Domingo Cavallo and Carlos Menem in the Quinta de Olivos, in times of convertibility

Next year, Argentina concludes its fourth democratic decade at a critical moment: faces a complex situation, with risks and challenges that require political will and technical quality, and some unpopular measuresagainst the grain of an electoral way that tends to oscillate between cosmetic and magic.

Among many pending assignments, the most pressing is to lower inflation, not for a few months or until the next election, but permanentlywhich in turn requires realign two key relative prices that lagged behindhostage to easy and ineffective price policies: the exchange rate, which with a gap close to 100%, it generates informality and an outflow of dollars and inhibits the accumulation of reserves, and tariffs, which need to be adjusted to costs to reduce energy subsidies that already represent three points of GDP and that, in the absence of genuine financing, they are paid for with inflation or with increasing financial fragility.

All this in the context of a primary fiscal deficit of more than three points of GDP and with tax pressure and a multitude of indirect taxes that distort the incentives for production, investment and work.fueling the feeling of inequity that feeds the rejection of politics and the system in a vicious circle that challenges our liberal democracy.

Without a correction of these imbalances, it is unthinkable that the country could, beyond some specific and temporary improvement, reverse the secular stagnation, the recurrent crises and the social unrest of decades.

At this point it is clear that the economy needs a battery of urgent measures and that there is probably no time for rehearsals. With the exceptions inherent to the uncertainty of a changing global context, a crisis that has already lasted four years and a precarious government that has lost control of the economywhat is under discussion today is the sequence and speed of these measures: how to speed up the change without impatience killing the program?love?

The key to a successful stabilization plan for a bankrupt state is to generate a virtuous response from the private sector, both in aligning price expectations and, above all, in the indispensable increase in investment and the formalization of the economy. For this, as necessary as rapidly reducing inflation is building credibility in the continued success of the program, which requires at least two conditions.

The first is apparently the most obvious: avoiding the seduction of “clear, simple and wrong” answers, the next government must have a comprehensive and consistent plan. Just as important as a shock of measures is to show a sustainable path over time, avoiding doing everything in a hurry and carelessly to collide with the same stones. Not only because there will no longer be time for setbacks; Also because the temporary nature of economic policies has a boomerang effect, weakening or postponing the private response. Especially with our history of tax reductions that are reversed, money laundering that is used to tax assets, intermittent commercial openings, exchange controls that are put on and taken off, pension formulas that last two years, developments based on the CER or the UVA that are they dynamite as they cannot be liquefied, etc.

The second condition is today somewhat more controversial: respect credit and contracts. In particular, avoiding a new default of both the internal and external debt. To understand the technical background to this, it is worth clearing up a common confusion. In general, the government pays its interest and refinances most of the capital maturities (ideally, reducing the stock of debt in times of expansion and raising it in times of recession, so as to smooth the business cycle). In other words, no debt is sustainable without access to financing: restructurings are solutions of last resort, not to make the debt payable (in the sense of canceling it all at maturity), but to recover that financing that makes it sustainable.

It is true that for Argentina to recover access to credit it must reach the primary surplus: a country with a chronic deficit that is unable to even pay the interest on its debt, whatever its size, hardly has access to credit. But a new hasty restructuring, with haircuts that seek political gain before adaptation to the country’s payment capacity, or an unnecessary re-profiling, could end up closing the door to access the market for many years. Thus, far from buying time, the agony would only be postponed: What is the point of restructuring a debt for a few years if at the end of that period no one lends to us, forcing the country into permanent default or repudiation of its debt? Argentina will not be able to grow without financing. A long-term stabilization plan, thought out dynamically, cannot afford to do without its financiers.

Domingo Cavallo and Carlos Menem in the Quinta de Olivos, in times of convertibilityLEONARDO CAVALLO

Stabilization plans have not been lacking in these 40 years of democracy. In 1985, the Austral plan tested an exchange rate anchor combined with the coordination of prices and wages, only to succumb to the lack of fiscal consolidation (not least fueled by unpayable debt). In 1991, convertibility resorted to the exchange anchor again, this time supported by a fiscal adjustment that combined a battery of reforms with the Brady plan, which postponed the payment of the debt until the end of the 90s, but it succumbed to the loss of fiscal discipline, the financial fragility resulting from the dollarization of the economy, the global strengthening of the dollar, and the debt postponed by the Brady plan.

In 2002, the fiscal and monetary adjustment forced by the crisis and income transfers to the productive sector (courtesy of pesification, the freezing of tariffs and the fall in real wages as a result of record unemployment) left inflation at 3% at the end of the year. of the year, but from 2003, the lack of reforms and a growing monetary and fiscal populism consumed the surpluses and revived inflation, which has not stopped growing since then. In 2016, a more orthodox monetary approach, with inflation targeting and a managed exchange rate, proved insufficient to deal with highly inertial inflation, in the framework of a postponement of fiscal adjustment and debt dollarization.

All of these plans had fleeting successes only to end up, sooner or later, being hampered by fiscal and exchange rate inconsistencies, or by external shocks for which they were not prepared.. It would be a mistake to conclude that they failed: they fulfilled their objective of calming down the economy for a while, to give the incumbent government space to make reforms and align its policies behind the goal of stability.

Juan Vital Sourrouille, Minister of Economy, announcing the Austral Plan on June 14, 1985
Juan Vital Sourrouille, Minister of Economy, announcing the Austral Plan on June 14, 1985Presidency – Archive

Argentina needs what is known in economics as a regime change: a set of policies that achieve a radical change in the functioning of the economy and reverse the pessimism that prevails in all areas. This is what Germany did to stop hyperinflation in 1923, what Israel did to get out of inflation and stagnation in 1985, and what the Austral plan of 1985 and the Convertibility of 1991.

The 2024 stabilization plan should probably be a blend of all the previous plans, with fiscal consolidation, an orthodox monetary and financial program, an agreement on prices and wages, and economic opening, in a realistic combo that maintains a delicate balance between equity and effectiveness.

But if we have learned anything from the lessons of 40 years of plans, it is that a stabilization plan is only the first step towards stability.

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