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. ............