Argentina - Economic memorandum

Report No. 2988-AR Economic Memorandum on Argentina July 10, 190 FILE COPY Latin America & the Caribbean Regional Office FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients or,iy in the performance of their official duties. Its contents may not otherwise be disclosed without Wolld Bar. authorization.  CURRENCY EQUIVALENTS Currency Unit Peso ($a) Exchange Rate Effective June 30, 1980 US$1.00 $a 1860 $a 1,000 US$.54 $a 1,000,000 US$537.63  FOR OFFICIAL USE ONLY TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS . ....................... ...... i-x INTRODUCTION * * *..*.....*.................................. ....1........ I. INFLATION AND STABILIZATION IN HISTORICAL PERSPECTIVE .. 2 Previous Stabilization Efforts 2........................ 2 Stabilization through Controls and Corrective Inflation 1953-57 . ............... *................... 3 The 1959 Shock Treatment ...... .... ............ 4 Price Stabilization and Trade Liberalization 1966-69 ... 5 II. INFLATION AND STABILIZATION ATTEMPTS: 1975-1978 ....... 7 Excessive Demand and Crisis in 1974/76 .... o .......... 7 Attempts to Control Inflation and Restructure the Economy: 1976/78 . ..... . ...................6............ 9 Stabilization Attempts, Economic Growth and Employment.. 14 The Role of External Sector Imbalances .... o.......... o.. 16 III. THE 1979 PROGRAM AND ITS IMPACT ON INFLATION ... o........ 18 Stabilization through Increased External Competition ... 20 The Supplementary Role of Aggregate Demand Policies .... 22 Impact of the Program in 1979 .o.......o................. 24 Prospects for 1980 .1.9 80. . .... . . .0.. ..... ... . IV. MEDIUM- AND LONG-TERM ISSUES AND PROSPECTS .... o......... 33 Exchange Rate Policy and Tariff Reform ............... ... 33 Monetary Policy, Interest Rates and Capital Market Development . .. ........... . . .. .. . . . .. .o..o..o.oo o . . . .. . *.0.. *. 37 Public Sector Prices and Investment ....o ............ . 38 The Public Investment Program ....................o.-ooo 41 Financing Public Investment ......... ..............to.... 44 Balance-of-Payments Prospects and External Capital Flows 45 ANNEXES A. The Monetary Approach to the Balance of Payments and Its Relevance for Current Argentine Economic Policies B. Inflation and the Dispersion of Relative Commodity Prices in Argentina This report is based on the findings of a mission which visited Argentina in November 1979. The mission was led by Mr. Gerald Alter and included Messrs. Jan Peter Wogart and Jose Marques. In addition to background papers prepared by Messrs. Mario Blejer, Clark Reynolds, Pedro Rado and Jan Peter Wogart, Joaquin Martinez and Julio Duran contributed special sections to this report. This document has a restricted distribution and may be used by recipients only in the performance of their ofhcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  List of Tables in Text Table 1: Quarterly Indices of Major Monetary and Price Indicators, 1977-1979 Table 2: Wages and Unemployment Indicators, 1976-1979 Table 3: 1979 Policy Guidelines for Public Sector Tariffs, the Exchange Rate, Wages and Money Supply Table 4: Schedule of Tariff Reductions, 1979-1984 Table 5: The Convergence of the Inflation Rate Table 6: Change in Price Differentials Between Foreign and Domestically Produced Industrial Goods, 1977-1979 Table 7: Foreign Exchange Rate Movements, 1976-1980 Table 8: Changes in Employment, Production and Relative Prices of Public Enterprises Table 9: Projected Flows and Indicators of the External Sector, 1980-1985 List of Tables in Annexes Table Al: The Variance of Relative Price Changes (VP ), MIay 1977 - June 1979. t Table A2: The Variance of Relative Price Changes and the Rate of Inflation. Regression Results for Argentina (May 1977 - June 1979) Dependent Variable: VP t Table A3: The Variance of Relative Price Changes and the Components of the Rate of Inflation. Regression Results for Argentina (May 1977 - June 1979) Dependent Variable: VP  ANNEX -, IBRD-12432R 4 ' > nEa, de" } ,'.94- I/ ' .. X< M A C nr6 |~ ' : R t/ f -; 3. C SAN~~~1 ~~_TAO / 44,~~~~~~~~~~~~~~~~~~~~6 A mow,O ra)~~~ ~i 5' .vE.!/ - V / DMA ANTIAGENIN O \, T '' f > 1 ,- \ , C ~~~~~~~~~~-s-- - Primry ced tstiC 4ag r !0e O N ER,ood l- . I b2no t %-~~~~~~~~~~~~~~~~~~~~~~~9 LO1CH ZTE9S d 4,0 WPOt N,,- 04* /t,, ,t,octO 4-2. 0.04,. any 1444,rim0y r0,4 iR 0 tg C > ^ENDZ V/ J Po ici o.dre St' _;RDALl-0 $4'AG'V5tP,' UrrA 4,4*00,4,640004 Oo0044naFn ire 0 200 400 690 300 44!~~~~~~~~~~~~~~~~~~~~4oo C3 'd.11t O/k S-1!fL ~ tNg AR CGF E N* T I- tI A M J