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ARGENTINA
Argentina has experienced slow economic growth since the 1940s.
By the mid-1970s long-term growth declined noticeably, and in
the last half of the 1980s the country suffered its longest
period of stagnation in the century. Savings and investment
rates fell precipitously from the mid-1970s until 1989.
Argentines, responding to the unstable macroeconomic
environment, increasingly saved and invested abroad. Labor
productivity fell ang poverty worsened. This economic
performance was tranceable to chronic public sector deficits and
endemic inflation. Public sector deficits in the late 1970s
ranged from 10 to 14 percent of GDP, and in the early 1980s
surpassed IS percent of GDP. After the return to constitutional
democracy in 1983, public demands to control inflation were
translated into four successive stabilization programs. All
failed to eradicate inflation, and each ended in a more virulent
inflation than the one preceding it. The main reason for these
failures was the inability of the stabilization programs to
redress rapidly and permanently the public sector structural
deficit. Structural deficits emerged from the post-war
organization of the economy. Economic policy from the 1940s was
used to propagate rules and transfers favoring the interests of
private groups with access to power. By the early 1980s public
expenditures approached 40 percent of GDP. Unionized labor
benefitted from high wages, guaranteed employment, and rigid
rules governing hiring and dismissals. Industry benefitted from
highly protected markets, tax exemptions through special
promotion regimes, subsidized credit-or effective grants, as
many loans were not collected-subsidized inputs from public
enterprises, and high prices on sales to public enterprises.
Housing contractors and middleclass home buyers benefitted from
enormous public transfers through earmarked taxes and effective
grants through the Housing Bank. Tobacco growers, sugar growers,
the merchant marine, and other small interest groups enjoyed
special tax breaks. Consumers enjoyed below-cost tariffs from
public enterprise and lax collectioll practices. Provincial
governments could avail themselves of costless credit from the
provincial banks, which the central bank reimbursed. The
military enjoyed expanding budgets, especially over 1976-82, as
well as management perquisites in state companies they
controlled. By 1989 subsidies through the budget, tax
exemptions, agriculcural regulations, public enterprise tariffs,
and central bank rediscounts were estimated to amount to roughly
8 percent of GDP--the equivalent of some $8 billion. The growth
of the state and concomitant rents and subsidies, along with the
capital flight provoked by an inconsistent exchange rate policy,
were financed during the late 1970s largely by external
borrowing through the expanding Eurodollar market at low or even
negative real international interest rates. This permitted the
government to run large deficits and sustain a revalued exchange
rate with relatively low levels of inflation in the second half
of the 1970s. An abrupt end to voluntary foreign commercial
credit in the early 1980s and the sudden rise in real
international interest rates provoked a financial collapse and
placed additional pressure on public finances. The situation was
complicated by the South Atlantic War. The loss of external
finance and lack of adjustment meant the treasury had to resort
to increased inflationary finance through monetary creation. The
private sector, in an effort to avoid the resulting inflation
tax, gradually withdrew its resources from the financial system
and reduced its real holdings of currency ; this, together with
the negative effects of inflation on real tax collections, made
Argentina's economy progressively more unstable in the 1980s.
Even though the deficit fell from near 20 percent of GDP in the
early 1980s to an average of about 10 percent over 1987-89, the
base for the inflation tax shrank even faster--efforts to reduce
the deficit were not fast or permanent enough to convince the
private sector that savings in domestic currency would not be
eroded by inflation. Inflation became high and unpredictable,
and the main impediment to the recovery of private savings and
investment. The decade ended with two episodes of hyperinflation
in 1989.
Post-1989 Structural Reforms
Tbe present administration took office in July 1989 during a
traumatic hyperinflation--July inflation alone was 200 percent.
This culminated a decade-long crisis in public finance. The new
team inherited weak public institutions accustomed to deficit
spending and with an institutionalized reliance on the inflation
tax. In addition, claims on state revenues were far greater than
its capacity to mobilize resources-in short, the Argentine state
was insolvent. The government undertook stabilization programs
in 1989 and 1990. Neither succeeded, principally because of the
intractability of the fiscal deficit. The first terminated in a
new hyperinflation at the end of 1989 and in early 1990. The
second lasted from March 1990 to December 1990 and ended in a
new inflationary outburst but, unlike the previous breakdowns,
the economy did not spin into hyperinflation. Instead, a new
fiscal package in February 1991 was sufficient to close the
remaining fiscal gap. This was followed by the April 1, 1991 Law
of Convertibility fixing the local currency to the dollar and
effectively proscribing money creation other than to buy net
foreign reserves. The convertibility program disciplines
monetary policy and limits the power of the government to
finance its deficit through inflation. The law markedly reduced
the foreign exchange rate risk to investors and the inflation
risk to business and labor--as long as the fiscal fundamentals
are in place to support it. The February 1991 program was able
to close the gap in large measure because the government's
sustained structural reform efforts had progressively improved
the foundations of public finance. The government had undertaken
difficult to reverse reforms in the legal framework,
institutions, and policies. These included institutional reforms
of the federal government, public enterprises, and
federal-provincial fiscal relations, and restructuring
liabilities with domestic and foreign creditors to adjust them
to serviceable levels. Other reforms have helped elicit
efficient private investment, notably trade, deregulation, and
financial sector reform.
Federal Government
The government undertook a major effort to improve revenues
through the implementation of a much-broad- ened and uniform
value added tax first to goods in February 1990, and later
extended to services in Novem- ber 1990. The government also
improved the efficiency of the tax administration in 1989,
establishing a control system for the largest taxpayers that
took effect in February 1991. The tax penalty law, adopted by
Con- gress in 1990, provided much needed sanctions for tax
non-compliance. The tax package of February
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