Argentina has entered a period of growth that will last for many years—perhaps decades. Two crucial factors will facilitate this continued growth. First, the rate of investment is increasing—I expect that it will reach 22 or 23 percent of the gross domestic product (GDP) in the near future. During the 1980s, it fell to levels as low as 12 percent and has now recovered to around 18 percent. Second, productivity is also increasing. For example, the marginal relation between product and capital—the increase in productivity over investment—is recovering strongly…We have before us, I believe, many years of rapid growth like that of the Southeast Asian countries in the 1970s and 1980s. Like postwar Germany, France, and Japan, Argentina is in the process of stabilizing and taking advantage of the opportunities the world economy offers. We will increase our productivity and assert ourselves in the global economy.”

“Secrets of Success: Argentina’s Blueprint for Economic Prosperity”

Fall 1994

As part of the innovative symposium, “Predicting the Present,” I have been asked to respond to the above quotation from my interview, “Secrets of Success: Argentina’s Blueprint for Economic Prosperity,” in the Harvard International Review, Fall 1994 issue. In 1994, when I gave this opinion, Argentina was completing four years of impressive growth and successful stabilization. At the beginning of 1995, Argentina was shocked by the Mexican Crisis that provoked a sudden stop in capital inflows and a deep recession. Nevertheless, by the beginning of 1996, Argentina was recovering very rapidly and its economy grew steadily until 1998. Overall, from 1991 to 1998, Argentina’s GDP expanded at 6 percent per year, with the investment rate reaching 22 percent of GDP in 1998 and productivity growth averaging 3.8 percent per year. Inflation had disappeared from the Argentine economy. Until that time, events evolved exactly as I had predicted in mid-1994.

As it emerges from the rest of the interview, my reasoning behind this prediction was the “reform of the rules of the political game.” Answering the second question in the interview, I described what it meant. “In Argentina, a country that has suffered decades of serious economic and institutional disorder, this transformation occurred at many levels. It has led into a focus on integration into the world economy. Private companies have replaced public enterprises, subjecting businesses to competition and professional regulatory agencies. The state has limited its activities to essential functions, resulting in a thorough deregulation of capital, labor, and goods and services markets.”

Popular support and political leadership had been crucial. “Public support was fundamental to the success of the reforms. The dramatic hyperinflationary experience had left its mark on the people. Fearful of uncontrolled inflation, Argentines, for the first time, started to value stability. This popular support, combined with political leadership, gave us momentum for extensive reform. In three years we achieved what took Chile ten years under a dictatorship and Mexico six to eight years under the strict political control of the [Institutional Revolutionary Party].”

Made possible by the immediate success of the stabilization program know as the “Convertibility System,” Argentine economic reforms included both significant cuts in government expenditure and a tax reform that would improve tax administration and remove distortions on relative prices created by some taxes. If Argentina had not created clear rules of the game for the currency and wage that remained unprotected against currency depreciation and inflation, none of the reforms could have been implemented. Therefore, the Convertibility System became the political and economic cornerstone of the overall economic reform program.

The Interplay of Domestic and External Shocks

The Brazilian Crisis of February 1999, and its predecessor, the Russian Crisis of August 1998, did not have such an immediate impact on Argentina as the Mexican Crisis of 1995 did, but their negative effects were longer lasting and much more damaging for the performance of its economy. This different response of the Argentine Economy to two very similar external shocks—the Mexican and the Brazilian shocks—originates in two circumstances that I had overstated in my 1994 analysis. One was the political support in Argentina for the fiscal discipline necessary to preserve rapid growth. The other was the opportunity offered by the integration into the world economy.

On the domestic front, after I left former Argentine President Carlos Menem’s government, the President allowed the provinces to borrow from the local banking system to finance expanding current expenditures. The increasing indebtedness of the provinces started to crowd out bank credit for the private sector and generated a continuous fall in the investment rate.

On the foreign front, several factors created very adverse external conditions for the Argentine economy, including the extreme strength of the dollar until 2002 and the US recession in 2001. Consequently, domestic and foreign economic agents started to predict the collapse of the Convertibility System. This prediction affected domestic interest rates, which started to incorporate an increasing country risk component.

The government of President Fernando De la Rua, an administration that had won the 1999 Argentine presidential election by committing to defend the Convertibility System, had tried and achieved a reduction in primary government expenditures similar in absolute size to the expansion during the last three years of the Menem Administration. By the second semester of 2001, De la Rua had successfully engaged in an orderly process of debt restructuring, but in cutting government expenditure and trying to preserve public credit, De la Rua expended most of his initial political capital.

By the fourth quarter of 2001, the International Monetary Fund (IMF)—instead of helping Argentina reinforce the adjustment mechanisms within the existing rules of the game, as it had done until August 2001—changed its diagnostic and decided that Argentina was suffering from reform fatigue and that it was useless to support voluntary and orderly adjustments. Its new attitude, in practice, meant a shift to the side of those very indebted provincial governments and private entrepreneurs that demanded debt default and “Pesofication-cum-Devaluation” as a way to wipe out their debts and restore their solvency. This was none other than the very old and addictive mechanism that, during ten years of inflation, had helped Argentine debtors to evade and ultimately rob their creditors.