Discipline as the central objective of economic policy: An essay on the economic programme of the Argentine government since 1976

World Development, Vol. 8, pp. 913-928 Pergamon Press Ltd. 1980. Printed in Great Britain

Discipline as the Central Objective of Economic Policy: An Essay on the Economic Programme of the Argentine Government Since 1976 ADOLF0 CANlTROT”

CEDES, Buenos Aires Summary. - This paper evaluates the economic policies adopted by the Argentine government since the coup of 1976, in the light of that administration’s view of the nature and causes of the preceding economic and political dislocations. It outlines the interpretation proposed by liberal ideologists which traced the origins of the problem to economic distortions that had built up over a 30-yr period, and that were considered inextricably bound up with the political strategies characteristic of Peronism. The far-reaching and highly ideological character of this interpretation, linking together the economic and the political, found favour with a military government convinced that only very profound structural changes could rescue Argentina from its mid1970s predicament, and that viewed economic policy not so much as an end in itself, but as an integral part of a political project centred on the eradication of the Peronist legacy. Viewed in this context, although short-term economic stabilization measures were regarded as important, they were not always given the highest priority by economic managers. A more important explanation of policy choices can be derived from the long-term prescriptions given by liberal economic doctrines, even where these rested on assumptions that were far removed from the realities of Argentine economic structure. Previous policy objectives such as the promotion of industrial development, and an explicit commitment to the acceleration of economic growth have been dropped, in preference for the reestablishment of a stable economic order. Various key measures of economic policy - ‘openness’ and financial reform - are best viewed as new ways to introduce more effective discipline into society. Nevertheless the paper recognizes that at various points lack of success in achieving short-term stabilization goals may have forced the authorities to modify secondary aspects of their policies, although without ever abandoning their underlying ideological commitments. Conflicts between short-term objectives and the logic of the overall ideological project may prove crucial in determining the eventual outcome of this far-reaching experiment.

1. THE CRISIS OF 1975 AND THE DIAGNOSIS MADE BY THE ARMED FORCES On 26 March 1976, the Argentine Armed Forces seized power from the Peronist movement, a long-awaited development which aroused neither protest nor resistance. This reflected the widespread awareness of the extent of the crisis and of the Peronist government’s inability to cope with it. The economy was in a state of hyperinflationary recession, with a huge publicsector deficit and the balance of payments in a desperate condition. These economic problems, grave enough in themselves, were in fact but symptoms of intense underlying social conflicts - over income distribution in particular - which had

slipped out of control. Political confrontations were taking place at a level of extreme violence. Paradoxically, however, these clashes did not occur between the rival political parties, which respected earlier agreements based on a common wish to preserve the system of democractic coexistence, but rather within Peronism itself. The Peronist movement was the setting for a merciless political struggle. Corroded by factionalism, it was barely able to exercise any control over the functioning of the economy, despite its position as the government. As a historical topic this process of Peronist ascent by plebicite, of its self-destructive

*Translated by Linette Whitehead. 913

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trajectory and of its final collapse in less than 3 yr, has an incontestable dramatic force.’ It has an element of tragedy which is underlined by the very impotence of the actors involved to arrest it. The final denouement was already foreseeable a year before it occurred. But all the efforts to find a compromise solution between the parties, or through organized elements in society (in particular the union leadership) or through the Armed Forces, failed as soon as they began. It is possible to imagine, at least theoretically, that a combination of political parties, with the support of the Armed Forces or led by them, might have put into effect a recovery programme capable of overcoming the more turbulent aspects of the political and economic situation (a political truce and a stabilization programme), at the end of which the normal functioning of political institutions would have been resumed. However, neither was fragmented Peronism prepared for this, nor did there exist among the unions sufficient political capacity to enable them to play any role other than that of pressing for an increase in wages, nor. was there in the Armed Forces the ideological disposition to strive on behalf of the preservation of a representative political system. The attitude of the Armed Forces was largely determined by the sequence of events which, beginning in 1970, culminated in Perdn’s ascent to power. From the mid-1950s they had conducted a policy of resolute opposition towards Peronism and had required his exclusion from government. The failure of various attempts to dissolve his electoral support by interposing alternative party arrangements had led them, in 1966, to attern& an authoritarian solution based on corporatist ideas and the elimination of all political parties. This solution failed in turn during the critical months of 1969, and as a result there was a complete change of tactics. The new strategy was to organize elections while negotiating with Peron on joint sponsorship of a military candidate. This attempt led to a further setback. Instead of reaching an agreement, the Armed Forces were obliged to give way little by little in their negotiating position until the government was left entirely in the hands of the Peronists. In this way they were reduced to a role of formal neutrality, in relation to the new regime, kept in fact at the margin of political decision-making. The negative consequences deriving from this marginalization of the Armed Forces under the new government were reinforced by the existence of guerrilla activities that were for the most part directed against military personnel,

institutions and properties. The guerrillas had in fact been allied with the Peronists in their struggle to regain power and later, when the Peronists turned against them, they survived thanks to the inefficiency and arbitrariness of the repressive apparatus. The persistence of guerrilla activities impeded all possibility of rapprochement between the Armed Forces and Peronism. This was made a point of principle by the Armed Forces: they kept themselves in a position of tense isolation, which ruled out any hope of renewed agreement between them and the political parties. As viewed by the Armed Forces, the serious incidence of violence, disorder and conflict that characterized the 1970s should be judged as the end-product of a process of distortion of national life that dated back to 1946. These ideological, political and economic distortions were held to explain the historical failure to establish a functioning democracy, and to account for the persistence of social instability, that was injurious both to national security and to the natural potentialities of the country. This perception of the situation caused the Armed Forces to converge in their choice of programmes (and partially in their ideology) with the most hard-line demands of traditional anti-Peronists, a grouping based on elements which may have come from a liberal political background but which in practice were opposed to any democratic experiment that involved Peronist participation. Although lacking in electoral significance, these sectors have a strength which emanates from the important positions which its members occupy in the institutional structure, in the press and in the apparatus of production and finance. Within this grouping a prominent position is occupied by the Consejo Empresario (Businessmen’s Council) whose president up until 1976 was Dr Martinez de Hoz, who has been in charge of economic policy since the coup of 1976. 2. STABILIZATION AND TRANSFORMATION The term ‘stabilization policy’ assumes the existence of a normal and accepted pattern of behaviour. One stabilizes that which has temporarily departed from equilibrium. To stabilize is to return things to their previous state, to normality. There is a long list of economic experiences which fall within this concept of stabilization: the European cases dating from 1975, the more recent Mexican experience etc. These countries

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were the subject of stabilization projects designed to restore an economic normality which had temporarily been disturbed by inflationary and balance-of-payments problems.2 However, neither the Argentine case of 1976 nor, broadening the discussion, those of Chile in 1973 and Uruguay in 1974, fall within this definition. In these three cases the objective was the transformation of the economic structure. The resolution of short-term difficulties with regard to inflation and the balance of payments was an indispensable (or almost indispensable) requirement in order for the long-term programme to operate effectively, but in the end this was only a secondary objective. From the perspective of those who designed the policy, this was a stage through which it would be necessary to pass, but not an end in itself. The limited priority assigned to short-term policy is evident, particularly at the beginning of Martinez de Hoz’s term in office. On the face of it, a short-term policy hardly seems to have existed at all at that stage. On the basis of a diagnosis which attributed inflation to distortions in the economic structure and to certain political vices, the government seemed to have supposed that simply restoring genuine relative prices (‘sinceramiento’) - i.e. raising the exchange rate, increasing public service charges and farm prices - together with a restoration of the free market, and a cut in real wages, and the financing of the remaining government deficits by issues of fixed interest stock in the financial markets, these measures would suffice to gradually eliminate inflation. In their structural diagnosis, the short-term problems were destined to resolve themselves on their own in response to the restoration of a freely functioning market economy.3 The general objective of bringing about radical economic transformation did not originate with the present government. In Argentina this has been a recurrent pretension of govemments, parties and ideologists. This pattern must be attributed to the existence of a deepseated state of dissatisfaction with the course of national history over the last few decades. The dominant myth is that the country is intrinsically very rich - as shown by the years which elapsed between 1880 and 1930 - and destined to occupy an outstanding position in the world, and a position of clear leadership in Latin America. This destiny was apparently frustrated: Argentina has experienced a slowdown in economic growth and has lost its relative position compared to neighbouring countries, in particular to Brazil. There is no general agreement about the causes of these

frustrations; each ideological position attributes blame to different culprits: imperialism, Perdn, the old oligarchy, the unions, the politicians, the inefficient industrialists, the Jews, the military, the national character etc. But the myth itself - of frustrated destiny, and of the need for Argentina to find a way back that will enable her to fulfil her innate greatness once again - unites a majority consensus. The deep rootedness of this conviction of the need for basic changes strongly influences the political thinking of the current military government, and makes it necessary to focus our analysis on the long-term issues. Here we will limit ourselves to the economic aspect. Underlying the sense of discontent with the nation’s recent history and the prevalence of the myth of its frustrated destiny are more concrete realities, such as the instability of earnings, the insecurity generated by high rates of inflation and by the fierce altercations between expansion and recession, all expressed in the violent character of social conflict. The problem is to determine how these phenomena are related to the prevailing economic model, and to define the meaning and the justification for the changes proposed by the present economic team. Naturally this will take us beyond the restricted framework of a mere analysis of the current stabilization plan.

3. THE POLITICAL QUESTION THE ECONOMIC PLAN

AND

On assuming power the Armed Forces declared that their top priorities were to defeat the guerrillas (without restraint from the constitutional restrictions inherent in the rule of law) and to eliminate the disorder and corruption resulting from such causes as the eruption of trade union activity, the prevalence of unproductive speculation and the moral bankruptcy of Peronism. But in a more lasting sense their main priority was to produce a complete transformation of the functioning of Argentine society such that a repetition of populism and the subversive experiences of the first half of the 1970s would be impossible.4 The military leadership proclaimed their final goal to be the restoration of democracy, but not until their purgative policies had achieved their aims. Thus, what was being contemplated was a transitional period of authoritarian government, although without fixed time limits (‘the government does not have plazas sino objetivos, not deadlines but goals’, was the slogan). Two precautions, that of’not agreeing to any

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time limit, and that of insisting that even after the return to democracy, the military would retain a major tutelary role over ensuing governments, indicate that the Armed Forces themselves perceived that they might have considerable difficulty in achieving their objectives. For reasons of electoral arithmetic, the eventual outcome would have to be a quite restricted form of democracy. But general military agreement on this point still left room for a wide range of options. At one extreme is the possibility of constructing a conservative and elitist democracy, where the Armed Forces would act systematically as the party of order, even under a civilian government; at the other, that of direct military government, not imposing its own conception but acting as a point of convergence and compromise, for the arbitration and reduction of the conflicts that emerged from civil society. The differences between these two concepts are considerable. They signify very differing perceptions of the relationship between the military and political parties, not only in the immediate future, when the system of restricted democracy would be in operation, but also during the subsequent period of transition. Failure to resolve this problem left the political plan in a state of hibernation, with the result that the government turned its main attention to the economic plan. Agreement to give this aspect top priority was facilitated both by the awareness of the critical state of the economy at the beginning of 1976, and by the hope that a success for the economic plan would add to the government’s margin of manoeuvre when it turned to the subsequent political plan. Thus was repeated, more by necessity than by choice, the pattern already observable in earlier military governments, of devoting a phase to the resolution of economic issues before turning to a second stage in which attention would focus on political questions. But this choice was not neutral in its effects. In the elaboration of the economic plan, the liberal group possessed considerable advantages, deriving both from the possession of a clear body of theoretical and ideological arguments, and from the political talent of their leader, Dr Martinez de Hoz. From his position as Minister of the Economy, he led not only on economic matters; rather he made his mark on the entire conduct of government. He nurtured within -the government the concept of a farsighted and remote authoritarianism, possessed of a morality and discipline higher than that of a surrounding society made sick by years of mismanagement. In this way he both met the political objectives of a military government

aiming at social transformation, and at the same time turned the interlude before political life was to be restored to his advantage, by steering the regime in a direction compatible with his own vision of a conservative democracy.

4. THE DIAGNOSIS OF ECONOMIC LIBERALISM

The central proposition of economic liberalism is the idea that the market, functioning without interference, is the most efficient assigner of a society’s resources. This proposition, justified rationaIly,5 represents the projection into the economic field of an individualistic political philosophy opposed to state interventionism beyond narrow limits. Consequently, economic liberalism is strictly opposed to all the activist employment policies, and to policies intended to alter income distribution, provide social security or promote favoured sections of the economy. Such policies, of course, have been prevalent in the greater part of the world since 1945. In the liberal view of how the economy works, all these endeavours are not only harmful from the standpoint of their general effectiveness, but they are also counter-productive - or at the least ineffective - in relation to their stated objectives. From this starting point, economic liberalism has attributed the difficulties of the Argentine economy to two principal causes: the distortion of relative internal prices caused by the industrialization policy, and the uncontrolled expansion of state activities. According to this diagnosis, high import tariffs created a protective wall that favoured the establishment and survival of an inefficient industrial sector. In parallel, the agricultural sector, wherein resided the comparative natural advantages of the country, was discriminated against by demagogic, albeit ineffective, policies of income distribution. On top of this came the distortions attributable to the monopolistic practices of a unitary and vertically organiced labour movement, which continually pushed for wage levels above the limits set by labour productivity. The government, for its part, squandered resources on the maintenance of a weighty bureaucracy, and on subsidies for inefficient and deficitridden enterprises, and in the running of an enormous, costly and ramshackle system of social welfare. Deprived in this way, according to the

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ARGENTINA diagnosis, of the benefits of free competition and isolated from the world, the Argentine economy grew slowly. It lacked.either a large surplus or a pattern of incentives that would induce the accumulation of capital. International firms and foreign capital only entered when offered extraordinary privileges. In order to alleviate the effects of economic stagnation, the state increased public employment and took over the provision of goods and services which, in a different context, would have provided private enterprise with an income. In this way public spending rose to a proportion of total income which it was impossible to finance through taxation, without bankrupting the private sector. In consequence, the government’s deficits became the principal cause of monetary expansion. Attempts to subsidize these overstrained enterprises with credit at negative rates of interest also contributed to the monetary expansion. The result was the destruction of the capital market, and chronic inflation. Since, according to this same diagnosis, no economy is able to function permanently in such conditions, each period of short-term expansion was followed by a recessionary crisis. The crises were overcome, time after time, by means of stabilization plans, but these could only be temporary palliatives as long as the basic economic distortions mentioned above persisted. It was these distortions which had to be eliminated.

5. THE ECONOMIC PLAN OF 1976 The economic plan of March 1976 can be seen as the logical consequence of the preceeding diagnosis. Nevertheless, when one judges the whole experience of economic management from then until the present, it is necessary to take account of the modifications introduced along the way. These modifications were principally motivated by the persistence of virulent inflation in spite of the measures adopted in order to moderate it. The most important changes were those introduced in May and December of 1978. Their significance was such that the economic policy of the entire period may be considered in two stages, before and after these changes. However if this twofold division is adopted, it becomes necessary to return to the original plan in order to separate out its permanent elements from the transitory ones. This should yield, 4yr after the original measures were adopted, a clearer perspective on the significance of the initial plan than was available at the outset. Summarizing greatly,

one may say that while the original formulation revealed the regime’s economic ideology, orientation and objectives, and contained the essential features that have been conserved, the modifications of 1978 are a clear expression of the style of management of the economic team, and are in that way also revealing of its ideology .6 The central provisions of the economic plan of 1976 were the following: 1. The establishment of a new equilibrium level for real wages about 40% lower than the average level of the previous 5 yr. 2. The elimination of taxes on the export of farm products. 3. The application of a programme of progressive tariff reductions. 4. The elimination of subsidies on nontraditional exports and of development credits, and the closing of the deficits in welfare funds (health and housing), as well as an increase in the real prices charged by public-sector enterprises. 5. The liberalization of financial and foreign exchange markets, and the financing of public deficits through publicly subscribed bond issues. 6. The reduction of government expenditure, public employment and the borrowing requirement together with the return of public enterprises to private ownership.

6. THE ECONOMIC PLAN AS A POLITICAL PROJECT The economic plan of 1976 had the declared aim of liberalizing the economy. Each one of the measures listed above may be understood as the application of this aim to a specific market. There are evident connections between the measures proposed in the plan and the various problems identified in the liberal diagnosis. This assessment of the economic plan is correct, but incomplete. It is correct in its recognition that the economic managers have a consistent and rationally founded concept of the ideal functioning of an economy, on the basis of which they make their diagnosis and elaborate the corresponding solution with due professionalism. Nevertheless, it is an incomplete account without recognition that behind its theoretical rationality and technical instrumentation stand fundamental premises from which the plan was derived. These basic assumptions were adopted for reasons that are beyond the internal logic of the liberal model,

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coming both from certain ideological preconceptions and from the particular standpoint by which the authors of the plan judged the economic conjecture.’ In general, the assumptions of any model are postulated in the light of the desired conclusions. A theoretical model is nothing more than a conceptual instrument. Neglect of this point leads to a conception of economic policy-making as a mere technical exercise in pursuit of a neutral objective -- in this case efficiency - which must be insulated from political interference. From here to such artificial dichotomies as the ‘economic’ stage of reconstruction that must precede the ‘political’ stage is a simple step. This raises the question of the motivations and objectives of the economic plan. Neither the doctrinal foundations of the diagnosis nor the critical judgements it contains are sufficient to explain its adoption. Nor was the diagnosis new. In reality its most significant contentions are more suited to the condition of Argentina in 1960, before the occurrence of substantial growth both in industrial productivity and in agricultural output and before the surge of manufactured exports etc., rather than to the conditions of the 1970s. The revival of this diagnosis, and of all the associated prescriptions derived from economic liberalism, must be attributed to the political crisis of the first half of this decade, a crisis which both the Armed Forces and the private sector perceived as threatening to destroy the prevailing. social system. Within the Armed Forces it was asserted that this crisis was but the culmination of a process under which a vulnerable political and institutional structure had been subjected to the disruptive and dominating influence of Peronism and the interests which it represented. By extension, liberalism was able to attribute the economic crisis that had been gathering force up to 1975, to the persistence of economic arrangements that had their origin in the first period of Peronist government. The merit of the liberal position was that it demonstrated to the Armed Forces that the politico-institutional structure which they sought to replace was closely tied in with a supporting economic order. In consequence, economic reform was a necessary condition of political reform. The economic plan found its justification not so much in the economic objectives it pursued as in its relevance to the political objectives of the Armed Forces’ transformation project. Thus a dual relationship was established: the economic plan was dependent on the political project, but was at the same time a necessary condition for it.

This is the thesis which is to be expounded in the following pages. instead of a detailed analysis of the different areas in which the economic plan operates I have opted for a global type of approach which emphasizes the complementarity of the diverse measures contained in the plan. This complementarity can be analysed under two main headings: the opening of the economy, and the financial reform.

7. THE MODEL OF SEMI-CLOSED INDUSTRIALIZATION Before examining the economic plan it is necessary to outline the key characteristics of the model it proposed to replace. As is wellknown, importsubstituting industrialization, based on an expansion of the internal market, was not the product of a sovereign decision derived from an industrialist philosophy. It was imposed, as the only socially viable alternative, as a consequence of the international economic crisis of the 1930s and later of the Second World War.a It was not until 1946, faced with the prospect of a renewal of external supplies of goods and capital, and the risk of a third war, that the Argentine government turned industrial protection into an instrument of long-term industrialization policy. From then on the functioning of the Argentine economy may be represented in a twosector model: an agrarian sector producing consumer goods for both export and for the home market, and an industrial sector using imported machinery and other imports to produce consumer and capital goods destined exclusively for the internal market. In this model the agrarian sector always produces at full capacity, while the industrial sector varies its level of activity according to the volume of domestic demand. In its first period of application ( 1946- 195 9) this model was kept working by measures adopted to shift relative prices between the two sectors. The imposition of protective tariffs for industry permitted firms to profitably absorb higher labour costs. Industrial wages and prices rose in relation to farm prices. Seen from another angle, the increase in wages in relation to agricultural prices gave urban workers additional purchasing power that stimulated demand for industrial goods thus providing the main motor of expansion. In parallel, the methods used to reduce farm prices (IAPL9 export taxes) signified a transfer from rural incomes to urban public expenditures. Furtherthe government deficit increased. more,

ARGENTINA Increased public employment stretched the labour market. Inflation began to be a chronic problem in Argentina, virtually simultaneously with the adoption of this model. Under this model, the expansionary effect of the transfer of income from agriculture to industry comes from the multiplier effect in the second sector: rising wage costs are fed back as rising demand for industrial goods. What sets an upper limit on expansion of this kind is the economy’s capacity to run external trade deficits. In practice, this upper limit was exceeded on various occasions, making inevitable the adoption of contractionary stabilization plans. This explosive tendency derived from the circular character of the wage-price spiral in the operation of this model. As an alternative to wage-led demand for industrial goods, there could be a stimulus centred on investment demand, or on public expenditure demand, or on the consumption demand of non-wage earners. These were the expansionary forces that prevailed in the 1960s.i” Real wages fell sharply in 1959. This eased the pressure of internal demand, freezing resources for a strong increase in exports, so that the balance-of-payments constraint receded into the background. Traditional industries based on the production of wage-goods Ianguished, but there was a rapid growth of new enterprises, established to produce vehicles and basic inputs. In the second half of the decade, this stimulus was reinforced by an active programme of public investments. The 1959-1970 period was one of considerable growth, but with persisting instability. This second variant of a closed economy, with growth led by investment demand, requires increased profit margins in the industrial sector. In an economy lacking significant reserves of manpower, and containing a very active and well-organized Iabour movement, there are only three ways to impose such a policy: through a political agreement under which wage earners more or less voluntarily agree to surrender some fraction of their incomes, through an inflation in which prices outstrip wages, or by resort to authoritarian political forms. In the first half of the decade the first two solutions were attempted; the third method prevailed in the second half. It was the political difficulty of sustaining any one of these three policies for longer than 3 or 4 yr that accounted for the economic instability. Viewed in this context, there were two stages to the crisis of the 1970s. The first, beginning in the middle of 1969, was characterized by a progressive disintegration of the

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military-authoritarian system, accompanied on the economic front by declining growth rates and accelerating inflation.” The second stage, beginning in 1973, with the Peronist assumption of office, saw another attempt to construct a wage and prices agreement. But the political basis for this was fragile and the outcome was a galloping inflation.12

8. THE OPENING OF THE ECONOMY Since the middle of the 1960s a new development has attracted attention: the export of industrial manufactures. By 1974 the phenomenon had reached major proportions, representing half of the country’s exports. Many traditional kinds of consumer goods were included in these exports. These firms had initially been forced to search for new markets by the slow growth of internal demand for wage goods. The government provided important subsidies to support these activities. In this way the semiclosed economic model seemed to be progressively dissolving. This process has been interrupted - although not immediately - by the economic policy implemented from 1976 onwards.i3 The economic plan of 1976 envisages the ‘opening of the economy’ in the sense of opening the internal market to external competition, rather than pushing domestic production onto external markets. The latter is viewed not as an objective but rather as a natural consequence to be expected from the increase of efficiency produced by the heightened competitiveness in the internal market. The reduction of import tariffs was the basic instrument of this policy in the programme of 1976. But it was not the only one. Any resulting increases in labour productivity take time to appear; they must be looked for in the future. Meanwhile the only immediate way to cut industrial costs is by reducing real wages. On this point the policy was the opposite to that of 1946. Then protection and real salaries rose together. From 1976 on they fell together. Conceptually, the assumption of an inverse relationship between degree of protection and level of efficiency - or productivity - is an extension without guaranteed results of partial microeconomic analysis to the field of macroeconomics. In Argentina it may be applicable to the steel or paper industries which enjoy very high tariff levels compared with other industries. But when the argument is extended to whole economic sectors, for example, to the relationship between industry and agriculture, the main effect of sustained tariffs on industrial

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imports will be an increase in the average level of prices in the industrial sector relative to agriculture. It becomes less a question of efficiency than of income distribution.14 In any case the nominal level of protection given by tariff schedules may not be fully utilized by industrial enterprises when they set their prices. Between the maximum price which the tariff permits and the effective selling price chosen by price setting firms there will be a margin of safeguard. Industrial enterprises generally price according to their basic costs plus a markup determined by the conditions of the internal market.15 For this reason it is meaningless to use any concept of protection as measured by nominal tariffs unless these are related to the level of nominal wages and to the exchange rate prevailing at the same time. Given a certain tariff level the exchange rate, at international prices, defines the extreme upper limit of the margin of protection, that is the price above which foreign competition would enter the country; on the other side the wage level determines, by way of costs, the extreme lower limit of industrial prices.16 Then, the margin of protection varies according to the price of foreign exchange in relation to nominal wages. This function shifts upwards or downwards as the tariff rises or falls. In theory a condition of zero industrial protection can be envisaged. But in Argentine conditions this point can only be reached with great difficulty. The protective margin serves two limited functions that are essential to the security of the industrial enterprises: (1) it safeguards their profits from the fluctuations of external (and internal) prices; and (2) it gives them the flexibility to fix the relationship between output prices and wages. In other words, the function of the margin is to protect industrial concerns from the ‘brink of the abyss’ at which firms would have to exist under perfect competition. Moreover, the existence of this margin accounts for the limited ability of economic managers to modify the relationship between industrial prices and wages through the pressures of international trade, except by the application of extreme policies which simultaneously push many enterprises to the brink of extinction. Short of such extreme measures, the influence of international competition in moderating inflation is weak. In the Argentine experience there have been repeated episodes of a rising. exchange rate in relation to wage levels, without resultant moderating effects on industrial prices.” This degree of autonomy in the industrial sector makes it possible to fix prices and wages by mutual agreement between man-

agement and labour. Add to this the fact that in production oriented towards the internal market, consumption by wage earners is a principal component of demand, so that rising real wages are an effective way of stimulating demand. Consequently, labour-management agreement may be based on mutual advantage. This is the economic rationale for the association of interests between management and industrial wage earners that lies at the base of populist political alliances. Tariff protection may increase economic freedom and political power in the whole industrial sector. In an ideal situation the reduction of the margin of protection could increase the effectiveness of economic management by the central authorities.i8 Wages would be regulated indirectly via the market for final goods, which would in turn be determined by world prices for the same products and by the exchange rate. Industrial enterprises would not be free to negotiate en bloc with wage earners beyond this upper limit. They would, however, be free to negotiate enterprise by enterprise, to the extent that they wished to distribute to their own employees those profits they obtained in excess of the industry average. But these would be highly localized negotiations between each firm and its workers, not a collective agreement between a group of employers and all the workers in an industry.i9 Thus the policy of opening the economy may be justified by its authors in various ways. This can be done explicitly, in terms of Pareto’s theorems of efficiency, which extol perfect competition. Or, on a more practical level, the reason could be that in the face of severe inflation there is a need to increase capacity for intervention of the central authorities. Lastly, on a long-term political view, there is the idea of an Argentina with open windows where the unhealthy collusions generated by Peronism cannot be repeated. Various observations should be added to this analysis. The first concerns the role of the concept of efficiency as a bridge from ideological motivations to the justifications given by technical rationality. Inefficiency is proclaimed a priori on the basis of arguments derived from the theory of perfect competition, but it is neither verified empirically nor considered as an argument for alternative strategies such as, for instance, deliberate measures to stimulate technical progress. The ideological motivations contain the intention not only to control the behaviour of wage earners, but also to discipline the managerial class itself by organizing the economy in order to eliminate any temptation

ARGENTINA to make spurious agreements with the lower classes (of which Per&r’s Economy Minister Jose Gelbard was the incarnation).20

9. FINANCIAL

REFORM

The theme of financial reform must be analysed in the context of a central question concerning the behaviour of a capitalist economy: that referring to the formation of capital, that is to the way in which the savings of the economic system are generated, transferred and utilized. The economic plan of 1976 makes the freeing of capital markets one of its fundamental objectives. The whole concept of a freeenterprise economy rests upon achieving full effectiveness here. Moreover the implementation of this plan by Martinez de Hoz from 1977 onwards has signified a complete rupture with a very extensive past history in which fiscal subsidies, official bank credits, rediscounting and negative real interest rates played a leading part in financing the corporate sector.

(a)

The financing of industrial investment

The treatment of this subject requires a distinction between internal and external financing of investment. Internal financing depends on the level of profits. In principle this level is positively associated with the margin of profit per unit of output, which implies that lower wages may generate higher profits and therefore more investment. Nevertheless, in branches of industry producing wage goods it is possible to find a positive association between the level of wages and profits right up to the maximum level of activity (full employment). This type of relationship tends to predominate in the economy when the industrial sector is mainly concerned with the production of wage goods, as was the case in Argentina before 1959. Even investment, to the extent that it is induced directly or through expectations of demand expansion - by the level of activity, will be a positive function of real wages. In any case, in this system the volume of investment is necessarily small, as even at maximum activity profit margins per unit of output remain 10w.~’ The situation is completely different, however, when the demand for industrial goods can be increased from autonomous sources - public transport, exports, substitution of imports and consumption demand from non-wage earners - that are independent of the level of real wages. In this case lower real wages will

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permit higher levels of profit and more internally financed investment. The accumulation of capital can be as rapid as the widening of profit margins permits. This is not an easily applied prescription, however, since it will require the maintenance of wage levels that are low in relation to industrial prices even when the economy is in an expansionary phase and close to full employment. The methods of real wage control available for this purpose have already been mentioned: political agreement, inflation or authoritarian regulation. In addition, since the volume of investment does not depend only on present profits but also on those expected in the future, the intensity of the process of capital accumulation will depend on businessmen’s expectations with reference to the government’s capacity to sustain whatever system of wage controls into the future.22 The corporate sector also requires external financing for investment. From the perspective of each enterprise these funds come either from the banking system or from financial intermediaries, or from the government. But viewing the industrial sector, or major branches of it, as a single unit of analysis, the enterprise sector also has at its disposal implicit financing that may be derived from shifts in relative prices. The government can manipulate relative prices via the application of taxes and subsidies, or through its handling of the exchange rate. Of most interest in this respect are’the terms of trade between industrial and agricultural goods. It is of most interest because historically the process of industrialization has involved a transfer of earnings from agriculture to industry, effected by means of the depression of the prices of the first with respect to those of the second. In Argentina the main methods used to this end have been overvaluation of the exchange rate - in real terms - and the imposition of taxes on agricultural exports.23 In this second case two effects combine: (1) the increase in spending on industrial goods on the part of wage earners that is made possible by the lower agricultural prices; and (2) the transfer of the tax proceeds to the industrial sector by way of government spending and subsidies. The alternative procedure by which the agricultural surplus may be used to finance industry is through the capital market. In the case in question, with the elimination of taxes on farm exports, prices received in the agricultural sector rise and farm managers regain control over resources which were previously transferred through the government. If industry requires those funds, it must resort to the capital market

922

WORLDDEVELOPMENT

and pay the going rate for them. This procedure obviously cuts out subsidies to industry.24 This description of the main ways in which industrial activity may be financed is useful in relation to the 1976 plan’s financial assets. It demonstrates the existence of two financing schemes based on different concepts of how the economy functions, and of what the purposes of the economic policy shall be. Let us call them the ‘industrializing’ and the ‘ef* ficiency’ viewpoints. (b) The ‘industrializing’ viewpoint The economic model prevailing in Argentina until 1976 rested on a positive valuation of industrialization as the most suitable means to achieve economic growth, which in turn was regarded as either good in itself, or at least a necessary condition for attaining the collective good. Having accepted this assumption, the industrializing model rests on the theories and policy strategies originating in essence in the ideas of Keynes and Kalecki, which attribute to investment a determining role in the level of economic activity, the growth rate and the volume of profits accumulated by the corporate sector. A relevant characteristic of this industrializing concept is the low esteem in which the capital market is held as an efficient instrument of economic growth. The economic policies applied under this model include, in all cases, provision for the subsidized financing of industry through the government’s intervention to regulate relative prices, and to allocate taxes and public expenditures in such a way as to transfer resources between sectors. A first reason given for the inefficiency of the capital market is the low capacity of industrial enterprises to generate internally the investment resources necessary for their expansion. This reason is above all valid in the early stages of the industrialization policy. In the Argentine case it reflected the difficulty, that was as much political as economic, of reducing industrial wages, as has been indicated earlier. In these conditions firms must resort to outside sources of financing, on a scale that represents an important proportion of their total financing investment, and that is high in relation to their net worth. This burden of external financing has negative effects in the capital market. Both lenders and borrowers consider that the higher the ratio of debt to net worth, the greater the risk attached to further credit. As a consequence, the interest that lenders will charge for

funds increases, whilst the amount that borrowers feel they can afford to pay diminishes. The result is that investment is choked off. A second problem with the capital market is the uncertainty provoked by instability. This is a characteristic of the Argentine economy’s behaviour that has already been mentioned. The sense of instability is generalized and refers to relative prices, to the level of activity and to the continuity of policies. Confronted with such instability, enterprises react by reducing the length of time within which they require the recovery of their investment capital or, in other words, by raising the real rate of return they require on their own capital. For this to be possible they require, in addition to subsidies, exemptions and other special advantages, that the capital obtained from external sources should not only represent a high percentage of their total investment but should also be granted at below market interest rates. Concessions of this type have been regularly provided under the various schemes of industrial promotion and the many special agreements negotiated to provide important investment projects, in particular since 1954. The industrializing model is, in consequence, a statist model. The government performs a central role in transferring resources for the process of capital accumulation, substituting for the capital market since it is considered a weak instrument for this task. Implicitly this idea is at the heart of all the various economic policies, adopted to promote economic growth up until 1976. (c) The ‘efficiency’ viewpoint By contrast the economic plan of 1976 rests on an approach to financing whose central element is that the capital market should be freed to function without interference. This approach is integral to an economic policy whose declared objective is efficiency in the allocation of resources. This policy is based on a concept of the economy represented by Walras’s model, a static theoretical model where, beginning with certain given resources and preferences, the formation of prices is determined on the assumptions of free competition and complete certainty. This model can be extended in time, without specifying its assumptions. Under conditions of permanent full employment (inherent to the model), the volume of investment for economic expansion would be determined by the decisions to save taken by the consumers. These decisions to

923

ARGENTINA

save, in turn, would be the product of the consumer preferences for expenditure over time. Saving becomes a decision to postpone present consumption until a definite point (given by the consumer’s complete certainty) in the future. In this model the rate of interest is the relative price between present and future goods. Its function is to express, in today’s capital market, the consumers’ time preferences for savings and consumption. Pareto’s rules can, in consequence, be applied to this market. Any external intervention in the market to influence prices implies a violation of the consumer’s preferences and, therefore, a loss of efficiency in the allocation of resources that diminishes collective welfare. In a theoretical model of this kind, the problem of growth does not arise. Growth is simply a reflection of consumer preferences. The relationships between investment, level of activity and rate of profit, which provide the theoretical bases of the industrializing model are completely ignored. In the social sciences, however, theoretical assumptions can be analysed as rationalizations designed to construct a conceptual apparatus which justifies an implicit choice of objectives and which gives coherence to the methods selected. Judged in terms of its theoretical suppositions, it is clear that the economic plan of 1976, by giving a central importance to the free functioning of capital markets, reduces the objective of economic growth to a secondary role, subordinated to the aim of upholding a particular social order.25 Examination of this question merely confirms the central role attached to social discipline by the 1976 economic plan, a point that has already been made above when discussing the significance of economic ‘openness’. The reduced priority accorded to such objectives as investment and growth can be seen in the implementation of the new economic policy. Between 1976 and 1979, there were periods of expansion in which the level of economic activity reached full employment. However, these temporary peaks were induced by noncumulative forms of investment and by stock accumulation.26 Over the past 4yr as a whole the tendency has been towards stagnation. It was evident to the enterprise managers that what would determine the variables which most affect investment decisions - relative prices, the level of activity, the rate of real interest would be the vicissitudes of the anti-inflation policy. They would therefore lack the guarantees of stability indispensable for major investment decisions. Meanwhile the capital market

showed spectacular growth. The financial sector was the most dynamic element of the economy, but its operations were limited to the short-term.27

IO. THE CONSEQUENCES OF THE ANTI-INFLATION POLICY In May 1978 the government decided to eliminate indexation in the economy, adopting the policy of adjusting the exchange at a pace slower than that of the increase in internal prices. The prices of public-sector outputs received a similar treatment. At first an attempt was made to diminish the balance-of-payments surplus, or even to produce a deficit, in order to slow the growth of the money supply and reduce inflationary expectations. In accordance with the balance-of-payments objective, a tax was applied on income from foreign capital. In December 1978 this policy was abandoned. A schedule of future mini-devaluations was announced, and movements of foreign capital were freed. The basis of the anti-inflation policy was radically altered. The idea of controlling prices via the monetary supply was abandoned, and a passive monetary policy adopted. Inflation would be reduced by the pressures of competition from the supply of imported goods.28 The negative effect on the margin of industrial protection is the same in both cases. It derives either from a fall in tariffs or from a slowing in the rate of devaluation relative to internal inflation. In both cases there is an element of uncertainty resulting from the instability of internal and external relative prices.29 But the new policy adds a further uncertainty which results from not knowing u priori the future value of the exchange rate that will arise when the point of equilibrium nD = IS -I- b is reached, or its relationship to the future real value of wages.30 In the case of farm prices the effect of progressive overvaluation of the exchange rate is not attenuated by the existence of any initial margin of protection. Until the margin of industrial protection disappears, or the point when ?rD = nX f 5, farm prices should decline relative to industrial prices. This has effectively occurred since May 1 978.31 The direction of the intersectoral resource transfer changed totally. The agricultural surpluses that had been channelled through the financial market fell as real farm prices declined. On the financial supply side, these were replaced by the entry’ of capital from abroad. The foreign

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WORLDDEVELOPMENT

exchange reserves and the external debt both increased rapidly. In the near term, this reinforced the power of the economic policymakers. The progressive overvaluation of the peso meant that a low real rate of interest in local currency could be made compatible with a high real rate of interest in foreign currency. As a consequence, a strong inflow of foreign capital contributed to a short-term economic expansion during the first three quarters of 1979. This expansion carried the economy up to full employment and favoured the recovery of real wages.32

11. A GLOBAL EVALUATION ECONOMIC PLAN

OF THE

The short-term analysis given in the preceding section provides additional elements that can be includedin an overall assessment of the economic measures initiated in 1976. Any early evaluation of the programme one made, for example, in the last months of 1976 - could only emphasize its crudely classbased character. Nominal wages had been frozen in the middle of an acute inflationary process intensified by general decontrol of prices. As a whole, farm prices, exempted from export taxes and boosted by a devaluation, had risen relative to other prices.j3 The labour unions had been taken over, and their leaders massively purged. Meanwhile, extremely intense speculation in government bonds had produced an enormous transfer of wealth from middle-class savers to the corporate sector and financial groups. Towards the end of the year, however, it began to be apparent that beyond this initial impact, the economic policy was geared to a programme of economic reorganization derived from the Armed Forces’ project of political transformation. As has already been indicated, this programme centred essentially on the opening of the economy and on a financial reform. With the passage of time, the persistence of inflation and the need to seek methods to control it caused a refining and narrowing of the economic policy’s immediate objective. Attention was focussed on regularizing the behaviour of industrial prices. This was presented as a long-term objective, notwithstanding the changes that were made in the methods and in the theoretical justifications proposed to achieve it. In this way the persistence of inflation merely reinforced, in the eyes of the their original conviction economic managers, of the need to introduce new disciplines in re-

lation to industry, its entrepreneurs and its wage earners. In this context, the measures of May and December 1978 represented a dramatic reinforcement of the regime’s long-term policy orientations, now applied also as anti-inflationary instruments. The progressive upward revaluation of the real exchange rate became a powerful tool of economic control, all the more powerful as the margin of protection of industry was reduced, and as the foreseeable costs of its abandonment in terms of financial calamity and economic recession were increased. Martinez de Hoz adopted this ‘strategy of the abyss’ even at the expense of the real prices and incomes received in the agricultural sector - precisely the sector where he obtained his most enthusiastic support - and despite the fact that it entailed severe conflict with the industrial entrepreneurs. Indeed, the Minister gained in effective power as he distanced himself from the immediate interests of the business community. Here it should be recalled that Martinez de Hoz and other high officials in the present economic team had already experienced the responsibilities of economic management under earlier military governments. Never before, however, had they displayed such rigidity and persistence in their economic policies, regardless of the directly observable effects. The explanation for this contrast is complex, but one aspect requires particular emphasis. In each of the previous occasions, despite the absence of formal institutions encouraging political representation, those social sectors most affected by an economic policy measure could always find some way to express their views and influence policy. On these occasions, after a strong initial impact, overall economic policy would lose strength and coherence as it came up against various forms of social resistance, until finally it would be abandoned. What makes possible the continuation of present economic policy is the unprecedented degree of isolation in which the state has placed itself in relation to civil society. This makes it extremely difficult for any kind of opposition to find a voice or organize effective alliances to press its claims. It is not so much a question of direct repression, as of the general ‘climate’ in which economic policy is conducted, which obstructs the very possibility of formulating an alternative programme. The military regime has so completely identified its economic programme with its more general political objectives that any open opposition to the programme exposes the protagonists to the risk of a dangerous confrontation, with the whole governing bloque. This situation is not entirely unfamiliar to Argentine wage earners,

ARGENTlNA

who are the principal victims of the economic policy, although never before has labour organization been so heavily repressed. But it is a complete novelty for other social groups, notably urban and rural entrepreneurs and traditionally influential groups in the middle class. These social groups now find that one of their erstwhile leaders, Dr Martinez de Hoz, has been gaining in power the more he distances himself from their immediate interests. He has been able to do this, in the face of pressures from his own class, because he benefitted from the ethical justification provided by strict adhesion to the concerns of a shared ideology. But this was not all. The transformation of normal politics into ideological politics was also a logical result of the exercise of unlimited power, the culmination of an authoritarian practice which had been integral to the govemment from the start, Nothing is more clear in this respect than the arbitrary management of relative prices that has occurred. They were altered however drastically the authorities considered necessary, according to whatever theoretical prescriptions for the cure of inflation were adopted at the moment, without paying the least attention to the consequences for the distribution of income. The same high-handed approach that was at first applied to labour incomes was later applied to the other social classes. Faced with such determined policy-making the business leaders vacillated. Each individual entrepreneur is conscious of the reduction in his own room for manoeuvre. He is also aware of the unresponsiveness of the decision-makers to his appeals, and realizes that contrary to some initial illusions he has no means of control over the government. But on the other hand he also places his hopes in his concentration of power. He is left with no other remedy than to attribute wisdom to omnipotence. In this acute predicament, the indus-

925

trial manager reveals once again his problems of ideological identification and his serious difficulties over taking the political initiative. The industrial manager’s main needs are order and growth. In the 1970s he at first supported one programme which led to disorder, and then another which led to stagnation. But the preeminence accorded to ideological considerations will not last forever. The economic plan of 1976 is indissolubly linked to political objectives that emerged from a situation viewed as one of extreme emergency. Once order is restored, the bourgeoisie comes to take its profits for granted, and to worry more about the costs of maintaining such a political system. The pressure for a programme of growth will become more and more intense. For a while firms can obtain profits from speculation and from the reduction of real wages, but these sources dry up. In the long run the generation of profits is directly related to the growth of the economy. The final question is therefore whether the current economic policy can change into a policy of growth. The programme of 1976 is disciplinary and corrective. It cannot be transformed into a programme of expansion without renouncing its ideological premises and modifying its central provisions: the opening of the economy and the financial reform. An expansionary strategy cannot dispense either with a margin of industrial protection or with the subsidized finanqing of investment. The transition from one strategy to another, even assuming that such a decision could be taken, will not prove easy. It requires at the very least an interval of recession produced by the abandonment of current policies. It remains to be seen, therefore, what will be left of the government’s antiinflationary stance when existing tensions generated by the violent shifts in relative prices of recent years once again find expression in the form of demands that lost income be restored.

NOTES 1. See Adolf0 Canitrot, ‘La viabilidad de la democracia: un analisis de la experiencia peronista 19731976’, CEDES Esrudios Sociales, No. 11 (Buenos Aires: 1978). Oscar Landi, ‘La tercera presidencia de Per&: gobierno de emergencia y crisis politica’, CEDES Documento de Trabajo, No. 10 (Buenos Aires: 1978). 2. In the present international context, however, it is difficult to find examples of a ‘pure’ stabilization programme. Even in European countries these programmes have been accompanied by proposals of a structural

character: energy-saving reductions in the bargaining power of labour unions, dismantling of elements of the welfare system etc. Nevertheless, these programmes do not envisage a really radical transformation in the functioning of the economy. In this context it is also worth noting the contrast between the latest Argentine programme and the stabilization policies in the late 196 OS. during the government of General Ongania and his minister Krieger Vasena. Krieger’s policy aimed to stimulate investment and the expansion of the industrial sector through changes in income distribution

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WORLD DEVELOPMENT

and in relative prices, but without altering the essence of the prevailing economic model. 3. The initial measures may nevertheless be conceived as parts of a policy of recessionary stabilization derived from a diagnosis that the inflation was due to excess demand. But notice that it was only some time later, at the end of 1977, and at the urging of Central Bank officials. that an attempt was made to restrict the money supply. From then on measures concerned with short-term policy began to acquire a certain autonomy. This tendency became much more marked with the measures of May and December 1978. The point is important because it shows how the persistence of intlation forced the questions of short-term management increasingly to the fore, and led to the neglect, at least temporarily, of some of the significant elements of the original long-term strategy, such as shifting the internal terms of trade from industry to agriculture. These questions are analysed in Section 9 of this paper. 4. In its fist declarations the military junta used deliberately moderate language for tactical reasons. It stressed such limited aims as the fight against subversion, and the stabilization of the economy; and it promised a speedy return to political dialogue and constitutionalnormality. These declarations produced the desired effects, pacifying anxieties both on internal and external fronts, and minimizing resistance during the particularly delicate first stage of the new regime. 5. The justification starts with a conception of the economy as functioning according to the competive general equilibrium model of Walras, and is based on Pareto’s optimizing theorems. This basic theoretical approach is complemented by the quantity theory of money modified ‘according to Friedman’s reformulation. Thus monetarism asserts the independence, in the long run, of real and monetary spheres. In consequence, it attempts to demonstrate that short-run disturbances are produced by misguided attempts to influence the real variable through ultimately ineffective fiscal and monetary policies. This brand of monetarism only endorses an active monetary policy when the motive is to correct deformation attributable to such misguided past actions. 6. This paper cannot analyse in detail the reasons for the inflationary phenomenon, nor for its persistence in spite of all the efforts made to moderate it. It limits itself to a consideration of the effects of inflation and the anti-inflationary policy on the behaviour of macroeconomic variables, and on the design of longterm policies. On the subject of inflation see Roberto Frenkel, ‘Inflacidn y politica anti-inflacionaria en la Argentina; 1975-1978’, Estudios CEDES, Vol. 2, No. 6 (Buenos Aires: 1979). 7. Walras’s model, which offers a theoretical justification for the free market economy, is a model of exchange which operates on the assumption of perfect certainty with respect to the future. The notion

that an economy that is not disturbed from outside will always operate in conditions of full employment equilibrium and the associated notion that real variables are independent of monetary variables are the deductions from the suppositions on which Walras’s model is based and therefore only need command acceptance under the conditions that Walras assumed. 8. See, in this regard, ‘El Plan de Reactivation Econdmica ante el Honorable Senado (Plan Pinedo)‘, Desarollo Econdinico, No. 75 (October-December 1979). 9. IAPI was a state monopoly for farm exports. As part of its regular operations it held the prices paid to agricultural producers below export proceeds, and retained the difference. 10. In the 1960s there were at least four different types of economic policy. But this section does not attempt a historical analysis. The description here merely characterizes the policies of Frondizi (19591962) and Krieger Vasena (1967-1969) which were the most important in that period. 11. It has been argued that even without the intensification of political conflicts, the economic growth of the 1960s would have run out of steam. This view rests on the claim that the motor of expansion was a pent-up demand for inputs that had previously been imported but that were subsequently being produced domestically, together with high-income demand for luxury consumer goods. By around 1972 these pentup demands would have been satisfied. Evidence to support this view in the case of the vehicle industry is adduced from the gradual decline in the annual growth rate of sales. If one could generalize from this instance, the industries whose expansion stimulated growth in the 1960s would have lost their dynamism, and come merely to follow the rates of growth given by their respective elasticities and the overall rise in real incomes. See Juan Sourrouille, ‘La presencia y comportamiento de las empresas extranjeras en el sector industrial argentino’, Estudios CEDES, Vol. 1, No. 2 (Buenos Aires: 1978). 12. See Juan C. Torre, ‘Sindicatos y trabajadores bajo el ultimo gobierno peronista; Argentina 1973-76’. in Juan C. Torre and Juan Corradi (eds.), The Return and Fall of Peronism (Philadelphia: ISHI, 1980). 13. Industrial exports grew until 1977, then they declined until they have virtually disappeared. They were affected first by the elimination of the system of subsidies, then by the policy of monetary contraction and finally by the rise in the exchange rate. As a matter of policy they were sacrificed to the cause of fighting inflation and eliminating artificial prices and subsidies. 14. From the viewpoint of the general equilibrium supported in Walras’s model it can be demonstrated, using Pareto’s theorems, that any price alterations caused by decisions external to the market, whilst

ARGENTINA the (n-l) remaining prices continue to be freely determined by the market, implies loss of efficiency in the system as a whole. But this conclusion is not necessarily valid if any of the remaining prices had been ‘altered’ previously. in consequence the criticism of tariff protection from a global equilibrium viewpoint requires one to accept not only the validity of Walras’s model, but also the absence of any other distortion in the free system of prices. 15. It is precisely the existence of a margin of protection which permits industrial concerns to price according to their costs independently (within limits set by the tariff level) of international prices. In the agricultural sector price determination occurs differently. The international price, taking account of the exchange rate and of export taxes, determines the internal price. As wage and input prices are given - for the sector agricultural profits emerge as the residual. This contrast in pricing mechanisms in the two sectors is essential to any analysis of the Argentine economy. 16. The variation of the exchange rate also affects the industrial costs but only insofar as imported inputs constitute a significant element in total costs. 17. For example the whole of 1974 continuing until June 1975.

18. A scheme of complete market freedom requires, in order to be consistent with Walrasian principles, that the exchange rate be freely fixed in the external market. However, under the economic policy of Martinez de Hoz this rate not only was not freed, but on the contrary was used as the most powerful instrument of regulation, of economic activity and of the capital markets. The government’s economic managers gained leverage over the economy in proportion to the decline in the rate of industrial protection. Thus, in direct contradiction to its economic theories, the government (run by liberals) came to exercise tighter control over economic variables than any Argentine government had obtained for many years. 19. Note how this vision of localized wage negotiation relates to the policies adopted towards the labour movements. Liberalism conceives of society as the aggregation of a multitude of individual, independent, decision-making units. These are summed statistically - via the market system, the electoral system - in order to produce collective decisions. In this worldview there is no place for corporatist organizations either of workers or of employers. 20. This analysis would be neither fair nor complete if Martinez de Hoz’s policy of economic openness were not contrasted in terms of its regulatory effectiveness with the alternative. What sets a limit to the policy of openness is enterprise resistance to the surrender of a margin of protection businessmen consider essential to their security. The greater the instability of world prices, the greater the felt need of industrial enterprises for such security. It isnot necessary to emphasize the enormous political potential they have for resist-

927

ante. However, this limitation to the regulatory capacity of the policy of ‘openness’ poses broader questions about the political viability of any antiinflationary policy. The alternative is a wage and prices agreement that is the voluntary surrender by both power groups in the industrial sector - management and labour - of their freedom to fix their own prices, in the service of the general good (the moderation of inflation), even though the immediate beneficiaries would be the agricultural sector whose prices are qegulated by the government. The success of such an agreement is unlikely unless at least some compulsory element is introduced: price controls, credit rationing etc. The effectiveness of these methods as compared with the alternative of inflation control via ‘openness’ is a matter for empirical study. 21. To this must be added the consequences of economic instability which was mentioned earlier as an inherent characteristic of the semi-closed model. 22. This analysis makes the implicit assumption that wage earners have a low propensity to save and that their purchasing intentions over rime are unresponsive to the rate of interest. 23. Overvaluation of the exchange rate affects the terms of trade between agriculture and industry to the extent that, with the help of protectionism, industrial prices can rise in response to rising costs. A transfer of resources may also be achieved through the state monopoly of exports (IAPI). 24. This subject is conceptually related to that of the recessionary effects of a devaluation. In his paper ‘A note on the impact of devaluation and the redistributive effect’ [Journal of Political Economy, Vol. 74, No. 6 (December 1963)). Diaz Alejandro argues that an increase in agricultural prices resulting from devaluation implies a transfer of earnings from agricultural wage earners towards farm owners, and that the recessionary effect is a consequence of the greater propensity to spend of the former compared to the latter. This argument was qualified by Sidravsky in ‘Devaluacidn, inflacidn y desempleo’ [Econdmica, Vol. 11, No. l-2 (La Plata: June-August 1968)] who asserted that the recessionary effect could only take place if the money supply expanded at a slower rate than the increase of prices. This debate remains open. The question is to determine whether the recessionary effect takes place even when a passive monetary policy is adopted. Dr’az Alejandro’s thesis implies: (a) an increase in the demand for money following devaluation; or (b) a price effect - through inflation which reduces the real value of monetary assets before the expansionary effects can take place. 25. The present European fashion for monetary economic policies reflects similar concerns. The international crisis and the associated inflationary problems have pushed concern with economic growth to the background and substituted interest in how to reestablish a stable ordering of the economy. Keynesian policies (a la Samuelson) which predominated since

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928

the post-war period, have lost prestige. Nevertheless in these countries the shift of emphasis is a question of degree. The existence of a representative political system obliges governments to base their economic policies on negotiated agreements (explicit or implicit) with the various social sectors and in particular, with the labour movement. Such agreements will only retain their effectiveness for a limited period, however, if the conditions of economic stagnation persist. 26. Public investment remained at high levels. In part this “was due to the fact that public enterprises, provincial governments and municipalities maintained a significant degree of autonomy in the planning and execution of their investment plans. When the publicsector prices fell in real terms - as a result of the government’s counter-inflationary measures - public enterprises were able to maintain their activities by borrowing. It is as well to notice here that Argentine liberalism never objected on the grounds of anti-state ideology to the level of activity of public enterprises or to the magnitude of their investment needs. The only effectively ‘anti-statist’ policy which economic liberalism carried through was to displace the state from the central role it had held until 1977 in the transfer of earnings between sectors, transferring those functions to the capital market. 27. The transfer from the state to the financial sector of the management of intersectoral resource movements signified, moreover, a transfer of power. In the philosophy of economic liberalism, the financial sector is the most vital centre for the functioning of a free-enterprise system. Theoretically it guarantees an apolitical neutrality which is the condition of efficiency and which the state, because of its political nature, is unable to offer. In fact, the transfer *of power puts the industrial sector, as a net debtor, in a situation of dependence with respect to the financial sector. Such dependence can only be relieved when the industrial sector achieves a less overstretched relationship between its financial capacity and its capital spending. In the brief period that has elapsed since 1975, various financial conglomerates have rapidly emerged in the Argentine economy, and have extended their control over important industrial groups, even dominating entire branches of production. 28. Over time, it was planned that the rate of devaluation would progressively slow down. At the outset of the new anti-inflationary policy it was recognized that: rrD>nX+&

where TD is the rate of internal inflation, nX is the international inflation rate for tradeable goods and k is the rate of devaluation. Rising external competition should force nD downwards, so that at equilibrium: nD = nX+P,

But since e should tend over time towards zero, the final result of the policy should be: rD = rrX.

Domestic inflation would equal the international rate. For a theoretical justification of this policy see Carlos Rodriguez, ‘Algunos consideraciones teoricas

sobre la estabilidad de reglas alternativas de politr’ca cambiarid’, Documentos de Trubajo, No. 4 (Buenos Aires: CEMA, July 1979). In another paper by Carlos Rodriguez and Larry Sjaastad, ‘El retraso cambiario en la Argentina? Mito o Realidad?‘, Document0 de Trabajo, No. 2 (Buenos Aires: CEMA, June 1979), they sought to demonstrate that the Argentine economy had already reached the stage of: nD = nX = c!.

The issue here turns on how industrial prices are set. Ana Martirena, ‘Crawling-peg systems and macroeconomic stability. The case of Argentina 1971-1978’, Documentos de Trabajo of the Instituto di Tella (1979) analyses the same question usine a model

which, in contrast to the industrial prices determined would be true only to the protection was maintained.)

previous workscited, has on a cost-plus basis. (This extent that the margin of In this case, the formula:

nD = nX + i

becomes the objective sumed starting point.

of policy rather than the as-

29. Both RD and rrX are indices based on the weighted averages of many price movements. But inflationary processes are also characterized by sharp fluctuations in relative prices. Equally, the margin of protection will vary from one branch of industry to another, In some branches protection is used up before the stage nD = RX + e is reached. Textiles and electronics are cases in point. 30. In practice industrial protection was reduced at a higher rate than planned. During 1979 the rate of reduction proceeded at about 3%/month faster than initially contemplated. 3 1. The reason why it was possible for 2 yr in succession to adjust the exchange rate more slowly than warranted by internal cost pressures without incurring trade deficits was that industrial activity was allowed to stagnate. This freed surpluses for export, and reduced the demand for imports. In addition, Argentina has been experiencing a notable increase in cereal yields (maize, soya and sorghum) dating back to the late 1960s. 32. A partial recovery of real wages was encouraged both by the expansion of employment and by the fall in real terms of agricultural prices. In the medium term, however, total elimination of the margin of industrial protection should lead to a lower level of real wages. Most likely this will come about through a recession caused by rising real interest rates, a development which must occur either when internal inflation finally slows to the same pace as external inflation plus the devaluation rate (TD = nX + P), or if that does not occur, when capitalists draw the inference that a sudden sharp devaluation is to be feared. 33. This initial slant towards farming interests was underlined b:T the intense activism of the Minister of Agriculture, playing a double role as member of the government and representative of rural interests, which made him appear the second most important ligure in the economic team after Martinez de Hoz.