade strategy would honor ear-lier commitments to trade opennessÐand wenote with worry that Mercosur's common ex-ternal tari� has risen even as Argentina hasused a ``statistical tax'' on imports to detertrade with nonMercosur partners.69 Of course,as projections for the country's current accountde®cit over the next two years balloon above4% of GDP,70 the temptation to raise tari�sfurther will persist. The best way to resist willbe to implement other support measures.

This would include enhanced support for thesmall and medium-sized enterprise sector. Re-cent preliminary survey research suggests thatsmaller industrial ®rms have made some head-way in shifting to an export-oriented mode ofproduction, but also indicates that greater gainscould be achieved with the help of a more as-sertive public policy framework to guide thiseconomic restructuring (Robbio, 1997; Kosac-o� and Ramos, 1997). Some support has beenarticulated in domestic legislation (FIEL,1996), but this has been weakly implemented.What is crucial now is the fostering of hori-zontal and vertical links to larger ®rms; theprovision of publicity, marketing, and technical


know-how; and the creation of better ties be-tween education, job training, and employmentexpansion in these ®rms.

Meanwhile, public investment in infrastruc-ture for productive purposes (railways, irriga-tion, industrial facilities) has dropped tohistorically low levels. The high concentrationof public expenditure on current allocations inthe 1990s has been especially detrimental to thecountry's interior provinces, and has workedagainst the broader expansion and diversi®ca-tion of production in industrial activities. In asecond phase, this de®cit in productive invest-ment must also be addressed, a task which willalso necessitate determining the sources of newrevenue.

The contours of labor market reform willalso need to be settled. Since 1991, a series ofpiecemeal deregulatory laws have increasinglyintroduced ¯exibility, productivity, and othercost-cutting clauses into labor contracts. Thesemeasures have already forced major adjust-ments in Argentine labor markets in the 1990s,including various ad hoc arrangements thatgrant ®rms e�ective ¯exibility (Murillo, 1997,pp. 77±82). Yet the remaining gaps in labormarket reform and the failure of politicians topush a comprehensive legislative packagethrough the Congress has perpetuated a credi-bility problem, particularly from the standpointof foreign investors. A second-phase labormarket reform strategy demands that politi-cians ®nally take a stand and complete the la-bor reform agenda. Such an agenda need notfollow the draconian and politically problem-atic union-busting measures, such as eliminat-ing industry-level bargaining, as suggested inWorld Bank (World Bank, 1996a, p. 16); ratherthe goal should be to make hiring easier, partlyby codifying the many changes that have al-ready occurred as a result of incremental bar-gaining and ad hoc adjustments in domesticlabor markets, and ®x in place rules that can atleast add more predictability to labor costs andrelations.

The success of these macro and microeco-nomic second phase reforms will hinge on theextent to which a badly needed overhaul of themost relevant public sector institutions is car-ried out (NaõÂm, 1995). While progress has beenmade in modernizing the state's main economicinstitutions, other public entities such as thejudiciary, the regulatory commissions, the so-cial ministries, and provincial governments arestill too easily permeated by corruption andoutside interests. Thus, and with good cause,

the Argentine public has continued to viewstate institutions with suspicion. One bench-mark of the importance of institutional reformto the long-term success of market policies isthe IMF's remarkable 1997 o�er to open a newline of credit for Argentina based on ``goodgovernance''.71 More to the point, during thissecond and more challenging phase of marketreform, public institutions are crucial conduitsfor guaranteeing greater equality of economicopportunity and wider participation in thebene®ts of growth.

Finally, a word about social policy. As Ar-gentina boasts the region's highest per capitaincome (US$9,387),72 the most highly educatedpopulation, and relatively wide welfare cover-age, the Menem administration was able tolaunch a ®rst phase of market reform withoutresort to the safety-net compensation schemesthat were adopted in poorer countries like Bo-livia and Peru (Graham, 1994). Since 1991,however, the combined e�ect of the Convert-ibility stabilization program, government in-centives which favor low value-addedinvestments, and higher levels of market con-centrationÐincluding of ownership, produc-tion, and exports (CEP, 1997)Ðhas contributedto persistent poverty (Burki and Edwards,1996, p. 8), and a worsening of distributionaltrends (see Figure 12). This could be tackled inthe second reform phase through: (i) bettertargetting of social expenditures toward high-risk groups; and, (ii) a more concerted e�ort atencouraging the kinds of high value-added in-vestments and concommitant educationaltraining which would o�er employment op-portunities for a much broader segment of theArgentine population.

Building a more viable political coalition topush forward a credible set of second phasereforms is another matter. Despite some con-cern on the part of private sector analysts thatthe end of the Menem administration's longreign would herald market instability, the un-precedented political competition witnessed inthe October 1997 mid-term elections appears tohave had the opposite e�ect. Not only did theresults re¯ect an explicit commitment to policycontinuity, the growing allegations of govern-ment corruption and infringement on civilrights prompted the public to vote for thosewho represented an end to the highly presiden-tialist and autocratic style of management thathas been the hallmark of the entire Menem pe-riod.73 Opening the policy process up to morecitizen involvement may generate a reform


agenda that is less ambitious, but a coalitionthat is capable of sustaining market reform intothe longer-term (Graham, 1998); it could alsoprovide some badly needed accountability

checks that will induce policy-makers and po-litical leaders to more closely harness marketpolicies to the productive and distributive tasksfor which they were originally designed.

NOTES

1. See ``Camdessus calls for `second generation' of

reforms in argentina,'' IMF Survey, Vol. 26, No. 11

(June 9, 1997), pp. 175±176.

2. Statement made during authors' interview on Au-

gust 1, 1996, Buenos Aires.

3. Data sources for all ®gures are listed in Appendix A

at the end of the text.

4. While progress on the macroeconomic front was

gradual, the adminstration did move ahead on

privatization, ®scal reform, and other measures that

helped set the stage for the eventual stabilization. These

are discussed in more detail later in the article.

5. Stabilization was made possible, in part, by the

earlier ``Plan BONEX'' in which state debt was con-

verted into 10 year, dollar-denominated bonds; this

allowed the government to extend the maturity of public

debt from less than one month to 10-years and to

eliminate the quasi-®scal de®cit (a savings estimated to

equal approximately 5% of GDP). Both outcomes made

®scal constraint easier to manage within the con®nes of

the Convertibility Plan. See RodrõÂguez (1995) and

Tanner and Sanguinetti (1996); for a nuanced account

of policy-making during 1989±91, see Corrales

(1997, 1998).

6. For a detailed look at the speci®c rules of the

Convertibility Plan and currency board in Argentina, see

Ades (1995). As we also note below, Argentina's

program di�ered from a more orthodox currency board

in that the Convertibility Law permitted part of the

monetary base to be covered by dollar-denominated

Argentine Treasury bonds. This gave the government a

bit of breathing room when the 1995 crisis hit.

7. For a general view of the role of capital mobility in

Latin American development and stabilization, see

Mahon (1996).

8. On Argentine ®scal reform, see AcunÄa (1994),

Canitrot (1994), de la Balze (1995), pp. 70±72), Artana

and Navajas (1995), and Berensztein (1996).

9. A model of how slow disin¯ation creates currency

appreciation is available in Dornbusch (1995); alterna-

tive views, which stress how such appreciation might be

an equilibrium phenomenon, are available in Calvo and

VeÂgh (1994) and Uribe (1997) and are explored later in

the text.

10. As per the usual practice, declines in the real

exchange rate imply increases in the domestic currency.

11. The e�ect of the exchange rate appreciation was

tempered somewhat by the tax system. In 1992, the

government decided to o�er a ``general reimbursement''

on exports with the same added value scale structure as

had been established for imports. Thus, wheat was

exported with a subsidy of 2.5% and was imported at a

duty of 2.5% (Cristini, 1996, p. 2.9). These mirrored

tari�s and rebates ranged from 2.5% to 20%; the e�ect

was a ®scal devaluation.

12. By the calculations we present below, the Argentine

peso was at least 25% below its long-term equilibrium

value through much of the 1980s and so at least half of

the post-Convertibility appreciation re¯ected a normal

process of recovery.

13. Likewise, Cristini (1996, p. 2.4) notes that the

higher levels of exports from 1988±90 were due to both a

decline in domestic activity and incentives to earn

dollars. Models of macroeconomies with such export

dynamics are o�ered in Arida and Bacha (1984) and

Pastor (1987, ch. 5).

14. Argentine investors were estimated to have stashed

nearly US$45 billion abroad by 1987, an amount

equivalent to over 75% of the country's external debt

(Pastor, 1990). Since hyperin¯ation in the late 1980s

induced the exodus of even more monies, there was

ample ¯ight capital to return home.

15. While the point is salient on a theoretical level,

Tanner (1997) uses Granger-causality tests with only a

two-year lag structure; this leaves open the possibility

that his results simply record the impact of a consump-

tion boom on output itself.


16. By 1996, intermediary goods had staged a modest

comeback and capital goods fell to 41% of imports and

consumption goods to 20%.

17. Chisari et al. (1996, p. 233) suggest that the very

nature of relative prices channeled investment into the

nontradeable sector; see also Gerchuno� and Machinea

(1995). Chudnovsky et al. (1996) argue that there was

some investment expansion into tradeables in 1993 and

1994, but the strongest investment was in Mercosur-

related sectors (e.g., autos), re¯ecting the growing

relationship with Brazil and the relative appreciation

of the latter's currency. Bielschowsky and Stumpo (1995,

p. 159) note that FDI was also drawn primarily into

nontradeables, with the largest ¯ows going toward

services and petroleum (which is a mostly domestical-

ly-oriented industry in Argentina).

18. The main export products were also capital-inten-

sive, implying that this growth was not conducive to the

creation of new jobs. For a review of export perfor-

mance and composition from the 1970s to 1990, see

Bisang and Kosaco� (1996); for a review of the

contemporary period which suggests that there was

essentially no export boom in manufactures, see Cristini

(1996).

19. While we present unemployment ®gures for Buenos

Aires and the provinces, we believe the former to be

more reliable than the latter. The Ministry of Economics

has recently stressed, however, the improvement in the

national unemployment rate, which has been lower than

the rate for Buenos Aires in the last several years. This

shift coincides with a methodological improvement in

the government's labor market survey, which recorded

the number of active job searchers in Buenos Aires but

did not do so for the provinces and thereby tended to

diminish the labor force divisor for the national series.

See Ernesto Kritz, ``Tribuna Abierta: ¿Qu�e hacer con las

mediciones de empleo?,'' Clar�õn (April 7, 1997).

20. Labor productivity reportedly rose by 4.1% per

annum during 1990±95; see `Ìnsu�cient growth limits

job creation,'' CEPAL News, Vol. 27, No. 6 (June,

1997), p. 1. On the other hand, Argentine real wages

grew by just 0.2% annually during 1990±95 (compared

to 5.1% for Brazil and 4.4% for Chile), with the rising

wage-productivity gap indicating one reason for the

worsening distribution of income.

21. According to Pessino (1997), the unexpected sever-

ity of labor market adjustment was directly related to the

higher relative price of labor with respect to capital in

the aggregate, the simultaneous increase in the labor

force and the shrinking of job opportunities, and

virtually no change in long-outdated labor market

regulations.

22. Quoted in ``The markets are getting nervous,''

Latin American Weekly Report (December 15, 1994).

23. There was an earlier scare in November 1992, but

the government stuck by the convertibility rules and, as

Williamson notes (Williamson, 1995, p. 9), ``the crisis

passed rapidly.'' Also see Starr (1997).

24. See `ÌMF allows a de®cit this year,'' Latin Amer-

ican Weekly Report (September 14, 1995). This section

on government policy responses to the 1995 ®nancial

crisis draws, in part, on authors' interviews with

frontline managers at the Argentine Central Bank,

conducted in July, 1996 Buenos Aires. See also GarcõÂa

(1997).

25. See Figure 2, as well as Charles Newberry, `Àr-

gentine growth pickup and lower rates seen,'' Bloomberg

Business News (December 26, 1996); another reason for

the slow gain in employment was employer decisions to

simply lengthen working hours (see `Àrgentina: Longer

hours, not more jobs,'' Latin American Weekly Report,

March 11, 1997). Over the year, the ®nancial system had

also been shored up: in November 1996, bank deposits

rose to US$53 billion, up sharply from the US$38 billion

low of April 1995.

26. The problem of GDP growth without employment

growth has become common to many Latin American

reforms; see ``Great reforms, nice growth, but where are

the jobs?,'' The Economist (March 21, 1998), pp. 37±38.

27. Oil, for example, rose 41% in value while raw

materials went up by 21%. See ``Growth of 6% forecast,''

Latin American Economy and Business (LAEB-97-03).

Meanwhile, exports of industrial manufactures actually

fell by 1% (EIU, 1997, p. 29).

28. The December 1997 issue of Notas de la Econom�õa

Real from the Centro de Estudios para la Producci�on

(Secretar�õa de Industria, Comercio, y Miner�õa, Argenti-

na) indicates that labor productivity (per hour) in

industry improved a striking 38% during 1990±95.

Figures in the October 1997 issue of Notas suggest that

the gain in service sector productivity was probably

about half that and some of the 1990s increase in both

industrial and service sector simply re¯ects catch-up

from the collapsed production and excessive employ-

ment of the 1980s.


29. For more on this ``disequilibrium'' view of the

exchange rate, see Dornbusch et al. (1995).

30. Uribe's model does ®t the data. although it should

be noted that consumption growth in Argentina was

nearly 50% more than he predicted, suggesting that the

process in Argentina re¯ects both equibrium and

disequilibrium (�a la Dornbusch) processes; see also

Calvo and VeÂgh (1994) for a similar view. Felix (1995),

p. 660) o�ers an entirely di�erent explanation for the real

appreciation, suggesting that trade liberalization damp-

ened price increases in tradeables but exercised less

discipline over prices in the highly cartelized nontrade-

able sector.

31. The actual procedure involves regressing the log of

the real exchange rate on time (entered linearly and as a

square) and using the result to obtain predicted values of

the equilibrium rate (see Goldfajn and Valdes, 1996, p.

7). We did not use a multilateral, trade-weighted

exchange ®gure and so we may be overstating the

appreciation to the degree that the dollar fell in

international value. It is interesting to note that the

equilibrium value of the peso has been rising over time,

implying that Argentine o�cials may be partially right

when they point to the peso's appreciation as a long-

term and sustainable trend. This real adjustment is a

very slow process however, and the movement of the

actual rate has gone well beyond the long-term value.

32. Argentina has managed to generate some real

depreciation without nominal devaluation; in 1996,

in¯ation was only barely above zero which, given

ongoing international in¯ation, produced a slight de-

preciation in real terms and the real exchange rate ®nally

dipped below the 25% ``risk'' threshold in April 1997. If

we generously assume that: (a) zero in¯ation continues,

(b) international in¯ation stays at around 3%, and (c)

the equilibrium currency value continues to drift up-

ward, then the actual real exchange rate will arrive

within 5% of its equilibrium value by the end of 2001.

Waiting through that process, particularly in light of the

high unemployment rates that have characterized con-

temporary Argentina, is not likely to be a comforting

thought for most politicians.

33. For more on credibility, highly visible signals, and

the Convertibility Plan, see Canavan and Tommasi

(1996). On the politics of the Convertibility Plan, see

Corrales (1997) and Starr (1997).

34. For a general discussion of the problems of

exchange rate-based stabilization, see Reinhart and

VeÂgh (1996).

35. Statement made during authors' interview on

August 1, 1996, Buenos Aires.

36. Quoted in ``Cavallo provokes crisis, keeps job,''

Latin American Weekly Report (September 7, 1995).

37. The policy has been slightly more activist than the

image; in 1993, for example, the government introduced

restrictions and antidumping measures on the imports of

some goods, hoping to shrink the growth in the trade

de®cit. See Tussie (1996) for further detail.

38. Measured as export, imports, and GDP in constant

1986 pesos, these ®gures derive from the data compiled

by the Ministerio de Econom�õa, Rep�ublica de Argentina.

While other measures (such as in current pesos) will

show di�erent speci®c numbers, all reveal a general

growth in trade as a percentage of GDP.

39. As of 1994, 99% of these companies employed less

than 50 workers, and it is this group that accounts for

70% of all employment and 22% of GDP (FIEL, 1996, p.

14). Authors' interviews with Bernardo Kosaco� at

ECLAC and Omar Chisari, Director, Instituto de

Econom�õa, Universidad Argentina de la Empresa, Au-

gust 1, 1996, Buenos Aires.

40. Authors' interviews with eight members of the

Confederaci�on General de la Industria, a business

chamber which represents all of the small and medi-

um-sized ®rms in Argentina, July 26, 1996, Buenos

Aires. Also see FIEL (1996).

41. Data taken from Table 8.1.2, exports, imports and

balance, by economic region and principal countries,

Statistical Yearbook Republic of Argentina, 1995 (CD-

ROM), and S�õntesis de la Econom�õa Real, No. 9

(November 1997), from Centro de Estudio para la

Producci�on, Buenos Aires.

42. Mercosur's Common External Tari� now averages

17% and 80% of internal trade covered by the agreement

has been liberalized. Major sectors such as autos and

textiles have yet to be formally incorporated into the

agreement, however, and the capital goods, informatics,

and telecommunications sectors are still exempted from

the CET (Nofal, 1997).

43. While auto producers within Mercosur have ad-

vanced quickly in modernizing their operations and

increasing their export ratio, the ``price'' for this

sophisticated system of protection has been the contin-

ued inability to compete e�ectively outside of the

subregional market, not to mention higher auto costs


for consumers within the Mercosur bloc (AgosõÂn, 1995;

Chudnovsky et al., 1995).

44. Preliminary ®gures from Informe Economico, No.

24 (posted at http://www.mecon.ar) indicate that exports

to the European Union declined 13% that year, exports

to NAFTA countries declined 3%, and exports to

Mercosur countries (primarily Brazil) increased 14%.

45. This section draws on: Gelpern and Harrison

(1992), Chudnovsky et al. (1995), de la Balze (1995),

pp. 88±99), Artana and Navajas (1995), and Saba and

Manzetti (1997).

46. While the o�cial numbers used in Figure 11

suggest that 1996 saw a modest primary de®cit, newer

cash basis numbers for the consolidated public sector

indicate that such o�cial ®gures may consistently

overstate the balance by about 1±2% of GDP over

1991-96. According to the World Bank (1998), such a

full accounting would reveal that the a nonprivatization

surplus was achieved only in 1993 and has since eroded

sharply. The trends for both sets of ®gures are, however,

similar to those in Figure 11 and thus the ®gure does

a�ord a reasonable sense of changes over time.

47. These ®gures are reported in the INDEC (1997)

Statistical Yearbook of the Argentine Republic, Vol. 13,

pp. 480±483. The World Bank (1998, p. 6) reports that

public enterprise expenditures were reduced from 11% of

GDP in 1989 to 0.5% in 1995±96.

48. See, for example, Anthony Faiola, `Àrgentine

private enterprise draws public opposition,'' The Wash-

ington Post (June 22, 1997), p. A20.

49. A study by Daniel Azpiazu found that 66 of

Argentina's 200 largest companies emerged out of the

privatization program, with the 50 most pro®table ®rms

receiving 60% of all pro®ts generated by the larger group

of businesses; see ``Big pro®ts for privatized services,''

Latin American Regional Reports-Southern Cone (March

4, 1997), p. 3. An earlier study by Fundaci�on Capital, a

private think-tank, found that just three privatized ®rms

accounted for 40% of the total turnover of the 70

companies quoted on the Buenos Aires Stock Exchange

(see `Àrgentina's drift toward concentration,'' Latin

American Weekly Report, October 5, 1995).

50. Authors' interview, Jaime Campos, Director of

INVERTIR, August 7, 1996, Buenos Aires. Campos

notes that these rules also make it more di�cult to track

new FDI ¯ows into Argentina.

51. See also `Àrgentina: Longer hours, not more

jobs,'' Latin American Weekly Report (March 11, 1997).

52. Some estimates show that only 60% of the Argen-

tine workforce is now formally registered (de la Balze,

1995, p. 108). More general information on the labor

market provided in a speech by Felipe Frydman,

Economics Attache at the Embassy of Argentina,

Washington, DC, `Àrgentina under the convertibility

plan,'' Johns Hopkins University, School of Advanced

International Studies, November 13, 1996, Washington,

DC.

53. See Cli�ord Krauss, `Àrgentine labor code largely

intact,'' New York Times (March 16, 1988).

54. According to Saba and Manzetti (1997, p. 363), `Ìn

less than four years the (Menem) administration su�ered

some 19 scandals resulting in 29 ministers and senior

advisers being dismissedÐwith privatization scandals

extremely prominent.''

55. At the same time, poverty rates fell steadily

between the start of the program in 1991 and its 1994

peak (Petrecolla, 1995). Such improvements are com-

mon in the wake of hyperin¯ation, and can in fact be

consistent with a relative worsening of income distribu-

tion. This pattern is usually politically acceptable, unless

the absolute improvement is suddenly arrested, as it was

in Argentina in late 1994. Data made available to the

authors by the Argentine Instituto Nacional de Estadis-

tica y Censos (INDEC) indicate that the household

poverty rate (in Gran Buenos Aires) rose from a decadal

low of 11.9% in May 1994 to 20.1% in October 1996 (see

also Beccaria, 1996); the poverty rates then fell by 1.3

percentage points in May 1997, which is the most recent

period for which we were able to obtain data. This

worsening of economic fortunes may help to explain the

subsequent political rejection of Menem's party in the

1997 elections.

56. Information on sales and pro®ts in 1995 taken

from ``Big pro®ts for privatized services,'' Latin Amer-

ican Regional ReportsÐSouthern Cone (March 4, 1997),

p. 3. An earlier report also suggested that the biggest

®rms had seen their turnover increase even as the

economy plummeted in the ®rst half of 1995 (see

`Àrgentina's drift toward concentration,'' Latin Amer-

ican Weekly Report, October 5, 1995). As for bankrupt-

cies, there was a 26% increase in the number of ®rms

®ling for bankruptcy between ®rst half 1994 and ®rst

half 1995; see ``Going bust,'' Latin American Weekly

Report (August 3, 1995).


57. See EIU (EIU, 1997, p. 15); information also

garnered from authors' interview with Roberto Bouzas,

FLACSO, July 30, 1996, Buenos Aires. See also Caprio

et al. (1996) for a general discussion of the tequilla shock

and the ®nancial system.

58. As Artana and Navajas (1995, p. vi) note, a

turnover tax counts for 50% of provincial own-source

revenues; half of the remainder stems from property

taxes. Both revenue sources were boosted by the 1991±92

recovery.

59. According to the World Bank (1996b), `òver a

dozen provincial banks were privatized...social security

systems were transferred to the streamlined national

system, salaries were cut, and a number of redundant

public employees were let go.'' For more on the

privatization of the provincial banks, see Banco Central

de la Rep�ublica Argentina, Bulletin of Monetary and

Financial A�airs (January±March 1996), pp. 13±14.

60. A similar burst of spending targetted toward

electoral gainsÐalbeit with less successÐoccurred in

1997. See ``Spending round aimed at elections,''Latin

American Weekly Report (February 11, 1997).

61. This point, as well as our elaboration on it,

borrows from Levitsky (1997).

62. Levitsky and Way (1998) point to other factors,

such as close personal ties between key labor leaders and

Menem.

63. Corrales (1997, pp. 65±66) describes a more inclu-

sive executive decision-making process, with stronger

congressional oversightÐan argument which we ®nd

lacking when the legislative track record is closely

scrutinized.

64. ``La gobernabilidad esta asegurada,'' Clar�õn (Oc-

tober 28, 1997).

65. See ``Menem's decrees ùnconstitutional'', Latin

American Weekly Report (January 7, 1997), p. 16 and

``Back to square one on labour reform'', Latin American

Weekly Report (May 20, 1997), p. 232.

66. Comments made by Senator Graciela Fernandez

Meijide (FREPASO/Radical Alliance), at an event

entitled ``Discussion on results and signi®cance of the

October 26 elections in Argentina,'' Brookings Institu-

tion, Washington, DC, November 17, 1997. Also see

Calvin Sims, ``New Broom is Sweeping in Argentina,''

New York Times (November 10, 1997), p. A11.

67. The idea of shifting away from VAT and toward

income taxes is also suggested in World Bank (1998, p.

18).

68. For more on Chilean reform, see Graham (1994),

Edwards (1995), and Velasco (1994).

69. `Èconom�õa elevar�õa a 3.5% la tasa estad�õstica,''

Clar�õn (May 2, 1997).

70. JP Morgan, ``World ®nancial markets: First quar-

ter'' (1998), p. 63.

71. This included, for example, higher spending on

health and education, an overhaul of the tax system,

improved court practices and judicial independence,

stronger guarantees on private property rights, and more

transparency in government accounting. See Paul Lewis,

`ÌMF Seeks Argentine Deal Linking Credit to Govern-

ing,'' New York Times (July 15, 1997), p. D1.

72. JP Morgan, `Èmerging markets: Economic indi-

cators'' (New York: Morgan Guaranty Trust Company,

January 9, 1998), p. 22. The somewhat distant runner-up

is Chile, with an estimated annual per capita GDP of

US$5591. Of course, unlike Chile, much of Argentina's

®rst-place status is due to the extraordinary exchange

rate appreciation of the 1990s.

73. In one incident, Alfredo Y�abran, an entrepreneur

who has often speci®cally bene®tted from Menem's

policies and who was suspected of having ordered the

murder of press photographer Jos�e Luis Cabezas, main-

tained close telephone contact with the head of the

Justice Ministry who was supposedly investigating him.

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APPENDIX A Ð DATA SOURCES

Argentine monthly in¯ation, the real ex-change rate (calculated as the nominal ratemultiplied by the US wholesale price index, andthen divided by the Argentine CPI), exports,imports, trade balance, capital ¯ows and in-ternational reserves are from the InternationalMonetary Fund's International Financial Sta-tistics.

Growth of real GDP, investment, and con-sumption, shares in GDP of investment, con-sumption, and imports, and unemploymentrates from the Ministerio de Econom�õa of Ar-

gentina (see http://www.mecon.ar and http://www.indec.mecon.ar). Fiscal performance datagathered from various issues of InformeEcon�omico, as posted at http://www.mecon.ar;the 1995-97 ®gures as a percentage of GDPinvolve some estimation by the authors.

The unemployment ®gures are collected bythe Instituto Nacional de Estadistica y Censos(INDEC); INDEC is also the source for thedistributional data in the text which was pro-vided by special arrangement to the authors.Composition of imports and exports takenfrom INDEC, Statistical Yearbook Republic ofArgentina, 1995 (CD-ROM version).


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