Argentina : in search of growth

DRAFT FOR STAFF USE ONLY ARGENTINA: IN SEARCH OF GROWTH Egardo Barandiaran CPO Discussion Paper No. 1986-6 January 1986 CPD Discussion Papers report on work in progress and are circulated for Bank staff use to stimulate discussion and comment. The views and interpretations are those of the authors. ARGENTINA: IN SEARCH OF GROWTH Abstract This paper discusses the critical factors that are preventing sustainable growth of the Argentine economy. Three major constraints are identified. First, the unsettled political system, which has continuously failed to provide effective responses to changing economic conditions and which has become a major source of economic inefficiency. Second, the inflationary pressures derived from the expansion of the public sector and from the struggle over income shares. Finally, the heavy debt burden inherited from economic mismanagement in 1980-82. It is concluded that the unsettled political system is the critical constraint for economic growth. Additional foreign borrowing is likely to aggravate the burden of debt, with no significant impact on growth. Only upon the settlement of the political system can stabilization endure. The Argentine political system is facing the immediate challenge of consolidating the initial success of the Plan Austral. Argentina: In Search of Growth Edgardo Barandiaran I am grateful to Herman Cortes, Bruce Fitzgerald and members of CPD Informal Seminar for comments on an earlier draft. ARGENTINA: IN SEARCH OF GROWTH Edgardo Barandiaran January, 1986 This paper discusses the current state of the Argentine economy with the purpose of identifying the critical factors that are preventing sustainable growth. The use of a long-run perspective to analyze the contraction of 1980-84 leads to identify the increasing disruption of the political system since 1930 as a decisive factor in the poor performance of the Argentine economy. Such disruption took new force and direction after 1970, having major economic consequences which remains as important blocking factors to Argentine's development. In Sections II and III the analysis centers on two of those consequences: the accumulation of debt and the acceleration of inflation. As shown in Section II, the increased stock of foreign debt has implied a severe burden to the relatively closed Argentine economy and the service of the debt has become a major constraint on growth. Debt restructuring has been alleviating this burden, but it remains exceedingly high. As discussed in Section III, inflation has become the main economic symptom of an unsettled political system, which has increasingly failed to maintain some minimum fiscal and monetary discipline and has exacerbated the struggle over income shares. The Argentine Government finally reacted to the threat of hyperinflation in June 1985, by implementing the "Plan Austral". The program and the results in the first six months of its implementation are also discussed in Section III. -2- The unsettled political system is the critical constraint for economic growth. Additional foreign borrowing, as will be evident from the analysis of this paper, is likely to aggravate the burden of debt, with no significant impact on growth. Only upon the settlement of the political system can stabilization endure. The Argentine political system is facing the imwediate challenge of consolidating stabilization. Steady progress in this direction would be an indicator that Argentina is starting to settle its political system. I. LONG-RUN STAGNATION AND THE CONTRACTION OF 1980-84 1. The decrease in output and the evolution of other economic indicators in 1980-84 point to some kind of collapse. This bleak performance has no parallel in the history of Argentina and it can be viewed as the final stage of a long period of.stagnation. A quick review of output in this century (Table 1) indicates at least four periods of different growth. (a) Up to 1930 Argentina could absorb a large immigration while output per capita increased at a high rate. By 1929 output per capita was half of that in the United States and 3.6 times that of Brazil. (b) Between 1930 and 1955, output per capita increased at a lower rate than in the previous period, but the relative position of Argentina did not deteriorate. Argentina suffered as much as other countries during the Great Depression but certainly less during the Second World War. By 1955 growth was already lagging vis a vis the recovery of industrial countries and the development of other Latin American economies. -3- (c) Between 1955 and 1970, the rate of growth of output per capita was higher than in the two previous periods, but this was a very poor performance in relation to the rest of the world. The relative decline of Argentina, which had started around 1950, was substantial with respect to other developing countries; for example, while in Argentina output per capita increased 40 percent between 1950 and 1970, in Brazil it doubled. (d) Since 1970, output per capita increased first at a declining rate and finally has decreased to its 1965-69 level. The deterioration vis a vis other countries has been extraordinary. In 1981, output per capita was only 20 percent of that in the United States and only 15 percent higher than in Brazil. 2. Between 1950 and 1980, the path of most economic aggregates was consistent with the low growth in output, wich some breaks first after 1955 and then after 1970. Trends in income and absorption were in line with.the trend in output during 1950-80 (Table 2), although a number of short-lived imbalances called for stabilization programs. After 1955 growth in output accelerated and there was a significant change in the composition of domestic absorption (Table 4). The increase in investment, financed by domestic savings, was important and the marginal productivity of capital did not decline (Table 13). The composition of output continued shifting in favor of manufacturing industry, but agriculture and other primary activities started to recover (Table 3). In the 1970s there was no change in the composition of domestic absorption but the marginal productivity of capital declined substantially. In addition, the decline of manufacturing industry implied a significant shift in the composition of output and employment (Table 3). -4- These changes were indicating that the declining trend in output growth would continue in the 1980s; there was, however, no evidence about the possibility of a sharp contraction. 3. Between 1950 and 1980, there were no major changes in the role of the external sector at the aggregate level, regardless of the extensive discussion about trade and financial policies. Only between 1955 and 1970, the ratios of exports and imports to GDP increased slightly (Table 5), but they continued to be very low compared to those in the 1920s. Rarely the current account deficit was significant (in 1951 and 1961 and to a less extent in 1952, 1955, 1971 and 1975); in fact, the current balance showed no trend (Tables 5 and 6). 4. After 1970, there was a significant increase in the size of the public sector, defined broadly as in Tables 9 and 10. Between 1955 and 1965, there was some contraction in the public sector as a reaction to its fast growth in the previous 15 years. Since 1970, the increase in total expenditures has been substantial, but not continuous. The immediate causes of this increase have been the social security system (line "Transfer" in Table 9), the current expenditures of public enterprises (mostly in "Goods and services" in Table 9), and the capital expenditures of all the public sector. The growing difficulties of financing the public sector resulted in a huge expansion of debt and consequently in an increase in interest payments. In the 1950s the size of the public sector was already considered detrimental to economic growth, which motivated some contraction in the 1960s. In the 1970s the public sector was again increasingly perceived as crowding-out the private sector and as wasting large amounts of resources. 5. Output per capita declined 13.5 percent between 1979 and 1984. The 1979 level was not exceptionally high; it was in line with the declining trend -5- of output growth. There was no autonomous expansion in domestic absorption that might have caused an unsustainable level of output in 1979 (Table 2). As shown in the tables, there were two major changes between 1975-79 and 1980- 84. First, as a result of the large increase in interest payments to the rest of the world, income declined with respect to output (Table 2). Second, domestic absorption increased sharply with respect to income, and this gap was financed with a loss of reserves and an increase in debt. However, domestic absorption increased slightly with respect to output. Given the sequence of events and the fact that output increased very little in 1980 and declined substantially in 1981, it can be concluded that there was initially a large expenditure switching from domestic to imported goods and services. This switching, a result of inconsistent economic policies, fed back into the contraction of output via the negative effect of larger interest payments on income. As a result of this process--in addition to the sharp decline in output, income and domestic absorption--the net foreign debt increased in US$35.5 billion in 1980-84 (Tables 7 and 8). The debt problem will be analyzed in the following section. 6. Other economic trends were broken in 1980-84. First, there was a significant change in the composition of domestic absorption. The fall in investment--both absolutely and in relation to GDP-continued up to 1984. This fall was aggravated by a negative marginal productivity of capital. Second, employment increased slightly, also with a negative marginal productivity, but not enough to prevent an increase in unemployment (Table 12). Third, the compositioa of output shifted in favor of agriculture and other primary activites. Fourth, there was a large increase in the ratio of exports to GDP, mainly as a result of the expansion of exports (Table 5). -6- Fifth, there was a sharp increase in total expenditures of the public sector, from 47.9 percent of GDP in 1975-79 to 60.6 percent in 1980-84 as measured in Table 9, to which the quasi-fiscal expenditures of the Central Bank have to be added (these expenditures include subsidies to residents who are borrowers in foreign currency, subsidized rediscount lines, and payments of the interest equalization fund or CRM. According to some estimates these expenditures were as high as 20.9 percent of GDP in 1982). 7. Argentina's long-run stagnation cannot be explained by external factors, as the performance of comparable countries in the last 40 years indicates. The contraction of 1980-84 is said to have been caused by exogenous changes in world capital markets, which first facilitated the overindebtedness of the private sector and later implied a huge burden as a result of the increase in interest rates. This raises, however, the questioning of the rationality of a policy that implied large expenditure switching to imported goods and services, with no expansionary effect on domestic output. This expenditure switching was an unintended and unforeseen consequence of inconsistent economic policies, and the political system did not react promptly to change these policies. 8. The Argentine political system has been ineffective in responding both to unsettling economic conditions and to new opportunities in the world economy. The struggle over power and income has pervaded economic policies, which have swung violently, as shown by the frequency and magnitude of changes in relative prices (Table 11) and of changes in revenues and expenditures of the public sector (Table 9). Furthermore, whatever trends can be found among these swings, they have been dysfunctional to efficiency. These trends include: -7- (a) the expansion of the public sector, as mentioned in paragraph 4; (b) the politicization of the private sector, mainly as shown by the regulation of prices and wages,-by the intervention in labor markets, and by public incentives and guarantees for private investment; and (c) the closing of the economy, as shown by a bias against exports and heavy protection for domestic producers. 9. The ineffectiveness of the political system can be traced to the crises of participation and of legitimacy that led to the breakdown of constitutional democracy in 1930. The institutional conciliation of mass participation and democratic legitimacy failed then and has proved to be very elusive in the last 55 years. 1/ This failure prompted a pervasive struggle over power and income which in turn rendered the political system ineffective. In effective management of the economy undermined successive governments, feeding back the crisis of legitimacy and exacerbating the struggle over power and income. 10. After 1970, as a result of the economic and political failure of the Ongania Government, the disruption of the political system took new force and direction. The new force, as shown by the passive acceptance of violence as 1/ When non-traditional political parties gained a majority vote to control the executive and the legislature -- the Radical party in 1928-30 and the Peronist party in 1945-55 -- they were reluctant to share the overwhelming power granted by the presidential system and to adhere to the rule of law. The military were called to protect the rights of minorities, first of Conservatives (1930) and later of anti-Peronists (1955) and eventually advocated alternatives to constitutional democracy. After 1955 the military prohibited the direct participation of the Peronist party in elections, and labor unions became a major political organization controlled by Peronists. Business unions failed to develop a political force of their own, but the struggle over power among parties, labor unions and the military stimulated the organization of special interests. This organization has been critical in the struggle over income. -8- part of political confrontation, resulted from defiance of the power of the military, which could no longer ban the participation of the Peronist party. The new direction resulted from and unbounded and non-responsible authority as the form of government attempted first by the Peronist party (May 1973-March 1976) and later on by the military (March 1976-December 1983). These political developments had a major impact on the economy, leading eventually to the crisis of 1980-84, II. FOREIGN DEBT: ACCUMULATION AND SERVICE 11. By 1975, foreign debt was not a burden, even though its level in relation to exports was high (Table 8). Since then, three periods can be identified in the development of the Argentine debt problem. (a) Up to 1979 there was a significant increase in the dollar amount of foreign debt, although it declined with respect to exports. Most of this increase was matched by the accumulation of reserves by the Central Bank. In this period there was a surplus in the current account. (b) Between 1980 and 1982, the debt increased sharply both in dollars and in relation to GDP and exports. At the same time there was a large loss of reserves and a huge deficit in the current account. (c) Since 1982, the foreign debt has continued increasing in dollars but not with respect to GDP and exports. The Central Bank has stopped the loss of reserves and the deficit in the current account has been reduced. 1/ 1/ Income earned by Argentinians on their foreign assets is not totally recorded in the balance of payments statistics, and therefore the deficit in current account is overestimated after 1981. Most of this income is being reinvested or spent abroad. 9 - 12. In 1976-79, economic policy was aimed at correcting the imbalances inherited from the Peronist Government. 1/ After the initial measures to correct the external imbalance, the stabilization program was based on: (a) a reduction in the deficit of the public sector, with the remaining deficit being financed by domestic and foreign credit, but not by the issue of money; (b) a restrictive monetary policy, particularly after the opening of the capital account in mid-1977, which implied that monetary expansion to meet the demand for high-powered money was to come from the accumulation of reserves; and (c) expectations management, which relied upon direct and indirect price controls (wage freeze, tariff reductions, price truces, voluntary 1/ It is said that economic policy in 1976-80 was also aimed at liberalization. The official discourse supported this view. However, effective liberalization reforms were limited to the financial system and to capital movements. The immediate purpose of these reforms would have been to alleviate the crowding-out of the private sector. The reforms were short-lived due to the failure of the stabilization program and, in the case of financial intermediation, to inappropriate enforcement of regulations. The coincidence of some of Martinez de Hoz's policies with the economic program that the military government was implementing in Chile has prompted a number of conjectures about smilarities in causes and consequences. These conjectures are generally based on partial evidence about some policies -- in particular, about exchange rate policy -- and results, but they fail to take into account the many differences in economic and political conditions as well as in other policies and results. A comparison of the macroeconomic performance of Latin American countries in the 1980s points to some common causes, and certainly changes in the external environment and expansionary demand policies have played a significant role in most of them. However, closer inspection of that performance points to significant differences, largely as a result of domestic policies and institutions. From this perspective, the experience of Argentina is as much similar to (or as much different from) that of Chile as to the experience of any other Latin American country. - 10 - agreements, and finally, after the others failed, the preannouncement of the exchange rate). All three components of the stabilization program were unsustainable: (a) the deficit of the public sector continued to be excessively high to be financed with either domestic or foreign debt; (b) inflation remained at very high rates (Table 1) and so did the demand for flows of high-powered money to keep real balances constant; the attempt to meet this demand by accumulating reserves, which in turn called for a surplus in the current account and/or a large inflow of foreign credit, implied a heavy burden for the private sector; and (c) expectations management consisted basically in repressing inflation by controlling some prices, which created sectoral and income imbalances that sooner or later would have to be corrected (so-called "sinceramiento" of prices). 13. The collapse of the stabilization program started in early 1980 and was followed by a period of great economic, military and political unrest. The program failed initially because of both the autonomous expansion in the deficit of the public sector and the financial crisis of March 1980, but the increasing perception of incoherence of the program was decisive in giving rise to the large expenditure switching mentioned in paragraphs 5 and 7. The collapse was aggravated by interest payments on the public debt and capital flight, and later by a decline in the revenues of the public sector. The economic mismanagement of this period has some parallel with that of other periods in which a stabilization program collapsed (1974-76, 1970-72, 1962); the main difference is the legacy of a huge foreign debt. - 11 - 14. By the end of 1982, the Argentine Government initiated negotiations with the IMF and with foreign bank creditors to obtain additional funds and to reschedule the debt. The 'Bignone Government (June 1982-December 1983) reached an agreement with the INF which became effective in early 1983 and the Alfonsin Government reached a new agreement with the IMF at the end of 1984. Access to tesources under both agreements was quickly interrupted, mainly because the Argentine Government could not comply with the major macroeconomic targets of the programs. Both programs were based on a gradual reduction of the public sector deficit; other measures were largely determined by the specific circumstances of each situation. The failure of revenues to increase as anticipated in the 1983 program, together with the persistence of external payments arrears, prompted a breakdown in the agreement. In the second program, expenditures were significantly cut (Table 9) but with a minor impact on inflation, prompting the Government to abandon it. In August 198-5, after the Austral Plan was implemented, there have been new agreements with both the IMF and bank creditors (see paragraph 32). 15. By the end of 1983, the total Zoreign debt of Argentina amounted to US$46 billion, of which US$32 billion (70 percent) were owed to commercial - banks, US$5 billion to suppliers and other private sources, US$4.2 billion to bond holders (other than Bonds and Promissory Notes that are included in the debt with commercial banks), and the remaining 10 percent was due to bilateral and multilateral institutions, including the IMF. It is estimated that by the end of 1985 the total foreign debt amounted to US$50.2 billion, which implies a debt to GDP ratio of 0.66, in compatison with 0.61 in 1984 (Table 8). The debt burden is quite heavy, even though relief has been important. At 1970 prices, according to the national accounts (Table 5), the effective transfer - 12 - as measured by the trade balance amounted to 5.7 percent of GDP in 1983 and to 5.1 percent in 1984, and to 39.1 percent and 36.6 percent of exports respectively. In 1985, at 1970 prices, this transfer would have increased up to 6 percent of GDP and up to 40 percent of exports, the expansion in the volume of exports being largely compensated by the deterioration in the terms of trade. At current prices, as shown in Table 8, the effective transfer amounted to 3.8 percent of GDP in 1983 and to 4.6 percent in 1984; in 1985 the transfer can be estimated in approximately 4.8 percent of GDP. Debt relief, measured by the difference between interest payments and the trade balance, declined from 3.5 percent of GDP in 1983 to an estimated 2.4 percent of GDP in 1985 (Table 8). III. INFLATION AND THE STABILIZATION PROGRAM OF JUNE 1985 16. Inflation started around 1945, and since then two main periods can be distinguished (Table 1). Up to 1970 inflation was high in relation to other countries, but the average rate of inflation was 24 percent per year. A major problem was the great variability of inflation -- there were a couple of years in which inflation was as low as 3-4 percent per year and a year in which it was as high as 114 percent -- which reflected siccessive periods of acceleration of inflation and of stabilization. Since 1971, however, inflation accelerated, up to 60 percent in 1973, to 444 percent in 1976, and to around 800 percent per year in early 1985, which are the years in which major stabilization programs were implemented. The variability of inflation has, of course, 'een much larger in this period than in the previous one: the - 13 - short-run success of the Peronist program rendered a rate of inflation of only 24 percent in 1974, and that of Martinez de Hoz's program succeeded in bringing it down to 101 percent in 1980. 17. One of the two major factors generating inflation is the deficit of the public sector. The expansion of this sector, broadly defined, can be observed in Tables 9 and 10 (paragraph 4). Since 1970, current revenues of the public sector have been increasing, but not pari-passu with expenditures. Furthermore, large swings around the increasing long-run trend can be observed, which is another indicator of the pervasive struggle over power and income, as well as of the erosion of the tax base caused by accelerating inflation. The deficit of the public sector averaged only 3.6 percent of GDP in the decade 1961-70 and went up to 8.7 percent of GDP in 1971-75. Initially this increase was financed by printing money and later, in 1977-79 when the deficit declined to 6.1 percent of GDP, by domestic and foreign debt. In 1980-84, the deficit averaged 15.4 percent of GDP without taking into account the quasi-fiscal expenditures of the Central Bank, and half of it has been financed by printing money. 18. The second factor generating inflation has been the struggle over income shares, which has significantly affected the short-run behavior of taxes and relative prices. Monetary policy frequently accommodated changes in relative prices resulting from increases in nominal prices. Increases in nominal wages, the nominal exchange rate, and the nominal prices of petroleum and agricultural commodities, have largely been determined by political forces. There have been violent swings in domestic relative prices. They have not shown well defined trends, except for the fact that in the last 15 years imports have become more expensive (Table 11). - 14 - 19. Political adjustments in nominal and relative prices have been complemented by formal and informal indexation. However, indexation has not been as pervasive as in Chile, where a unit of account linked to the consumer price index has been extensively used. Inflation-adjustment -clauses have been common in long-term contracts, while the nominal interest rates of short-run financial contracts have usually included some expectation of inflation. Government attempts to index the exchange rate and nominal wages have been very limited. The violent swings in relative prices, closely associated with the great variability of inflation, have limited the value of indexation. 20. Major stabilization programs were implemented in 1967-69, 1973-74 and 1976-79. These programs had some temporary success in reducing the rate of inflation, but they collapsed and inflation quickly accelerated. These programs reduced initially the deficit of the public sector and attempted to control monetary expansion, but they were aimed at "managing" inflationary expectations by direct or indirect control of some prices, after a new structure of relative prices was set. In the 1967-69 program the initial devaluation was followed by a fixed exchange rate, a wage freeze and a voluntary price agreement. In the 1973-74 program the initial increase in nominal wages was followed by a general freeze of prices and wages. In both cases, neither the new structure of relative prices nor the reduction in the public sector's deficit were sustainable. The policies of the 1976-79 program were also unsustainable (see paragraph 12). 21. In the first 18 months of government President Alfonsin failed to implement a consistent stabilization program, even though the short-lived agreement with the IMF at the end of 1984 revealed the intention of sacrificing the gains in real wages granted in the previous months (Tables 11 - 15 - and 15). These gains contributed to the acceleration of inflation during 1984, from 18 percent per month in the last quarter of 1983 to 23 percent per month in the third quarter of 1984. The breakdown of the IMF agreement implied a new acceleration of inflation, up to 27 percent per month in the three months including March to May 1985. In the meantime, output was declining after the small recovery of 1983-84. In the first quarter of 1985 GDP fell 1.4 percent with respect to the same period in 1984, and in the second quarter it declined 3.4 percent with respect to the second quarter of 1984. It was in this context that the Argentine Government undertook a new major stabilization program. Some measures were implemented at the end of May and others in early June, but the core of the program was announced on June 14th. The program is known as Plan Austral because of the new unit of money. 22. The Plan Austral is based upon: (a) A reduction in the deficit of the public sector and a commitment not to finance the remaining deficit by printing money. (b) An initial realignment of relative prices and the subsequent freeze of the new structure of relative prices. (c) An attempt to break inflationary expectations by (a) as well as by a general freeze of nominal wages and prices, including a fixed exchange rate. (d) A mechanism to adjust outstanding financial contracts to avoid the distributive effect of the immediate and unanticipated cessation of inflation. 23. The measures to reduce the public sector's deficit included new taxes and increases in the prices of public utiLities and goods produced by state enterprises. New taxes included an immediate increase in export and import - 16 - taxes and a "forced saving" tax which was sucessfully implemented in November. In addition, the average lag in the payment of the value added tax was reduced so the Government collected 13 months of this tax in 1985. Tax revenues were also expected to increase as a result of a recovery in the base, which has severely eroded by the acceleration of inflation. Before June 14th the prices of petroleum and other goods and services produced by state enterprises were significantly increased. As a result of these measures and of price stabilization, the increase in the Treasury's revenue has been extraordinary: the revenue of the second half of 1985 can be estimated to be approximately 95 percent of the revenue of all 1984 (In July-November it was already above 80 percent; see Table 15). All revenues have increased significantly, but export taxes, the "forced saving" tax and the operational income of state enterprises have been the main sources of additional revenue. 24. Public expenditures have not been reduced as part of the stabilization program. In fact, the Treasury's expenditures would have slightly increased in 1985 with respect to 1984 and in the second semester of 1985 expenditures would have been as high as in the first six months (Table 15). While in 1984 the Treasury's expenditures were reduced substantially, around 22 percent decline with respect to 1983, the Austral Plan has substituted new taxes for the inflation tax without affecting expenditures, which may be the main reason why the Plan has not reduced output in the short- run. Anyway, total public expenditures -- as defined in Tables 9 and 10 -- would have declined from 59 percent of GDP in 1984 to 55 percent in 1985. Real wages in the public sector have reduced further and by the end of the - 17 - year they were about two thirds of the 1982 level. In addition, public investment has declined in 1985 to less than 10 percent of GDP, its lowest level since 1970. 25. As part of the Plan Austral the Government has committed not to finance the remaining Treasury's deficit by printing money and so far has complied. In the second semester of 1985 this deficit would have been around 2 percent of the Treasury's expenditures, while in 1984 it reached 50 percent. The remaining deficit has been financed with foreign credit. Although the domestic debt of the Treasury has not increased at all since June 14th, the debt of the Central Bank has continued increasing. This increase is a result of the quasi-fiscal expenditures of the Central Bank, in particular the payment of interest on banks reserve requirements that were used to finance the public sector's deficit (see the item "Interest equalization fund" in Table 16A). The Central Bank's debt increased.A$1,104 millions between the end of June and the end of November (Table 16B), i.e., approximately 4 percent of the GDP. 26. The Plan included a currency reform but there was no commitment with respect to monetary policy, except for the non-monetary financing of the deficit of the public sector. Between the end of June and the end of November, the monetary base increased 79 percent (64 percent in real terms). This increase is largely explained by a recovery in the degree of monetization following the stabilization of prices. The increase in the monetary base was initially backed by an accumulation of foreign assets, but between the end of June and the end of November the expansion of domestic credit was as much as important as this accumulation of assets. In fact, the financing of the quasi-fiscal expenditures of the Central Bank explains most of the expansion - 18 - of domestic credit. This expansion has so far been absorbed by the increase in the demand for real balances. 27. Because of the high, ex-post real interest rates since the Plan was implemented, there has been some discussion about how restrictive monetary policy should be. The Government has been very reluctant to expand the monetary base to meet an uncertain incfease in the demand for money. However, in the last three months of 1985 the Government was forced to pursue a more restrictive monetary policy because of some pressures on wages and prices. The possibility of low and stable real interest rates continues to depend on a sharp break in inflationary expectations and on a larger portfolio shift than the one that has taken place since June 14th. In addition, the spread between deposit and loan interest rates has increased because the average interest paid by the Central Bank to banks on compulsory reserves was reduced. On average these reserves represent two thirds of the monetary base, but its marginal share in the second half of 1985 has been near one half (Table 16A). 28. A significant realignment in relative prices took place just before June 14th. First, there was a devaluation of 15 percent over the preset value for June 11th; however, it was largely compensated by export taxes. Second, prices of imports were also affected by an increase of 10 percentage points in the tariff. Third, the prices of petroleum and other goods and services produced by state enterprises were adjusted before June 14th. Fourth, the adjustment in nominal wages was to compensate partially for the inflation between the previous adjustment and June 14th. The impact of these changes can be observed in Table 15: in July the official exchange rate was 10.5 percent over the May value of the parity rate (25.7 percent over the 1970 value of this rate); the prices set by state enterprises increased 14 percent - 19 - in real value between May and July; and real wages in manufacturing declined 10.5 percent between those two months. 29. The realignment of relative prices was followed by a general freeze of wages and prices. The exchange rate has been fixed at 0.801 australes per dollar, and the prices of petroleum and other goods and services produced by state enterprises have been maintained at their new nominal values. Nominal wages remained constant until the end of the year, but there were some adjustments in the private sector via salary advances and other mechanisms. Starting in January 1986 the Government decreed a general increase of 5 percent in salaries. The consumer prices of seasonal goods have been adjusted according to mark-ups set by Government. In general there has "en no excess demand in consumer goods and services. The plan has succeeded in reducing inflation from 27 percent per month in March-May to around 2 percent per month in the last quarter of the year, and to less than 1 percent per month in wholesale prices. 30. The innovation in the Plan Austral was the depreciation of the old money in terms of australes according to a preannounced daily schedule. This "tablita" was to be applied to outstanding financial contracts in which the nominal interest rate included an expected inflation, otherwise the immediate and unanticipated cessation of inflation would have implied a large redistribution of income from debtors to creditors. This redistribution would have threatened the general freeze of prices. The "tablita" was a temporary mechanism and it has already lost any significance. 31. The immediate internal reaction to the Plan Austral was very favorable, reflecting the consensus on the critical situation that the country was facing. That reaction implied a portfolio shift -- a substitution of -20 - domestic monetary assets for foreign currency and assets -- and a low cost to enforce the price freeze. After July, that-portfolio shift was not enough to reduce quickly real interest rates (Table 15). More recently, the enforcement of the price freeze has become more difficult. By now inflationary expectations are very mixed and it is not clear to what extent the high nominal interest rates respond to persistent inflationary expectations. The results of the recent congressional elections (November 3) do not indicate any strong position either in favor or against the Plan Austral. 32. Previous experience with stabilization programs clearly raises the possibility of a collapse for the Plan Austral. Even if the Argentine Government did not reverse its fiscal policy, the program could collapse for a number of reasons. (a) The freeze of wages and prices will become repressed inflation if the quasi-fiscal expenditures of the Central Bank continue demanding an expansion of at least 2 percent per month in the monetary base. (b) There is an urgent need for flexibility in the structure of relative prices to accommodate real shocks, as indicated by the recent deterioration in the terms of trade and the loss of agricultural production because of floods. (c) Real interest rates are too high, at least ex-post, and may create expectations that the Government will bail-out debtors. They might follow an explosive path if the domestic public debt continues growing. (d) The new structure of relative prices, in particular real wages, has not been politically validated yet. The recent increase in nominal wages has been accompanied by growing labor unrest. - 21 - 33. An additional critical issue is the possibility of reversal in fiscal policy leading to a large deficitt The concern refers both to revenues and to expenditures. The increase in revenues derived from export and import taxes is substantial; it is difficult, therefore to replace them with new taxes. The level of export taxes was high even before the Plan. In addition, the prices of petroleum and goods produced by State enterprises may be appropriate to finance these enterprises, but they seem to be at excessivley high levels to be politically sustainable, in some cases they may be too high even vis a vis international prices. With respect to expenditures, the Government has attempted to minimize the contraction by emphasizing that the Plan intended to substitute other taxes for the inflation-tax. However, the reduction in wages and in some benefits of the social security system may also be unsustainable. The decline in the real value of wages and of those benefits has been too large vis a vis the decline in the incomes of other groups. Finally, since 1984, the level of public investment has been quite low as a result of a general cut in programs. however, no application of economic criteria to choose among programs was exercised and, therefore, the composition of public investment leaves much to be desired. 34. The Argentine Government reached a new agreement with the IMF in August 1985, and subsequently with bank creditors. This agreement implied a break in the strategy followed by both the Argentine Government and the IMF. The new program was largely designed by the Government, with targets consistent with the Plan Austral which were more severe than the targets set in the short-lived agreement with the IMF of early June. The targets set for September were met, but the probability of satisfying the targets set for March 1986 is not high. The IMF endorsed the general freeze on wages and - 22 - prices implemented by the Argentine Government, even though it is contrary to the recommendations usually made by the IMF. The agreement with the IMF and the subsequent one with bank creditors allowed the Argentine Government to eliminate foreign payments arrears and to pay all remaining bridge loans. The agreements rescheduled the amortization payments of the foreign debt for 1982- 85 and provided additional funds until July 1987. 35. Since the end of 1982, Argentina had been attempting to implement some guadualist stabilization program, until the Government finally abandoned gradualism only in June 1985. The social costs of gradualism compounded the costs of economic mismanagement in 1980-82 without any significant, durable gain over inflation. The loss of income has been very serious for some sectors, like government employees and social security recipients. Unemployment has increased, even though the regulatory system has prevented a much larger increase in open unemployment. Furthermore, the public sector has been unable to provide relief to the poor. The new stabilization program is likely to impose an additional burden to those that have suffered more in the last five years (public employees, social security recipients and the unemployed), while other low income groups may partly compensate their loss of factor income by the elimination of the inflation tax. IV. CONCLUSIONS 36. Three major constraints on growth were identified. First, the unsettled political system, which has continuously failed to provide effective responses to changing economic conditions and which has become a major source of economic inefficiency. Second, the inflationary pressures derived from the expansion of the public sector and from the struggle over income shares. - 23 - Finally, the heavy debt burden inherited from economic mismanagement in 1980- 32. These constraints have resulted in a low investment ratio and in a very low productivity of capital and labor, and consequently in the prospect of long-run stagnation or even decline. Numerical exercises based on extrapolating recent levels of investment and productivity are conclusive. I/ 37. Only the settlement of the political system, i.e., the consolidation of constitutional democracy (see paragraph 9), will provide the incentives both for capital accumulation and for a substantial recovery in productivity. Exogenous increases in income or concessional foreign funds may alleviate the burden of debt, but their impact on capital accumulation would be negligible if there were no change in the political system. In recent months, President Alfonsin has been eager to take the initiative to consolidate constitutional democracy, but it is too early to assess how much progress can be made in 1986. 38. The Argentine political system faces the immediate challenge of consolidating stabilization. The results of the Plan Austral in the second half of 1985 have been satisfactory, but lasting stabilization calls for institutional and policy reforms that will take some time to be designed and implemented. For those results to become permanent, the Argentine Government will have to commit itself to build a strong political support for the reforms. This second stage of the Plan Austral should aim at securing both a sharp break in inflationary expectations and an increasing degree of flexibility in relative prices and wages. Very strong fiscal and monetary 1/ See, M.A. Broda and J.C. de Pablo, "Por los Carriles Tradicionales, la Argentina esta Condenada al Estancamiento Absoluto por Muchos Anos. Pero Hay Salidas", Seminarios Internos, Instituto Di Tella, Noviembre 1985. -24- commitments, for the short and the long-run, as well as some truce over income shares are called for breaking inflationary expectations and to get rid of the general freeze of wages and prices without a revival of inflation. 39. The economic program for 1986 is still unknown but it seems that stabilization will rest upon the control of wages and prices, so there would be no second stage of the Plan Austral. For this control to be successful the Government must cope with the strong economic and political pressures on the current structure of relative prices and wages, and it must also increase the Treasury's current revenues to finance the quasi-fiscal expenditures of the Central Bank. As in previous stabilization programs, the Government may be over-estimating its ability to control prices and wages. If the Government attempted to pursue a restrictive monetary policy to facilitate the control of prices and wages, interest rates would increase substantially, which could lead to an explosive path because of the large debt of both the public and the private sector. Of course, this policy ignores the need to enhance flexibility in relative prices and it is likely to fail in breaking inflationary expectations. 40. Debt relief is badly needed just to maintain the 1985 level of domestic expenditures and output. As a result of both the deterioration in the terms of trade and of the loss of agricultural production, relief in 1986 will have to increase over the 1985 level (2.4 percent of GDP) in order to maintain domestic expenditure and output. This relief increases the burden of debt without enhancing the prospect of growth, and therefore should remain conditional upon a strong commitment to stabilization. If stabilization - 25 - succeeds -- indicating some progress in the settlement of the political system -- additional foreign credits woulC be needed to support the growth of the private sector. 41. In the meantime, given that the burden of debt is already very heavy, additional debt relief in the form of new credits would increase this burden without contributing to settle the political system. What is the probability that these funds will be used to finance investment rather than consumption? What is the probability that, if the funds are invested, productivity will be positive? Will a politicized private sector and an inefficient public sector behave differently? These questions need to be answered by reference to Argentine history, at least until there is strong evidence of a significant change in the political system. TABLE 1. ARGENTINA. GROWTH AND INFLATION Total GDP GDP per Capita % Annual Change % Annual Change with Respect to with Respect to Annual Inflation (%) 1914 previous 1900- 1914 previous 1900- Consumer Wholesale =100 period 1904 =100 period 1904 prices prices 1900-04 56.7 93.0 - - 1905-09 83.8 8.12 8.12 115.6 4.44 4.44 - - 1910-14 104.9 4.59 6.35 114.0 -0.27 2.06 - - 1915-19 100.8 -0.79 3.91 94.9 -3.60 0.13 9.92 - 1920-24 134.3 5.91 4.41 112.2 3.40 0.94 -2.60 - 1925-29 174.9 5.42 4.61 125.8 2.31 1.22 -1.34 - 1930-34 178.5 0.45 3.90 113.7 -2.01 0.67 -4.84 - 1935-39 209.5 3.26 3.80 122.4 1.49 0.79 3.54 - 1940-44 241.9 2.92 3.69 130.2 1.25 0.84 2.25 10.93 1945-49 300.5 4.43 3.78 147.9 2.59 1.04 18.87 13.18 1950-54 331.2 1.96 3.59 146.1 -0.24 0.91 20.77 22.02 1955-59 397.2 3.70 3.60 159.6 1.78 0.99 34.90 39.11 1960-64 456.3 2.81 3.54 168.7 1.12 1.00 22.90 21.55 1965-69 565.2 4.37 3.60 191.7 2.59 1.12 21.33 16.77 1970-74 664.6 3.29 3.58 212.0 2.03 1.18 38.14 38.38 1975-79 740.3 2.18 3.49 216.3 0.40 1.13 213.66 205.94 1980-84 736.8 -0.09 3.26- 197.5 -1.81 0.95 222.82 232.51 1975 716.1 -0.39 216.8 -2.12 182.8 192.5 1976 712.8 -0.46 212.0 -2.21 444.1 499.0 1977 758.2 6.37 221.6 4.53 176.2 149.4 1978 732.6 -3.38 210.4 -5.05 175.4 146.0 1979 781.8 6.72 220.6 4.85 159.5 149.3 1980 787.3 0.70 218.4 -1.00 100.8 75.4 1981 738.5 -6.20 201.2 -7.88 104.5 109.6 1982 700.1 -5.20 187.3 -6.91 164.8 256.2 1983 721.8 3.10 189.7 1.28 343.8 360.9 1984 736.2 2.00 190.7 0.53 626.7 573.3 1985* 704.9 -4.25 179.7 -5.75 670.0 663.0 *Preliminary estimates Source: Prepared with data from M.A. Broda y Asociados. TABLE 2. ARGENTINA. NATIONAL ACCOUNTS: GROSS DOMESTIC PRODUCT (GDP), GROSS NATIONAL PRODUCT (GNP) AND DOMESTIC ABSORPTION GDP GNP GNP - Domestic Absorption _ Millions Millions % Millions % % A$1970 A$1970 GDP A$1970 GDP GNP 1950-54 4766.5 4757.8 99.8 4815.9 101.1 101.2 1955-59 5713.3 5699.5 99.8 5747.9 100.6 100.8 1960-64 6576.1 6530.3 99.3 6592.5 100.2 101.0 1965-69 8132.5 8036.2 98.8 7973.9 98.0 99.2 1970-74 9397.1 9282.8 98.8 9398.5 100.0 101.2 1975-79 10446.8 10338.8 99.0 10220.0 97.8 98.9 1980-84 10397.1 9851.8 94.8 10239.6 98.5 103.9 1975 10105.3 10035.8 99.3 10275.0 101.7 102.4 1976 10058.4 9913.6 98.6 9762.4 97.1 98.5 1977 10699.5 10577.5 98.9 10339.7 96.6 97.8 1978 10338.8 10230.4 99.0 9800.0 94.8 95.8 1979 11032.2 10936.8 99.1 10922.6 99.0 99.9 1980 11114.2 11002.3 99.0 11565.0 104.1 105.1 1981 10421.2 10139.0 97.3 10708.9 102.8 105.6 1982 9878.6 9181.0 92.9 9461.6 95.8 103.1 1983 10182.0 9357.1 91.9 9606.8 94.4 -102.7 1984 10389.5 9579.4 92.2 9856.0 94.9 102.9 1985* 9950.0 9177.0 92.2 9352.0 94.0 101.9 *Preliminary estimates Source: Central Bank of Argentina. TABLE 3. ARGENTINA. GDP AND EMPLOYMENT: SECTORAL COMPOSITION Agriculture Mining Manufacture Construction Services GDP (%) 1950-54 18.8 0.7 27.7 4.5 48.3 1955-59 17.7 0.7 30.6 3.9 47.1 1960-64 16.3 1.1 31.2 3.7 47.7 1965-69 14.9 1.4 34.1 3.8 45.8 1970-74 13.2 2.3 27.9 6.1 50.5 1975-79 13.6 2.3 26.7 6.8 50.6 1980-83 14.3 2.7 23.5 5.7 53.8 EMPLOYMENT (%) 1960 20* 28 6 46 1970 16* 21 9 54 1980 13* 21 11 55 * All primary activities. Sources: Central Bank of Argentina and INDEC. TABLE 4. ARGENTINA. NATIONAL ACCOUNTS: CONSUMPTION, INVESTMENT, AND SAVINGS Consumption Investment Domestic Savings Foreign Savings Millions % Millions % Millions % Millions % A$1970 GDP A$1970 GDP A$1970 GDP A$1970 GDP 1950-54 4035.8 84.7 780.1 16.4 722.1 15.1 58.0 1.3 1955-59 4834.5 84.6 913.4 16.0 864.9 15.1 48.5 0.9 1960-64 5265.2 80.1 1327.3 20.2 1265.1 19.2 62.2 1.0 1965-69 6401.3 78.7 1572.6 19.3 1636.7 20.1 -64.1 -0.8 1970-74 7406.0 78.8 1992.5 21.2 1876.9 20.0 115.6 1.2 1975-79 7943.2 76.0 2276.8 21.8 2395.5 22.9 -118.7 -1.1 1980-84 8456.8 81.3 1782.8 17.1 1395.3 13.4 387.5 3.7 1975 8233.2 81.5 2041.8 20.2 1802.6 17.8 239.2 2.4 1976 7589.0 75.4 2173.4 21.6 2324.6 23.1 -151.2 -1.5 1977 7745.0 72.4 2594.7 24.3 2832.2 26.5 -237.5 -2.2 1978 7599.5 73.5 2200.5 21.3 2630.9 25.4 -430.4 -4.2 1979 8549.4 77.5 2373.2 21.5 2387.4 21.6 -14.2 -0.1 1980 9020.7 81.2 2544.3 22.9 1981.6 17.8 562.7 5.1 1981 8752.4 84.0 1956.5 18.8 1386.6 13.3 570.0 5.5 1982 7804.7 79.0 1656.9 16.8 1375.5 13.9 281.4 2.9 1983 8090.1 79.5 1516.7 14.9 1269.4 12.5 247.3 2.4 1984 8616.0 82.9 1240.0 11.9 963.4 9.3 276.6 2.6 1985* 8232.0 82.7 1120.0 11.3 945.0 9.5 175.0 1.8 *Preliminary estimates Source: Central Bank of Argentina. TABLE 5. ARGENTINA. NATIONAL ACCOUNTS: EXPORTS, IMPORTS AND FACTOR INCOME Exports Imports Net Factor Income Current Account Millions % Millions % Millions % Millions % A$1970 GDP A$1970 GDP A$1970 GDP A$1970 GDP 1950-54 470.5 9.9 519.9 10.9 8.7 0.2 -58.1 -1.3 1955-59 565.9 9.9 597.6 10.5 16.9 0.3 -48.6 -0.9 1960-64 708.9 10.8 734.6 11.2 36.6 0.6 -62.3 -1.0 1965-69 904.8 11.1 746.2 9.2 94.5 1.2 64.1 0.8 1970-74 788.1 8.4 807.4 8.6 96.2 1.0 -115.5 -1.2 1975-79 1110.6 10.6 883.7 8.5 108.0 1.0 118.8 1.1 1980-84 1374.8 13.2 1217.3 11.7 545.3 5.2 -387.8 -3.7 1975 737.4 7.3 907.1 9.0 69.5 0.7 -239.2 -2.4 1976 970.5 9.6 674.5 6.7 144.8 1.4 151.2 1.5 1977 1227.7 11.5 868.2 8.1 122.0 1.1 237.5 2.2 1978 1322.5 12.8 783.7 7.6 108.4 1.0 430.4 4.2 1979 1294.8 11.7 1185.2 10.7 95.4 0.9 14.2 0.1 1980 1242.1 11.2 1692.9 15.2 111.9 1.0 -562.7 -5.1 1981 1340.3 12.9 1628.1 15.6 282.2 2.7 -570.0 -5.5 1982 1359.1 13.8 942.9 9.5 697.6 7.1 -281.4 -2.9 1983 1476.1 14.5 898.5 8.8 824.9 8.1 -247.3 -2.4 1984 1457.8 14.0 924.3 8.9 810.1 7.8 -276.6 -2.6 1985* 1480.0 14.9 882.0 8.9 773.0 7.8 -175.0 -1.8 *Prelinimary estimates Source: Central Bank of Argentina. TABLE 6. ARGENTINA. BALANCE OF PAYMENTS: CURRENT ACCOUNT (Millions of US Dollars) Exports Imports Trade -alance Interest Current Account FOB FOB FOB Goods and Payments Balance NFS 1960-64 1206 -1084 122 -153 1965-69 1506 -1091 415 -157 395 1970-74 2530 -2006 524 -308 90 1975-79 5348 -3913 1435 1006 -616 390 1980-84 8145 -6213 1932 891 -4214 -3311 1975 2961 -3510 -549 -814 -430 -1284 1976 3916 -2744 1172 1155 -493 650 1977 5652 -3798 1854 1877 -569 1290 1978 6400 -3489 2911 2466 -681 1833 1979 7810 -6026 1784 348 -907 -537 1980 8021 -9394 -1373 -3259 -1531 -4767 1981 9143 -8391 752 -992 -3700 -4714 1982 7624 -4858 2766 2330 -4719 -2357 1983 7710 -4168 3542 2811 -5408 -2571 1984 8100 -4253 3847 3567 -5712 -2145 1985* 8000 -4100 3900 3600 -5450 -1850 *Preliminary estimates Source: Central Bank of Argentina. TABLE 7. ARGENTINA. BALANCE OF PAYMENTS: CAPITAL TRANSACTIONS (Millions of US dollars) Current Change Change Account in in Foreign Residual** Balance Reserves* Debt (4)= (1) (2) (3) (1)+(2)+(3) 1975 -1284 723 2571 2010 1976 650 -1154 195 -309 1977 1290 -2090 1398 598 1978 1833 -1966 2818 2685 1979 -537 -4310 6538 1691 1980 -4767 2850 8128 6211 1981 -4714 3569 8509 7364 1982 -2357 706 7963 6312 1983 -2571 -192 2372 -391 1984 -2154 -254 1815 -593 1985*** -1850 Accumulated 1975-79 1952 -8797 13520 6675 1980-84 -16563 6679 28787 18903 1975-84 -14581 -2118 42307 25608 * A minus sign indicates an increase in reserves. These are gross foreign assets (including gold) held by the Central Bank. ** Even though the deficit in the current account may be underestimated and the direct foreign investment is not considered, this residual is a good indicator of the accumulation of foreign assets by residents, except the Central Bank. ***Preliminary estimates Source: Central Bank of Argentina. TABLE 8. ARGENTINA. FOREIGN DEBT (Millions of US Dollars) GDP in US Dollars Official Parity Total Gross Exports Net Exchange Exchange Foreign Reserves Mechandise Goods Trade Interest Rate Rate* Debt and NFS Balance Payments 1975 53345 42462 8085 618 2961 3704 -814 430 1976 41574 43966 8280 1772 3916 4752 1155 493 1977 51077 49936 9678 3862 5652 6769 1877 569 1978 65525 52019 12496 5828 6400 7714 2466 681 1979 107975 62392 19034 10138 7810 9601 348 907 1980 153997 71970 27162 7288 8021 10765 -3259 1531 1981 122956 73488 35671 3719 9143 11545 -992 3700 1982 67074 71090 43634 3013 7624 9525 2330 4719 1983 66861 74393 46006 3205 7710 9386 2811 5408 1984 76233 78130 47821 3459 8100 9878 3567 5712 1985*** 64045 75517 50240 8000 9800 3600 5450 As % of GDP at Parity Rate As % of Total Exports Total Net Trade Interest Total Net Trade Interest Debt Debt** Balance Payments Debt Debt** Balance Payments 1975 19.0 17.6 -1.9 1.0 218.3 201.6 -22.0 11.6 1976 18.8 14.8 2.6 1.1 174.2 137.0 24.3 10.4 1977 19.4 11.6 3.8 1.1 143.0 85.9 27.7 8.4 1978 24.0 12.8 4.7 1.3 162.0 86.4 32.0 8.8 1979 30.5 14.3 0.6 1.5 198.3 92.7 3.6 9.4 1980 37.7 27.6 -4.5 2.1 252.3 184.6 -30.3 14.2 1981 48.5 43.5 -1.3 5.0 309.0 276.8 -8.6 32.0 1982 61.4 57.1 3.3 6.6 458.1 426.5 24.5 49.5 1983 61.8 57.5 3.8 7.3 490.2 456.0 29.9 57.6 1984 61.2 56.8 4.6 7.3 484.1 449.1 36.1 57.8 1985*** 66.5 4.8 7.2 512.7 36.7 55.6 * Using the parity exchange rate estimated by Carta Economica. ** Total foreign debt minus gross reserves ***Preliminary estimates Source: Central Bank of Argentina and Carta Economica. TABLE 9. ARGENTINA. PUBLIC SECTOR EXPENDITURES AND REVENUES (as Percent of GDP) 1961 1965 1970 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 I. CURRENT REVENUES 33.5 29.3 37.0 31.4 34.5 39.0 43.6 41.2 43.6 45.5 42.2 43.9 44.0 1. Taxes 20.3 17.8 22.9 16.4 18.6 21.5 24.1 24.1 27.3 26.2 23.0 22.9 25.1 2. Others 13.2 11.5 14.1 15.1 15.8 17.5 19.5 17.1 16.3 19.3 19.2 21.0 18.9 II. CURRENT EXPENDITURES 27.6 26.9 30.7 36.7 32.3 30.7 37.4 36.9 41.8 52.9 51.4 51.5 48.6 1. Salaries 11.3 11.4 11.0 14.8 9.1 8.6 10.6 10.7 12.4 12.6 10.3 13.3 13.3 2. Goods and Services 7.7 6.0 6.8 9.0 10.5 9.8 10.4 9.6 9.3 10.9 13.3 13.5 12.5 3. Interest Payments 0.1 0.1 0.8 1.3 2.1 2.1 3.2 3.2 3.6 10.1 12.7 6.4 5.6 4. Transfers 8.4 9.4 12.2 11.6 10.5 10.2 13.2 13.5 16.5 19.2 15.1 18.3 17.2 III. SAVINGS (=I-II) 5.9 2.4 6.3 -5.3 2.2 8.3 6.2 4.3 1.8 -7.4 -9.2 -7.6 -4.6 IV. CAPITAL REVENUES 0.5 0.5 0.5 0.5 0.4 0.8 1.3 0.8 0.8 1.4 1.4 1.2 1.1 V. CAPITAL OUTLAYS 10.2 5.7 8.8 10.8 13.2 14.1 14.2 11.7 11.2 12.0 10.9 11.4 10.3 VI. TOTAL REVENUES 34.0 29.8 37.5 31.9 34.9 39.8 44.9 42.0 44.4 47.0 43.6 45.1 45.1 (=I+1V) VII. TOTAL EXPENDITURES 37.8 32.7 39.5 47.5 45.4 44.8 51.6 48.7 52.9 64.9 62.4 62.9 58.9 (=II+V) VIII. BALANCE -3.8 -2.9 -2.0 -15.6 -10.6 -5.0 -6.7 -6.7 -8.6 -18.0 -18.8 -17.8 -13.8 (=VI-VII) FINANCING IX. CENTRAL BANK 0.3 0.7 0.6 8.3 3.5 1.5 0.0 01.0 3.4 5.1 4.8 16.6 6.1 X. DOMESTIC CREDIT 1.6 -0.2 -0.3 2.7 2.9 1.7 4.0 3.1 1.4 3.8 5.3 -0.3 0.0 XI. FOREIGN CREDIT 0.4 0.4 0.7 0.2 1.1 1.4 2.2 1.5 1.2 6.8 3.4 0.0 0.1 XII. OTHER FUNDS 1.5 1.9 1.1 4.4 3.1 0.5 0.5 2.1 2.5 2.3 5.2 1.4 7.6 Source: Prepared with data from M.A. Broda y Asociados. TABLE 10. PUBLIC SECTOR EXPENDITURE AND REVENUES, 1984 AND 1985 (as Percent of GDP) Central Provinces and Social Security Enterprises Total Public Government Municipalities System and Entities Sector 1984 1985 1984 1985 1984 1985 1984 1985 1984 1985 I. CURRENT REVENUES 12.5 13.8 7.6 8.3 9.4 9.2 14.4 16.7 44.0 48.0 1. Taxes 10.0 11.4 6.3 6.7 8.8 8.7 0.0 0.0 25.1 26.9 2. Others 2.5 2.4 1.3 1.6 0.6 0.5 14.4 16.7 18.9 21.1 II. CURRENT EXPENDITURES 10.7 9.2 9.7 8.4 12.8 12.2 15.4 15.3 48.6 45.1 1. Salaries 3.7 3.0 5.7 4.9 0.4 0.4 3.5 3.0 13.3 11.3 2. Goods and Services 2.0 1.7 1.4 1.4 0.0 0.0 9.1 9.1 12.5 12.2 3. Interest Payments 3.1 2.7 0.1 0.0 0.0 0.0 2.5 2.7 5.6 5.4 4. Transfers 1.9 1.8 2.5 2.0 12.4 11.8 0.4 0.5 17.2 16.2 III. SAVINGS (=I-II) 1.8 4.6 -2.1 -0.1 -3.3 -3.0 -1.0 -1.4 -4.6 2.9 IV. CAPITAL REVENUES 0.0 0.0 0.2 0.1 0.4 0.4 0.5 0.5 1.1 1.0 V. CAPITAL OUTLAYS 1.7 1.6 3.5 3.3 0.2 0.2 4.9 3.9 10.3 9.0 VI. TOTAL REVENUES 12.5 13.8 7.8 8.4 9.8 9.6 15.0 17.2 45.1 49.0 (=I+IV) VII. TOTAL EXPENDITURES 12.4 10.7 13.3 11.7 13.0 12.5 20.3 19.2 58.9 54.1 (=II+V) VIII. BALANCE 0.1 3.1 -5.5 -3.3 -3.2 -2.9 -5.3 -2.0 -13.8 -5.1 (=VI-VI) Note: The estimates for 1985 are based on the Budget approved in September 1985 and assume a decline of 2.5% in GDP. Source: Prepared with data from M.A. Broda y Asociados. TABLE 11. ARGENTINA. RELATIVE PRICES AND REAL WAGES (1970=100) Real Exchange Agricultural Import Real Rate Prices Prices Wages (1) (2) (3) (4) 1970 100.00 100.00 100.00 100.00 1971 88.50 108.43 90.03 100.65 1972 102.22 126.33 108.05 95.60 1973 75.67 88.77 98.28 100.08 1974 69.84 104.26 126.76 110.50 1975 78.72 82.74 146.82 106.43 1976 107.16 91.52 .203.87 76.63 1977 98.47 97.69 186.76 70.85 1978 80.07 91.98 128.03 69.30 1979 59.52 90.98 97.47 78.48 1980 47.20 82.20 94 26 88.45 1981 59.86 75.11 114.46 80.68 1982 105.55 88.27 163.12 69.98 1983 111.26 91.09 154.92 87.98 1984 102.48 110.38 Average 85.77 94.24 129.49 89.73 S.D. 19.50 12.30 35.10 14.26 Notes: (1) Estimated by Carta Economica using the GDP deflator for Argentina and the WPI for USA. (2) Agricultural prices relative to non-agricultural domestic prices according to WPI. (3) Import prices relative to non-agricultural domestic prices according to WPI. (4) Estimated by Carta Economica using the series of nominal wages from IOL-Ministry Of Labor. Source: INDEC and Carta Economica. TABLE 12. ARGENTINA. EMPLOYMENT IN LARGE URBAN AREAS* Labor Employment Employment Force % 1970 Unemployment in Participation Population =100 Rate Services 1966 44.9 42.6 92.8 5.1 55.3 1970 43.9 41.7 100.0 5.1 56.6 1974 39.3 38.1 111.4 3.0 49.7 1975 40.0 38.6 116.6 3.5 49.6 1976 38.9 37.2 110.5 4.3 51.5 1977 38.8 37.8 115.0 2.5 52.9 1978 39.5 38.7 113.5 2.0 53.3 1979 39.2 38.4 109.3 2.2 54.4 1980 39.2 38.2 117.7 2.4 53.3 1981 39.0 36.9 121.3 5.3 56.8 1982 39.2 37.5 123.2 4.3 61.3 1983 38.0 36.6 122.5 3.8 60.7 1984 38.6 36.6 124.9 5.3 59.5 *Greater Buenos Aires, Greater Cordoba, Greater Rosario, Mendoza and Tucuman. Source: INDEC. TABLE 13. ARGENTINA. MARGINAL PRODUCTIVITY OF CAPITAL (Five Year Averages) Investment in Fixed Change in GDP per Capital as % GDP Unit of Investment Gross Net Gross Net 1950-54 15.9 5.1 0.13 0.41 1955-59 16.1 6.4 0.18 0.46 1960-64 19.9 10.3 0.21 0.41 1965-69 18.9 9.3 0.27 0.54 1970-74 20.8 11.0 0.12 0.23 1975-79 21.7 11.9 0.08 0.15 1980-84 17.0 6.8 -0.07 -0.16 Source: M.A. Broda and J.C. de Pablo < Por los Carriles Tradicionales la Argentina Esta Condenada al Estancamiento Absoluto por Muchos Anos. Pero Hay Salidas > , Serie Seminarios, Instituto Torcuato Di Tella, November 1985. TABLE 14. ARGENTINA. MONETARY AGGREGATES AND INTEREST RATES Real Interest Rates .1 M2 M3 M4 % Annual as percent of GDP Deposits Loans 1950-54 25.23 33.53 33.53 33.3 1955-59 21.26 28.13 28.13 28.13 1960-64 13.99 18.96 18.96 18.96 1965-69 12.74 19.91 19.91 19.91 1970-74 12.83 22.83 24.14 24.18 1975-79 7.29 16.65 17.48 19.89 1980-84 4.88 17.38 17.49 20.04 1975 10.13 16.30 17.98 19.05 -72.36 -68.57 1976 7.27 10.50 11.75 14.63 -65.14 -65.04 1977 6.79 15.24 16.32 19.30 -19.78 -0.66 1978 6.32 20.05 20.14 22.81 -14.61 11.92 1979 5.94 21.17 21.20 23.66 -9.43 2.58 1980 6.43 24.53 24.56 26.71 -4.38 25.91 1981 5.17 22.57 22.58 25.52 9.51 7.03 1982 5.03 19.31 19.31 22.34 -15.13 -12.42 1983 4.02 11.34 11.35 13.75 -9.56 -18.44 1984 3.74 9.16 9.67 11.90 Notes: 1 = Currency + demand deposits. M2 = Ml + Savings and time deposits. M3 = M2 + non-regulated deposits + acceptances. M4 = M3 + Treasury's Indexed Bonds (VNA) + Treasury's Bills + Mortgage Bonds + Indexed Long-Term Deposits + Dollar Deposits. Sources: Prepared with data from M.A. Broda y Asociados. Interest rates from World Bank (< Argentina Economic Memorandum >, 1985, p. 205. TABLE 15. ARGMENINA: EOD0OMIC IDICATORS Year Year 1984 1985 Unit 1983 1984 Dic. Jan. Feb. Mar. Apr. May June July Aug. Sept Oct. Ncm. NATIONAL AOO0UNfS GDP, total 1970=100 116.4 119.2 114.0 114.3 CDP, agriculture 1970=100 136.3 141.3 139.5 136.8 CDP, manufacture 1970=100 113.3 117.8 99.0 107.7 Consumption 1970=100 122.4 130.2 127.4 117.4 Investment 1970=100 81.4 70.5 57.6 62.7 Industrial production 1970=100 104.7 108.3 99.6 103.0 98.6 105.8 102.7 101.1 93.5 93.0 97.2 100.6 102.2 PRICES Wholesale prices % change period 360.9 573.3 23.2 21.1 17.8 27.7 31.5 31.2 42.3 -0.9 1.5 0.6 0.8 0.7 Conssner prices % change period '343.8 626.7 19.7 25.1 20.7 26.5 29.5 25.1 30.5 6.2 3.1 2.0 1.9 2.4 REAL WAGES Manufacture 1982=100 124.7 150.4 152.1 143.5 133.7 132.3 132.1 134.9 128.1 120.6 111.5 112.0 115.1 117.1 Construction 1982=100 146.0 178.5 159.3 139.7 133.0 132.3 127.0 128.6 120.8 113.7 110.7 106-5 106.5 104.1 Public sector 1982=100 94.9 106.6 %.8 93.4 88.7 85.1 81.4 82.3 77.3 77.8 70.6 69.2 67.9 66.3 EXCHANE RATE Official exchange rate % change period 377.3 545.7 20.5 25.1 20.6 26.3 29.4 32.4 40.2 8.8 0.0 0.0 0.0 0.0 Spread Parallel/official % 40.6 . 31.3 13.1 19.3 30.8 31.6 29.6 18.1 9.2 18.6 19.3 17.4 15.5 12.6 Spread official/parity % 11.3 2.5 10.0 13.2 14.8 13.2 12.9 13.8 16.9 25.7 23.0 21.0 19.8 17.8 TRALE Exports Millions US$ 7836 8102 476 626 531 647 829 806 934 900 690 590 500 Imports Millions US$ 4504 4581 424 373 265 335 342 333 249 355 360 370 340 Trade balance Millions US$ 3332 3521 62 353 266 312 487 473 685 595 330 220 160 PUBLIC SECIOR Revenues, real Thousands A$1982 9265 9520 836 734 6% 442 638 800 669 1331 1514 1432 1432 2062 Expenditures, real Thousands A$1982 22418 17412 1506 1263 1450 1312 2020 1623 1770 1566 1497 1388 1565 1532 Revenues/expenditures % 41.3 48.9 55.5 58.1 48.0 33.7 31.6 49.3 27.4 85.0 101.1 103.2 109.7 134.6 Real Prices Of State Products 1982=100 109.2 127.5 136.6 136.0 131.4 128.6 124.8 135.2 146.9 154.3 150.7 148.9 146.8 144.3 Of Petrolas 1982=100 121.5 152.5 160.9 160.8 155.1 151.7 145.1 158.4 171.5 180.0 175.8 173.7 171.3 168.3 M3DEY AND INIEREST Monetary base, average Millions AS 87 489 935 1142 1292 1391 1478 1356 1952 2795 3071 3286 3641 3960 Monetary base, average, real 1982=100 112.0 86.4 87.6 72.5 69.1 58.7 48.2 40.5 42.7 60.0 64.4 68.0 74.3 79.5 M2, average Millions A$ 84 505 1048 1276 1506 1781 2091 2605 3759 4817 4931 5041 5345 5845 W2, average, real 1982=100 75.1 62.8 54.5 58.8 58.3 54.0 57.3 43.2 45.6 57.4 57.4 57.9 60.5 65.1 Loan interest rates Regulated % per month 12.6 15.4 19.0 20.0 20.0 22.0 28.0 32.0 17.2 5.0 5.0 5.0 4.5 4.5 Free % per month 18.6 19.5 33.2 25.2 22.9 25.5 28.8 33.1 18.8 7.2 7.7 7.3 6.3 6.4 IEPOSIT INIEBEST RAIES Free % per month 11.2 19.4 30.9 24.9 25.9 23.5 27.4 31.1 16.8 5.2 5.7 5.3 4.3 4.4 Source: Carta Ecoonica.