ARGENTINA: A PROMISING EFFORT AT ECONOMIC REFORM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600010053-2
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 31
• Document Creation Date: December 22, 2016
• Document Release Date: October 1, 2009
• Sequence Number: 53
• Publication Date: August 1, 1968
• Content Type: IM

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DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Argentina: A Promising Effort at Economic Reform
Confidential
ER IM 68-103
AUGUST 1968
COPY NO. 51
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WARNING
'I'bis document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, o the US Ccde, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
XXCLUIICO PROM AUTOMATIC
OON NC 11.1,INO AND
OICLAS..ITICATION
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
August 1968
INTELLIGENCE MEMORANDUM
Argentina: A Promising Effort at Economic Reform
Summary
In early 1967 the Ongania government initiated a
program of economic reform that still promises to
give Argentina its best opportunity in a generation
to begin realizing the potential of its resources.
For the first time since World War II, the country
has a government that has been both willing and able
to attack some of the problems of financial instability
and structural imbalance that have long hampered
Argentine economic growth. The task of economic reform
will be long and arduous, however. The program can
succeed only if maintained for a considerable period,
in the face of opposition from the many groups that will
be hurt, at least temporarily, by general austerity and
a redistribution of income.
The new program emphasizes the attainment of
financial stability. Measures to bring the rate of
inflation well below the average annual increase of
30 percent experienced in recent years include a
"voluntary" price control program, a freeze on wages
until the end of 1968, and reduction of the govern-
ment budget deficit by holding current spending
fairly steady while increasing revenues. Despite
extraordinary pressures on prices during 1967, the
program succeeded in laying the groundwork for
stability, and during the first half of 1968 increases
in price levels have been at a record low.
Note: This memorandum was produced solely by CIA.
It was prepared by the office of Economic Research
and was coordinated with the Office of National
Estimates and the Office of Current Intelligence.
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To ease the recessionary impact of these
stabilization measures and to induce the reallocation
of a larger share of available resources to invest-
ment and to ex9orts, supplementary incentives have
been introduced. Measures implemented during the
past year have provided for a variety of growth
inducements in the form of tax and credit preferences
for investment, new credit arrangements for consumer
durables to increase consumer demand, and strong
efforts to promote exports. The government also has
taken steps to improve the climate for foreign in-
vestment in Argentina.
These efforts, combined with a relatively good
crop year and a healthy export trade, succeeded in
averting a recession in 1967 despite the strong
stabilization measures taken. Gross national product
(GNP) for the year 1967 as a whole grew by about 2
percent. Pockets of depression persisted, however,
particularly in some manufacturing industries, and
in 1968 the government launched a large-scale public
investment program as a spur to current economic
activity as well as to long-term growth. By mid-
1968, manufacturing and construction were experiencing
a sharp upswing, but the increase in aggregate demand
was limited by poor crop yields and export marketing
problems experienced earlier in the year.
The economic reform program is being carried out
by a team of economic experts headed by the Minister
of Economy and Labor, Dr. Adalbert Krieger Vasena.
These specialists, who seek to promote free enter-
prise and foreign investment in Argentina, consulted
with the International Monetary Fund (IMF) and other
international agencies in drawing up their program
and have enlisted strong foreign support for it. The
success of the devaluation with which Krieger Vasen.a
launched his program, combined with official foreign
assistance, resulted in a substantial strengthening
of Argentina's foreign payments position. Foreign
reserves have risen to a level not achieved since
1948, and confidence on the part of foreign investors
is at a poF twar high. Argentina has been able to
float bond issues in foreign capital markets for the
first time since 1938, competition among foreign
suppliers is keen, and direct foreign investment is
showing a sharp upward trend. Its healthy state of
international liquidity provides Argentina with an
important element of flexibility in pursuing the
sometimes conflicting goals on the road to stabiliza-
tion and growth.
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Introduction
1. it is generally conceded that in no country
in Latin America has the contrast between economic
potential and actual performance been more pro-
nounced than in Argentina during the last three
decades. During the late 19th and early 20th
centuries, Argentina enjoyed a long period of rapid
expansion under the influence of high rates of
immigration and capital inflow combined with large
earnings from its agricultural exports. The world
depression disrupted such traditional patterns,
however, and under the economic policies pursued
since World War II, the Argentine record has been
one of slow and erratic growth, endemic inflation,
and recurrent balance-of-payments crises.
2. Countries that 30 years ago were Argentina's
peers in resources and development -- Australia and
Canada, for example -- have now moved far ahead. In
total economic output, moreover, Argentina has fallen
from first to third place among the countries of
Latin America during the postwar years. Although its
per capita GNP of about $750 is second only to that
of Venezuela, the less modern nations of Latin
America have been narrowing the broad gap that once
existed. To a large extent, Argentina's depressing
economic record reflects the damage inflicted by
the policies adopted during the Peron era. The "s?top-
go" measures and often inconsistent policies of
succeeding administrations, however, have served to
deepen the structural distortions that they inherited.
Background: Misguided Policies and T:teir Consequences
3. All Argentine administrations over the )as t
35 years have been committed to a fundamentally similar
economic objective: to reduce dependence on agricul-
tural exports both directly, through promotion of
industrial exports, and indirectly, by creating an
industrial sector more capable of competing with
imports in supplying the expanding -- though still
relatively small --- domestic market. By the 1933's,
and even more by the early years of World War II,
Argentina had acquired a strong economic base for
broader industrialization as well as agricultural
expansion. The types of policies adopted in response
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to the depression and the war and accelerated after
the military coup of 1943 and Peron's assumption
of full power in 1945 resulted, however, in a funda-
mental disequilibrium that has continued to afflict
Argentina up to the present time.
Peron's Policies
4. Under Peron, the government initiated a
variety of policies favoring rapid industrialization
and urbanization -- primarily at the expense of
agriculture. Through discriminatory tax, credit,
foreign trade, and wage policies, Peron shifted
capital and labor from crop and livestock production
into manufacturing. The economic program initiated
by Peron, moreover, went far beyond an attempt to
maximize Argentina's industrial capabilities. Equally
important objectives were nationalization of major
economic resources and enlargement of the size and
power of the urban masses upon which his political
support was based. Because Peron used a large part
of Argentina's foreign exchange reserves of $1.7
billion to nationalize foreign-owned industries,
railroads, and public utilities and deterred foreign
investment in other ways, the burden of further
development fell almost exclusively on domestic
resources. At the same time, the rapidly rising bill
for wages and worker benefits added heavily to the
cost of industrial goods and services, The shift in
income distribution toward the well-organized groups
of urban labor was pronounced. Between 1945 and 1949,
while per capita product increased only 10 percent,
real industrial wages rose by more than 50 percent.
Although money wages continued to skyrocket during
the early 19501s, they were outpaced by the rising
rate of inflation. As a result, peal wages fell by
more than 20 percent during 1950-52. Peron undertook
major adjustments in economic policies in 1953, but
by the time of his overthrow in 1955 the pattern of
economic deterioration had not been changed appreciably.
Industrialization and Strains in the Balance
of Payments
5. In agriculture, the squeeze on profits re-
:;ulting from a more rapid increase in costs and taxes
than in farm prices weakened ircentives and provoked
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a long period of disinvestment. The resulting stag-
nation in agricultural production, combined with a
subsidized increase in food consumption in the urban
market, seriously restricted export availabilities.
Whereas Argentina had large export surpluses before
the war as a result of its natural competitive ad-
vantage in agricultural production, a trade deficit
totaling more than $2 billion was incurred during
1948-62 (see Figure 11.
6. To an important extent, the weakening of
Argentina's foreign trade position also reflects the
hothouse atmosphere in which industrialization has
been cultivated. Supported by subsidies in various
forms and protected from foreign competition by
the highest tariffs in Latin America, industrial
producers have had little incentive to reduce costs
and expand markets. Their, major concern has been to
protect profit margins by passing on actual and
anticipated cost increases to the consumer. Even
within the traditional, well-established industries --
food, beverages, textiles, and consumer durables --
costs generally have risen in comparison with those
of foreign producers as tariff margins have depressed
incentives to modernize. As Argentina moved into pro-
duction of steel, chemi :als , vehicles, and a wide
array of relatively sophisticated capital equipment,
it came under still greater competitive disadvantages
because of the high price of inputs, inability to
effect economies of scale, and supply bottlenecks,
among other problems.
7. Although Argentina has developed the most
diversified industrial complex in Latin America, with
production capacity far in excess of domestic needs,
industrial prices are among the h_:Jhest in the area.
The high-cost nature of Argentine industry has vir-
tually precluded its entry into external markets,
and it thus has been able to contribute little to
import capacity. Manufactured goods continue to
provide only about 5 percent of export earnings.
Despite the adverse policies that it has been work-
ing under, agriculture hap continued to provide 90
to 95 percent of total export earnings and th""s has
financed most of the import requirements of the
favored industrial sector.
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8. Industry has provided finished products for
the domestic market that previously had to be im-
ported, but its requirements for fuel, raw materials,
and capital goods have added heavily to import re-
quirements. Imports of finished consumer goods
amounted to only 0.3 percent of GNP in 1966. This
decline in import requirements, however, only
partially offset the sharp rise in imports of raw
materials, fuel, and capital goods, which during the
1960's have comprised 92 to 94 percent of imports.
9. Because an inefficient industrial sector is
no substitute for an efficient agriculture in
financing growing import needs, Argentina has ex-
perienced periodic balance-of-payments crises.
From time to time, Argentine governments have attempted
to ease growing pressure on the balance of payments
through devaluation of the peso and administrative
restrictions on imports, as well as by tightening
credit. These measures usually have resulted not
only in recessions but also in sharp increases in
the rate of inflation and, within a short time,
renewed flights of capital -- thereby paving the way
for further balance-of-payments problems.
10. Owing mainly to a couple of record crop years
and an increase in foreign demand for meat and grains,
total export earnings have grown markedly since the
beginning of 1962 (see Figure 1). Much of the gain,
however, has gone to the servicing of a large and poorly
structured foreign debt. The foreign debt reached
a peak of $3.2 billion in 1963, about two-thirds of
which was repayable within five years. Although
some relief has been obtained through refinancing,
the Argentine government nevertheless has had to
hold imports well below the level of the early 1960's
to secure trade surpluses sufficient to cover debt
servicing obligations. The constraint on imports
has both dampened econonic activity and accelerated
inflation. The burden of a shift to an export surplus
(wherein consumption and domes tic investment are held
below the level of total catput) was permitted, more-
over, to fall entirely on investment. While consumption
continued to absorb about 80 percent of GNP, domestic
investment dropped from an average of 23 percent of
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 1800
1948
59660 8-68 CIA
ARGENTINA: VALUE OF FOREIGN TRADE, 1948-67
W`0$`
Approved For
"1444P. M-11,
AAI
J *?-
t
1962 1964
25X1
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GNP in 1960-62 to less than 18 percent in 1963-66,*
to the detriment of long-term prospects for growth.
Persistence of Rapid Inflation
11. Although Argentine production has displayed
a "boom-bust" pattern, rapid inflation has continued
throughout the postwar period, as shown in Figure 2.
The inflationary spiral began under Peron, but the
economic policies pursued since his overthrow have
served to intensify it. Cost-of-living increases
since 1955 have averaged about 30 percent annually.
Continued protection of domestic industries from
foreign competition has added to the rigidities in
domestic supply and provided wide latitude for price
rises. In the mid-1960's, for example, import
tariffs averaged about 120 percent and ranged as
high as 600 percent in some cases. Continued stress
on industrialization also has contributed to the
willingness of Argentine administrations to countenance
wage increases unmatched by gains in productivity.
Although Peron began the policy of favoring urban
workers, succeeding governments have felt compelled
to perpetuate it because of the continued political
influence of organized labor. Although at times
outpaced by the inflationary spiral (for example, in
1959 and 1962), wage increases in general have ex-
ceeded rises in the cost of living. During 1961-66
the real wages of industrial workers rose by about
25 percent, restoring the level of 1958. Increases
in real wages during this period pushed up costs
substantially and added to pressures on prices despite
some increase in labor productivity.
12'. The government's large budget deficits have
been an increasingly important source of inflationary
pressure. Growth of tax receipts has been sluggish
and in real terms has been eroded by the pace of
* Statistical measures of investment overstate its
relative size by a wide margin because of high
tariffs on imports of capital equipment and the high
cont of domestically produced capital goods. An
Argentine study estimates that, if calculations were
made at US prices, the share of investment in GNP
would be approximately half the indicated rate.
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INDEXES
6,000
5,000
4,000
600
500
400
INDUSTRIAL MONEY WAGES
Figure 2 25X1
1943 45 47 49 51 53 55 57 59 61 63 65 67
ARGENTINA: INDEXES OF INDUSTRIAL WAGES, COST OF LIVING AND REAL WAGES, 1943-67
59661 8-68 CIA
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inflation. Between 1961 and 1964, revenues in real
terms declined by 40 percent, falling from 9.5 to
5.6 percent of GNP. Increasing subsidies to the
poorly run state enterprises established under Peron,
high costs deriving from a badly deteriorated in-
frastructure, and a rapidly rising wage bill all
have contributed to the steady increase in current
expenditures. By 1964 the budget deficit was the
equivalent of 50 percent of expenditures and more
than 5 percent of GNP. Despite some improvement,
deficit financing has continued to be a major source
of inflationary pressure as new money was created by
the Central Bank to cover the fiscal gap.
Sluggish and Unbalanced Growth
13. Despite its favorable endowment of human
and material resources and relatively advanced level
of economic and social development, Argentina has
become one of the laggards in the race for economic
expansion. Since 1943 the growth of GNP has averaged
only 3 percent annually, and GNP per capita has
averaged only 1 percent annually (see Figure 3) In
the 12 'rears since Peron's ouster, the average rate
of economic growth has continued at this same
depressed level of 3 percent, and during 1962-67 it
averaged only 2 percent, or little more than the
rate of population increase. From 1956 to 1967 the
Argentine economy was unable to sustain growth for
mcre than two successive years. GNP declined, for
example, in 1962-63, grew by about 8 percent in 1964
and in 1965 with the impetus of record harvests,
declined again in 1966, and rose in 1967.
14. By hobbling agriculture and pushing in-
dustrialization in an inefficient and indiscriminate
manner, Argentina has succeeded in greatly reducing
the relative importance of agriculture in the economy.
From 1935 to 1965 the share of agriculture in GNP
fell from about 29 to 17 percent, while the share
of industry rose from 29 to 40 percent -- a rela-
tively high percentage by both Latin American and
world standards.* Similarly, the agricultural labor
force has undergone a long decline, while the industrial
labor force has expanded greatly. Between 1946 and 1960,
for example, the agricultural labor force declined by
15 percent while the industrial labor force increased
by more than 30 percent.
The percentage share of industry in Argentina's
GNP probably is somewhat exaggerated by the com-
paratzveZy high prices of Argentine manufactures.
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INDEXES
1943 =100
100
90
ARGENTINA: INDEXES OF GROSS NATIONAL PRODUCT,
PER CAPITA GROSS NATIONAL PRODUCT, MANUFACTURING,
AND AGRICULTURAL PRODUCTION, 1943-67
MANUFACTURING PRODUCTION
GROSS NATIONAL PRODUCT
AGRICULTURAL PRODUCTION
PER CAPITA GROSS NATIONAL PRODUCT
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Economic Reform Program
Policy Problems
15. Any Argentine government faces a formidable
task in attempting to move the economy toward sus-
tained growth. Although economic reform programs
have been attempted in the past, they have been
short lived and ineffectual, mainly because political
considerations have ruled out necessary but unpopular
changes.* Any meaningful program of stabilization
and development requires the allocation of a
larger share of available resources to investment
in productive activities. No Argentine government
in the past has been both willing and able to impose
the restraints on current consumption that such a
shift would entail.
16. Even an authoritarian government intent upon
staying in office until the job is done is under
important constraints in instituting economic re-
form. The consequences of the policy errors of
three decades ago can perhaps be ameliorated, but they
cannot b,-, 'rased. Existing industries -- however
inefficient -- cannot in general be wiped out. The
government cannot undertake a massive shift of un-
needed urban workers to rural areas, whatever
Argentina's natural advantages in agriculture and
self-imposed handicaps in industry. Nor is there
any quick way for the government to divest itself
of inefficient public enterprises. Moreover, even
where there is greater freedom to act, moves to im-
prove conditions in one area can aggravate problems
in others if counterbalancing steps are not taken,
and may do so even then. At best, an economic re-
form program as complex as that required in Argentina
involves a most difficult task of timing and coord-
ination.
17. The Illia government was ousted in June 1966
in large part because of its inability co move
toward the solution of Argentina's ecoromic problems.
* Argentina has had seven presidents during the
past 15 years, and the average tenure of Ministers
of Economy during this period has been 10 months.
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But the new military government headed by Juan Carlos
Ongania assumed power with no clear idea as to how
to go about stabilizing and modernizing the economy.
Although the new government was in a more powerful
position than its predecessors to enact economic
reforms, there was no consensus on economic matters
in Ongania's cabinet, and it floundered on the
question of choosing the most effective path to
follow. Gradualists fought with advocates of shock
methods, developmentalists with monetarists, and
advocates of a free market system with supporters of
greater government involvement. During its first
six months the Onjania government moved against
some obvious targets for reform such as the port
situation and work rules for the railroads, but
by the end of 1966 little had been accomplished in
the economic field. Inflationary pressures in the
form of wage and price increases and credit ex-
pansion were stronger than before the revolution.
18. Increasing disgruntlement among the military
leaders, stemming largely from the lack of a decisive
economic policy, finally brought a cabinet shakeup
in December 1966 and the appointment of Dr. Adalbert
Krieger Vasena as the new Minister of Economy and
Labor. Krieger Vasena, an internationally respected
economist who was serving as the Argentine repre-
sentative at the Kennedy Round talks in Geneva at
the time of his a pointment,
Inew economic
team drew up and launched a broad and complex pro-
gram for financial stabilization and economic
development. As Krieger Vasena explained it, his program
did not rest on shock methods but was designed to
attack problems in all sectors simultaneously in such
a way that the costs would be shared equitably.
19. The current reform program attempts simul-
taneously to halt inflation, achieve a surplus in
external accounts, and increase the rate of economic
growth. Thus, it reflects a necessarily complex
intertwining of economic variables. First, the peso
was devalued substantially in order to make exports
cheaper and more competitive and imports more
expensive, and thus to improve the balance of pay-
ments. Second, the government took two steps to
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counteract some of the inflationary impact of
devaluation: imposition of control over both
wage and price increases and sharp reduction of
tariffs. The latter step, by lowering domestic
prices of many imports, was also designed to force
greater industrial efficiency through operational
improvement and investment. Third, the government
planned a reduction in the budget deficit. Initially,
this would come through an increase in tax revenues
rather than through a reduction in government payrolls
that would add to unemployment. Fourth, in order to
facilitate the ultimate transfer of excess government
workers to more productive employment and to limit
the recessionary effects of the stabilization program
as a whole, the government offered tax concessions
and other incentives to private investment, both
foreign and domestic. Finally, the government in-
creased sharply its outlays on public investment in
order to spur current economic activity as well as
long-term economic growth.
Devaluation
20. The most highly publicized reform was the
devaluation of the Argentine peso from 250 to 350
per US dollar on 13 March 1967. At the same time,
the government lifted almost all restrictions on
international payments and transfers. The govern-
ment hoped that pegging the peso at a rate considerably
higher than that prevailing in the black market would
not only stop the outflow of capital but also induce
the return of flight capital already lodged abroad.
In addition to stimulating exports, the devaluation
was designed to encourage direct foreign investment,
which had been reduced to a trickle. To improve
further the climate for foreign investors, the
Ongania government signed new settlements with pe-
troleum companies that had had their contracts annulled
under Illia in 1964 and issued a new law to permit
broader foreign participation in the exploitation
of Argentine petroleum resources.
21. When the peso was devalued, export taxes of
16 to 25 percent were reinstituted on traditional
agricultural products. This measure reduced the
effective rate of exchange for exports of meat,
wool, and grains to 262.5 pesos per US dollar and
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of ocher products to between 280 and 294 pesos.
Re levying of these taxes, which had only recently
been removed when the peso went from 220 to 250
to the U5 dollar in November 1966, brought criticism
from farming circles. On the whole, however, the
farmers' opposition was moderate, probably reflecting
the validity of the government's position that these
products were competitive before devaluation and
that limitation of windfalls from devaluation was
necessary to fight inflation.
22. At the same time, the government reduced
import duties by an average of about 45 percent to
largely offset the rise in import costs implicit in
a devaluation. It also completely revised the tariff
system, with the aim of eliminating distortions
that dampened investment. High tariffs had dis-
couraged expansion in some industries by making im-
ported raw materials too expensive and had discouraged
modernization in others through excessive protection
from foreign competition.
Fiscal Reform
23. One of the government's primary goals has
been reduction of the deficit of the public sector
through the lowering of current costs and annin-
crease crease in tax revenues. Although the program
up by Krieger Vasena's economic team did not provide
for any cutback in government expenditures in real
terms during 1967, a greater proportion of total ex-
penditures was earmarked for investment. Expenditures
on current operations were to be held down by limit-
ing the wage bill and by imposing strict ceilings
on the amount of budgetary support permitted to
cover operational deficits of the public enterprises.
In April 1967 the wages of public employees were
frozen until the end of 19 6 8 , after the granting of
moderate increases. The maximum increase permitted
was 15 percent, compared with annual increases
averaging more than 30 percent in 1965 and 2.966. A
drive for greater efficiency throughout the govern-
ment was initiated to further reduce the burden of
salary payments, which throughout the 1.960's have
been absorbing an increasingly large portion of ex-
penditures. The major provision of this drive is
an "orderly shift" of an estimated 100,000 surplus
public employees to more productive employment.
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The timing of this shift in personnel was left
open, however, and it ar ' npeared that the main thrust
of the government's plan would not be carried out
until the private sector was able to absorb employees
and until new public work programs could be started.
24. Although the budget for 1967 did not provide
for a reduction in expenditures, the deficit was to
be held to one-seventh of total expenditures, compared
with one-third in 1966. Tax revenues, in real terms,
were to increase by 30 percent. A large part of
this increase was scheduled to come from the export
taxes relevied with the peso devaluaticn and from
temporary emergency taxes on property. The rates
of many sales and excise taxes also were raised and
placed on a pay-as-you-go basis to reduce the eroding
effects of inflation on receipts. The government,
moreover, took steps to tighten the administration
and collection of taxes. Strict limitation of budget
deficits is one of the guidelines agreed upon by
Argentina and the IMF, adherence to which is essential
to drawings on standby loans.
Income and Price Policies
25. As an important part of its stabilization
program, the government also took the unprecedented
step of imposing restrictions on the growth of incomes
in the private sector. Severe government reprisals
broke organized labor's attempt to launch a general
strike in March 1967 and splintered union leader-
ship. Against this background of weakened opposi-
tion, the government introduced a wage policy that
permitted increases of between 8 and 24 percent (de-
pending upon the date of the last readjustment) and
then froze wages until the end of 1968, the same
as for public employees.
26. The government's price control program
originally relied heavily on the deflationary effects
of wage restrictions, along with reduction of import
duties and control of demand through credit and
fiscal measures. Later announcements, however,
s'iowed that the government was prepared to take
more direct action if necessary in attacking the
"inflationary mentality" of producers and retailers.
Lt threatened to free imports of certain goods and
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use other methods of forcing businessmen to cut
costs and increase efficiency. In April 1967, more-
over, the government passed a new price control law
involving stiff penalties that can be applied
administratively (fines of 10,000 to 5,000,000 pesos,
imprisonment up to 90 days, and closing of the es-
tablishment for up to six months).
27. Resort to direct price controls under the
law of April 1967 has been rare because business
leaders agreed to collaborate in a "voluntary" price
control program. In mid-May 1967, 85 major Argentine
and foreign companies agreed to cooperate with the
government in restricting price increases, and many
smaller firms subsequently followed suit. The posi-
tive response of the business community stemmed partly
from the view that it is in its interest to make the
government's stabilization program work and partly
from the promise of preferential treatment for
cooperating enterprises in regard to credits, import
licenses, government purchases, and tax benefits.
In the background, of course, is the threat that the
government will enforce existing measures or enact
even more distasteful legislation should the voluntary
program prove inadequate.
Incentives for Private Investment and Production
28. Recognizing that effective action against in-
flation requires concurrent efforts to promote eco-
nomic growth and cure the structural ills of the
economy, the Ongania government in mid-1967 introduced
a variety of production incentives. The rash of
legislation that was issued was designed to counter-
act the recessionary pressures normally attending
stabilization efforts as well as lay the basis for
long-term economic growth. The government thus aimed
at limiting the reduction in domestic demand while
increasing, through devaluation, external demand for
both traditional and nontraditional products. As
one means to increase consumer demand in the face
of an expected fall in real wages, the Central Bank
issued a regulation establishing a new type of
commercial bank credit for the purchase of consumer
durables. In effect, the bank issues the borrower
a book of checks ,;o cover his purchases, and the
seller can use these checks to pay his supplier
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provided the supplier is one of the 1,400 firms
subscribing to the "voluntary" price control agree-
ment.
29. A large part of the legislation issued during
the first few months of the economic reform program
was designed to offer a direct stimulus to private
investment -- both foreign and domestic. New laws
revising the land tenure system and permitting a
reiraluation of industrial assets reduced some of
the basic obstacles to investment. Other legislation
liberalized credit requirements for imports of capital
equipment and reduced the costs of borrowing for
investment. Moreover, a 100-percent deduction from
taxable business income was permitted for purchases
made between 1 June 1967 and 31 December 1968 of
machinery and equipment for industry and a specified
list of capital goods for agriculture. The provision
that the equipment be new and of domestic origin was
meant to stimulate local industry and offset advantages
given to imported goods under earlier legislation.
Tax incentives also were given for the retention of
breeding cattle, for maintenance of a high level of
beef production, and for increased utilization of
technical expertise, pesticides, and other agricultural
inputs. Other legislation liberalized the terms for
investment credits, declared tax-exempt any interest
on credits to finance imports of equipment, and raised
the deduction for costs of technical assistance from
10 percent to 50 percent. Subsequent decrees ex-
tended tax and credit privileges to investment in
housing construction and mining development.
Public Investment Policy
30. The Ongania government favors the reduction
or elimination of state involvement in sectors in
which private capital, either foreign or domestic,
is willing to invest. It has encouraged private
participation in such basic industries as fuels,
power, steel, and petrochemicals by granting tax
Fnd import privileges similar to those allowed the
state-owned enterprises that previously enjoyed virtual
monopolies in these fields. To obtain private assistance
in the rationalization of public enterprises, moreover,
the administration issued a decree in June 1967 that
legalized the sale of up to 49 percent of the shares of
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any state enterprise to private interests, with
proportionate representation on the board of
directors.
31. Sharply expanded investments by the public
sector in the economy's infrastructure nevertheless
are still an important part of the development pro-
gram. The government planned to finance a large
portion of public investment expenditures from
budget revenues, earnings of public enterprises, and
other public resources within the confines of the
IMF budgetary guidelines. In addition, long-term
development credits were negotiated with international
financial organizations to assist in launching a
variety of power, transportation, irrigation, and
housing projects as well as other basic industrial
and agricultural programs. Taking advantage of
tha increased confidence in foreign financial circles
inspired by the first months of the economic reform
program, the Argentine government also moved, for
the first time in many years, to exploit the inter-
national capital market to help finance its invest-
ment program.
Progress of the New Program
32. The Ongania government introduced its economic
reform program in an expeditious manner, under rela-
tively favorable circumstances, and its progress to
date is encouraging. The government's success does
not derive from any extraordinary insight into
Argentine economic problems or newly found combina-
tion of policy instruments. The program is making
progress largely because this administration, unlike
previous ones, actually is taking appropriate, wide-
ranging measures and is giving the impression that
a new era of economic policy has arrived. The
various military groups were united in their backing
of the program. Indeed, Krieger Vasena's burst of
activity on the economic front effected a degree of
cohesiveness among Ongania's military supporters that
had not been evident since the early weeks of the
revolution. Although Ongania appealed for broad
popular support for the reform program, he showed
that he was willing to adopt a more authoritarian
stance, if necessary, to carry it out. The degree
of authority afforded the new economic team enabled
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it to launch its wide-ranging program and to move
quickly to correct imbalances as they arose.
33. The Argentine effort to strengthen the foreign
payments position has been highly successful so far --
in part because of strong international support.
Early in the drafting process, Krieger Vasena enlisted
the counsel of the Inter-American Committee of the
Alliance for Progress (CIAP), the IMF, and other
international agencies and incorporated their
suggestions into his program. As a result, financial
and technical support from official and private sources
abroad was immediate and enthusiastic. Within the
first few months of the grogram, Argentina received
about $400 million in s?candby credits from the IMF,
the US Treasury, and a consortium of North American,
European, and Japanese banks as well as important
development loans from other organizations.
34. The devaluation with which Krieger Vasena
launched his economic program further strengthened
Argentina's financial position. Through the purchase
of foreign exchange offered from private holdings,
high net earnings from trade, and drawings on standby
loans and other credits, the government raised the
reserves of the Central Bank to a level not achieved
since 1948. The Central Bank's holdings of gold and
convertible foreign exchange rose from less than
$200 million at the time of devaluation (13 March
1967) to more than $700 million by the end of the
year (not including $200 mill:.on in available stand-
by funds on which no drawings have been made-to date).
During 1967 as a whole, Argentina registered a
balance-of-payments surplus of $480 million, primarily
as a result of a reversal in the flow of private
capital after the devaluation. Despite a continued
high level of debt repayment, the total net inflow of
capital during the year amounted to $310 million
compared with a net outflow of $250 million in 1966
(see the table). About three-fourths of this improve-
ment derived from unspecified transactions involving
short-term capital, indicating the strength of the
peso at its new rate. As of mid-1968, foreign reserves
continued at the high level attained during the pre-
ceding year, and no real pressure against the peso
was evident. Indeed, taxes averaging about 18 per-
cent on Argentina's main agricultural exports afforded
considerable maneuverability short of further devaluation.
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Argentina: Balance of Payments
1.965-68
Million US $
1965
1966
1967
1968 a/
Current account
184
253
180
66
Trade balance 295
469
369
290
Invisibles balance -111
-216
-189
-224
Capital account -168
-250
310
11
Direct investment 47
30
19
30
Suppliers' credits 132
160
149
187
Drawings on long-
term loans and
bond issues 39
13
59
170
Debt amortization -319
-448
-366
-386
Short-term and other
capital -177
-188
231
10
Compensatory financ-
ing 110
183
218
0
Net errors and omis-
0
sions 0
-7
-10
.Balance-of-payments
surplus or deficit .76
-4
480
77
Change in reserves
(minus = increase) -16
4
-480
-77
- 21 -
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35. Fiscal reform efforts thus far have been
equally successful, and the IMF guidelinez on
deficit spending have been adhered to. The budget
deficit in 1967 was cut to half that of 1966, mainly
because total revenues increased by some 66 percent
in current prices. About half of this increase
derived from the reimposition of export taxes after
the devaluation and the application of an emergency
property tax. Improved tax administration yielded
better than a 50-percent increase in income tax
revenues as well as substantial increases in sales
and other indirect taxes. Total revenues in real
terms increased by nearly one-third and surpassed
the 1961 level for the first time. The 27-percent
increase in expenditures (amounting to virtual
stability in real terms) was in accordance with the
government's plan and attributable mainly to a sharp
growth in capital expenditures. All of the increase
in transfers to public enterprises went into invest-
ment. The deficit was reduced from 34 percent of
total expenditures in 1966 to 13 percent in 1967 and
from 3.7 percent of GNP to 1.4 percent -- by far the
lowest level recorded in the 19601s. The reduction
in borrowing from the Central Bank was even sharper
than had been planned and was facilitated by the
first successful sales of treasury bills in 20 years.
36. In impact on the populace, the government's
progress toward price stabilization has been perhaps
its most impressive achievement. Although the in-
crease in the cost of living reached 27 percent in
1967, the government did succeed in establishing a
basis for greater price stability and in limiting
the impact of the inordinately strong pressures
operating during much of the year. Despite the
large devaluation in March and the wage increases*
permitted in April and May, by the third quarter of
the year a tendency toward stability already was
evident in the indexes of both wholesale prices and
construction costs. The government also moved
quickly to limit the speculative price increases
arising from disruptions in production and trans-
portation due to abnormally bad weather during the
latter half of the year. On a seasonally adjusted
basis, the rise in the cost of living during the
first five months of 1968 measured only 3.5 per-
cent -- a distinct improvement over the 9-percent
increase during the comparable period of 1967.
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37. Despite the freeze on money wages, real
wages in mid-1968 had not deteriorated below the
level prevailing when Icrieger Vasena was appointed
in March 1967. After peaking with the wage increases
permitted in April and May 1967, the index of real
wages fell steadily and by December was some 7 per-
cent below the pre-freeze level. In January of this
year, however, the government increased take-home pay
by decreasing employees' social security payments,
and the index of real wages increased to a level
somewhat higher than that of March 1967. Because
of the general stability of prices since then, real
wages have held firm. To mitigate the pinch that will
come from moderate price increases expected during the
next few months, the government arranged for both public
and private employees to receive at midyear half the
annual bonus of a month's wages that is traditionally
given at the end of the year.
38. The stabilization effort has not brought on
a recession, as might have been expected. Thanks
mainly to good crops and a healthy export trade,
GNP for 1967 grew by about 2 percent, following a
decline in 1966 of about 1 percciic.. Serious pockets
of depression nevertheless persisted in important
branches of industry, and manufacturing output as
a whole declined during the last half of the year.
The need to draw down large inventories accumulated
during the extended recession of 1966 was partly
responsible for sluggish activity in some industries,
but it also was apparent that domestic investors
were pur:.t:ng a cautious policy. The disappointing
response: of the domestic private sector to the spate
of investment incentives legislated in 1967 was a
key issue in the government's decision to launch a
public investment program totaling some 319 billion
pesos (US $911 million) in 1968. Although large
investments in fuels and power, transportation and
communications, and other parts of the infrastructure
are needed badly, they are being undertaken at this
time primarily to support demand.
39. As a result of the sharp increase in public
investment and a continued high level of consumer
demand, an upswing in industrial and construction
activity has been evident in 1968. Manufacturing
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output grew about 4 percent during the first
quarter compared with the same period in 1967, and
production in the extractive industries and the
construction sector increased by 10 percent and 17
percent, respectively. The unemployment rate,
moreover, dropped to its lowest point in years --
5.6 percent as compared with the 6-percent average
during the boom year of 1965. The increase in
aggregate demand, however, has been moderated by
the drop in farm income and in exports during this
period. Farm output during the first few months of
1968 was almost 7 percent lower than during the same
period in 1967, mainly because of drought that
particularly affected livestock production. Farm
incomes were further affected by the 16-percent drop
in exports during the first quarter, which derived
not from a lack of price competitiveness but from
marketing problems (for example, the British ban on
meat imports from Latin America, drawn-out negotiations
on sales of wheat to Brazil, and stiffer marketing
conditions in the United States, Spain, and the
European Common Market) . By midyear, however, agri-
cultural conditions had improved and exports had
picked up, although not to their 1967 level.
40. Although private domestic investment activity
has been comparatively sluggish, funds are readily
available. Government officials indicate that, despite
the decline in interest rates over the past year, the
more rapid fall in the rate of inflation is now
causing a readjustment in the capital market. As a
result of the shift in the real cost of money from a
negative rate of about 10 percent last year to a
positive rate of about 5 percent this year, banks
are experiencing some difficulties in placing loanable
funds. As of 1 June, the Central Bank cut back by
50 percent the reserve requirements of commercial
banks, which further eases credit and should force a
further decline in interest rates. Should the ex-
pansionary impact of this move prove too great, the
government intends to apply countermeasures to
protect its plans to further lessen the rate of in-
crease in the money supply.
41. With the sharp buildup in foreign reserves
and the successful initiation of the stabilization
program, response on the part of foreign investors
has become more positive. By late 1967 -- for the
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first time since the prewar period -- confidence in
the Argentine economy among foreign financial circles
was sufficient to permit the floating of a $"5 million
government bond issue in the European capital market.
As of June 1968, about 70 percent of the issue had
been sold, and its guarantor, the West German
Deutschebank, agreed to back another bond issue for
an equal amount in September under even more favorable
terms than the first. In June 1968, Argentina was
able to enter the US private capital market -- also
for the first time since 1938 -- with a bond issue of
$25 million, which is being handled by a New York
brokerage firm. A fourth issue, planned for listing
on the European and New York stock exchanges in
November of this year, will be backed by the same
German and US sponsors.
42. Competition among foreign suppliers for orders
associated with Argentina's prospective large public
investment program has yielded sizable amounts of
suppliers' credits. During the latter part of 1967,
suppliers' lines of credit totaling $70 million
were obtained from six countries as a result of
Krieger Vasena's money-raising trip to Europe. Since
then, major suppliers have been offering increasingly
favorable terms of credit in their attempts to gain
a foothold in the Argentine market. Together with
aid from various international organizations,
external financing totaling some $370 million has
been obtained by the Argentine government since
February 1967.
43. Direct foreign investment in Argentina also
has shown a marked upward trend. In 1967 the
Argentine government authorized 159 plans for direct
private investments totaling $72 million, compared
with authorizations of $32 million in 1966. This
upward trend appears to be continuing in 1968.
Prospects
44. Although progress has been achieved under
the economic reform program, continuing -- and, in
some areas, increased -- constraints on expenditures
for consumption will be necessary. Inflationary
pressures should continue to ease in 1968 because
of the price control program and the freeze on wages
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and utility rates. Most of the price increases
deriving from the devaluation have already worked
themselves out. The healthy state of foreign ex-
change res :.,zees together with the resurgence in
foreign capital inflow should provide sufficient
flexibility to permit imports to rise in response
to increased industrial requirements and any food
shortages that might arise from an onslaught of
bad weather. If the government holds the line on
the reforms already introduced, the increase in the
cost of living should be substantially reduced, and
the government may well reach its goal of only a
10-percent increase in 1968 and virtual stability in
1969.
45. Argentina should be able to avoid serious
balance-of-payments strains during the next few
years if present policies are maintained and if
world demand for its traditional exports remains
strong. Under these circ uustances, total Argentine
exports probably could grow an average of about 5
percent a.-znually. Chances of reaching such a rate
will be improved if some progress can finally be
made in exporting manufactured goods. Because
real wages in industry appear to be little higher
now than in the late 1940's and industrial labor
productivity presumably has increased somewhat,
the cost disadvantage of Argentine manufactures
presumably has become less pronounced than formerly.
Imports probably could grow at a somewhat more rapid
rate, inasmuch as Argentina now has a small surplus
on currert account, foreign exchange reserves are
relatively large, and the inflow of long-term capital
is likely to increase. Import capacity will be
further improved after 1969, when debt servicing
obligations are scheduled to drop sharply. These
servicing obligations have absorber an average of
30 percent of commodity export earnings in recent
years and probably will absorb about one-fourth of
earnings in 19 69 .
46. The heavy burden placed on resources by the
public investment program possibly will give the reform
program its first real test, forcing the government to
reconsider the desired balance between financial
stabilization and the aim of "getting the economy
moving again." Although part of the program will
be financed through foreign credits and perhaps
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CON F11.)1 N'i'I AL,
through domestic bond issues, final success from the
standpoint of financial stabilization depends upon
the government's ability to effect increased public
savings by boosting tax revenues and improving
operational efficien^y in the public sector. With
the ending of the emergency taxes and the likelihood
of further reductions in export taxes to protect
agricultural incentives, increases in revenues will
be more difficult to obtain. Further large cuts in
current expenditures also may be difficult to
realize, especially through the removal of superfluous
personnel. The government payroll in Argentina long
has served as a hedge against unemployment, and the
administration probably will continue to be hesitant
to undertake large-scale dismissals or major shifts
in personnel into more productive employment.
47. The response of business to the "voluntary"
price program, the success of government offerings
on the domestic capital market, renewed interest in
the stock exchange, and increased activity by foreign
investors all are signs of a greater degree of
business confidence. But, hopeful as these signs
are, the economy is still susceptible to crises of
confidence, and severe tests are likely to occur.
Private Argentina enterprises will be difficult to
reorient because of their long tradition of protected
inefficiency, and the transformation of state enter-
prises will be a long, costly, and politically
sensitive process. As the barrier to imports afforded
by the devaluation diminishes, producers and re-
tailers will be under increasing pressure to cut
costs and hold down prices. The sacrifices that
labor will have to make in terms of lower real wages
and possible greater unemployment to improve effic'_ency
may well cause the resurgence of organized unrest.
Business will become increasingly impatient as
profits are squeezed and bankruptcies become more
frequent. A basic test will come in the ability
of the government to maintain its policies in the
face of accusations that domestic industry is being
sold out to "foreign interests".
48. Perhaps the most difficult adjustment will
be that of reducing the dependence of the rest of
the economy on the proceeds from agricultural pro-
duction. If Argentina is to realize more rapid and
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(.ONI1 I1*;N'I'IA1,
stable rates of growth, it in essential that a
larger share of these proceeds be reinvested in
agriculture itself and that much larger savings
be generated in the nonagricultural sectors to
finance their own investments. Higher returns for
agricultural produceen will directly increase the
resources available to them for investment, but
assurances that these returns will continue over
time are necessary to encourage farmers to invest
in long-term improvements in agricultural technology
rather than in other sectors.
49 . Consistency 0 basic approach jig the most
important requirement for the long-term success of
the government's program of stabilization and economic
development. The inflationary psychology and
skepticism that have pervaded the Argentine economy
for so long cannot be erased quickly. All partici-
pants in the economic life of the country must be
convinced that the present economic policies will
continue into the future before they will make the
necessary changes in thei.r patterns of investment,
production, and consumption
50. There clearly are no quick, easy solutions
for Argentina's economic ills. If crops are good
and worid prices remain high for major Argentine
exports, the process o:: adjustment will be easier.
The cure will be painful and lengthy, nonetheless.
The greatest danger to the government's program is
that various groups will become increasingly dis-
enchanted and impatient because Ongania and Krieger
Vasena cannot perform a miracle. Their dissatisfaction
will test the government's resolve to cortinue pro-
grams that can bring ncccssary changes only over an
extended period. The government will have to continue
its economic policies for five years or more to
change the atmosphere created by years of "stop-go"
approaches to deep-seated economic problems. Given
its human and physical resources, there is little
material reason why Argentina cannot achieve the
growth and prosperity that have so long eluded it.
For the first time since World War II, the ability
and willingness of an Argentine government to under-
take suitable economic reforms offer some hope that
the Argentine economy can begin to realize its
potential.
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