ARGENTINA'S ECONOMIC REFORM PROGRAM: PROGRESS AND VULNERABILITY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600030029-7
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 17
• Document Creation Date: December 22, 2016
• Document Release Date: October 14, 2011
• Sequence Number: 29
• Publication Date: March 1, 1970
• Content Type: IM

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/'r/ C. .r.. - r ? - v-
-Genf YJAUyYu
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Argentina's Economic Reform Program:
Progress And Vulnerability
f+_ut:JA..a:..l
ER IM 70-29
March 1970
Copy No.
I6
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WARNING
'I'bis document contains information allccling the national
defense of the Iltiitcd States, within the meaning of Title
18, sections 793 and 794, of the US Cock, as amcuded.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorizcxl person is prohibited by law.
c,u:ur r"~l
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CONFIDENTIAL
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
March 1970
Argentina's Economic Reform Program:
Progress And Vulnerability
Introduction
Widespread labor and student unrest in mid-1969
has brought into question the continued success of
the economic reform program that Argentina initiated
in early 1967. These disturbances led to wage in-
creases beyond the stabilization program's norms,
foreign exchange losses, and the forced resignation
of Krieger Vasera, the economics minister and archi-
tect of the reforms. Although Krieger's replacement
promised to follow his predecessor's policies, some
observers have predicted a return to the old pattern
of rapid inflation, sluggish economic growth, over-
emphasis on industrialization, and repeated currency
devaluations. This memorandum considers the accom-
plishments of the reform program, the threats to it,
and the outlook for the next several years.
Background
1. Argentina, once Latin America's most pros-
perous and economically advanced country by far, has
suffered slow and unbalanced economic growth, chronic
inflation, and balance-of-payments difficulties i11
most years since the mid-1930s. These problems were
made worse during General Juan Peron's administration
(1946-55). Peron shifted political power from the
landed aristocracy to the urban masses by undertaking
Note: This memorandum was produced solely by CIA.
It was prepared by the Office of Economic Research
and was coordinated with the Office of Current
Intelligence.
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a crash program of industrialization at the expense
of agriculture. Most succeeding governments failed
to improve the situation much. It was, for example,
largely because of the economic failures of the
Illia government during 1963-66 that a military
government headed by General Juan Carlos Ongania
assumed power in June 1966, During his first six
months, however, Ongania did little to slow infla-
tion or stimulate production.
2. In December 1966, Ongania initiated decisive
refcrm by appointing Adalbert Krieger Vasena, a
respected economist, as Minister of Economy and
Labor and giving him full discretionary powers. In
its first three months, Krieger's new economic team
drew up and launched a broad, complex program of
financial stabilization and economic development.
The program included a substantial currency deval-
uation, wage and price controls, sharp tariff cuts,
a reduced budget deficit, tax incentives for
private investment, and increased public invest-
mei;t - *
Reform Program's Successes Under Krieger Vasena
3. Few hoped-for results showed up in 1967.
The cost-of-living increase remained above 25%,
real output increased little, and export earnings
fell somewhat. Even so, the balance of payments
gained strength. The capital account improved by
$470 million, and gross foreign reserves nearly
tripled, reaching $767 million. The reforms did
stimulate direct investment by foreign businessmen,
but the added capital inflow apparently consisted
mostly of short-term credits and repatriation of
Argentine capital after the peso was devalued and
exchange restrictions lifted.
4. Economic progress in 1968, the reform's
first full year, was generally impressive. The
cost-of-living increase was only 10% because
demand and cost pressures eased and the government
pressured leading firms to "voluntarily" hold the
line on prices. Stable wages and some cuts in
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interest rates helped to hold down production
costs. Although better tax enforcement raised
government revenues less than expected, the budget
deficit was still well below the 1966 level. Sub-
stantial increases in manufacturing, mining, and
construction outweighed the slight decline in agri-
cultural production that resulted from poor weather
and helped to generate a 5% rise in real gross
domestic product (GDP), compared with 2% the pre-
vious year. A drastic reduction in the time lost
through strikes* helped producers respond to
increased demand, including inventory buildup.
The unemployment rate as of April, which rose from
6% in 1965 to 6/% in 1966-67, declined to 5/% in
1968. Although exports continued their 1967 decline,
capital inflow -- while not as great as in 1967 --
remained high. As a result, foreign reserves
reached $810 million -- their highest level since
the late 1940s.
5. Economic developments in early 1969 augured
well for the continued success of the reform pro-
gram. Businessmen, who had been very cautious in
1967 and most of 1968, were beginning to increase
their investment spending. Moreover, export
earnings -- the most disappointing aspect of per-
formance in 1968 -- were beginning to rise. At
the end of 1963 the government lifted the wage
freeze imposed in May 1967, as promised at that
time. Wages (including family allowances and other
casn benefits) were allowed to rise by 12%, but
this was only a little more than the cost-of-living
increase in 1968. Organized labor, while dissatis-
fied, was too cowed to protest.
Labor Disturbances in Mid-1969
6. The May 1969 disturbances surprised both
the government and its opponents. The disturbances,
although largely political in origin, soon moved to
the economic sphere. Motivated by the heavy-handed
reaction of the police to minor student complaints
at a provincial university, rioting soon became
serious in Rosario and Cordoba, the second and
third largest cities. Members of all classes,
The loss in Buenos Aires -- the only area for
which statistics are available -- dropped to 24,000
man-days, compared with 245,000 in 1967 and 1.9 mil-
lion in 1966.
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frustrated by the regime's benign authoritarianism,
took to the streets in support. of the students.
Organized labor was slow to take advantage of the
situation because of its divisions and recent defeat
in the La Plata oil refinery strike. By the month's
end, however, the unions mounted the first effective
general strike since Ongania took power.
7. Although rioting never seriously affected
the capital and was brought under control with
troops after about two weeks, strikes and other
labor unrest continued. In June a highly successful
37-hour general strike was held in Cordoba, fire
bombing destroyed 14 Buenos Aires supermarkets owned
in part by Rockefeller interests, and Augusto Vandor,
the nation's most important labor leader, was
assassinated by unidentified gunmen. July started
with a relat-.vely unsuccessful general strike
called by the "rebel" sector of the General
Confederation of Labor (CGT). A "Day of Protest"
in the form of a strike in Cordoba and demonstra-
tions elsewhere were held on 30 July by all segments
of the CGT. Other major strikes followed, culmi-
nating in mid-September in a nationwide rail strike
and further serious rioting in Rosario.
8. The Ongania government, accustomed to
imposed social peace, responded ineptly. Police
repression of the original student demonstrations
had alienated many Argentines, and the subsequent
use of troops further enraged them and threatened
to divide the military -- Ongania's power base.
The government's explanat,on of the disorders'
origins as a "Castroite conspiracy" was not believed
by even its staunchest supporters. Finally, Ongania's
ouster of unpopular cabinet members was seen as
weakness, while their replacement with men of similar
philosophy was considered proof that he had learned
nothing from events.
9. Krieger, whose wage policies and general
economic orientation had become anathema to labor,
was replaced in June by Jose Maria Dagnino Pastore,
a 35-year-old, Harvard-trained economist. Dagnino
promised to continue Krieger's policies, but his
will and ability to do so were openly questioned
by Argentine businessmen and international finan-
ciers. They doubted, for example, that he would
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receive as much support from Ongania for unpopular
economic moves as Krieger had. The new minister's
handling of the wage question strengthened these
doubts. After his June announcement that wages
would be frozen through December and that increases
in 1970 would have to reflect improved productivity,
he reversed himself in October and allowed a blanket
increase for privately employed workers of 3,000
pesos -- about 4% for the average employee. This
increase, which became effective in November, was
to be followed by a 7% increase in March 1970. In
December, government employees received wage
increases approximating the two approved for the
private sector.
The Economy's Progress in 1969
10. Despite unrest, 1969 was a generally good
year. Real GDP increased about 7%, continuing the
improvement experienced previously (see Figure 1).
Output was spurred by an. 18% jump in investment,
which rose from 20% to 22% of GNP. The unemployment
rate fell to about 4/%, one of the lowest levels
ever recorded in Argentina.
11. Real wages, after stagnating in 1966 and
falling in 1967 and 1968, turned up in 1969 (see
Figure 2). Increased wages and benefits allowed
at the beginning of the year approximated 12% for
the average worker. The cost of living rose only
6/% as a result of continued "voluntary" price
controls, tight credit, and a government deficit
that fell from 8% to 6% of expenditures. Whole-
sale prices, however, rose by 7/%, mainly because
of increased export demand for agricultural
products. Wholesale prices of agricultural com-
modities increased by 22% during January-September
1969, compared with 2% a year earlier. Although
a further shift in the internal terms of trade
in favor of agriculture was desirable, this large
price rise put heavy pressure on the cost of living
at the end of 1969.
12. Foreign trade boomed in 1969. Exports
increased about 18%, to $1.6 billion -- the highest
level in 30 years. The 26% gain in exports of
meat and hides far outweighed the disappointing
growth of grain exports following a poor wheat
crop. Imports grew even more rapidly than exports
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Figure 1
ARGENTINA: Percentage Change in Selected Economic Indicators
COST OF LIVING
40
REAL GROSS DOMESTIC PRODUCT
15
30
10
20 5
10 0
0 -5
1962 1963 1964 1965 1966 1967 1968 1969
GROSS FOREIGN RESERVES
780103-70
150
100
50
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INDEX OF REAL WAGES
(Including Family Allowances and Other Cash Benefits)
(INDEX 1960=100)
78011 3.70
because accelerated investment and manufacturing
activity required more foreign inputs. As a result,
the trade surplus fell from about $200 million to
$70 million. Although the long-term capital inflow
rose, the unrest and speculation about devaluation
provoked a $60 million outflow of short-term capital
in 1969, compared with a $130 million inflow in
1968. Argentina consequently experienced its first
balance-of-payments deficit under Ongania and suf-
fnred a $231 million (or 29%) loss in foreign
reserves during the year.
Record on Structural Changes
13. During the first three years of the reform,
the Ongania administration has had mixed success
in changing the economy's structure. Investment
increased from 19% of GNP in 1966 to 22% in 1969.*
* Although machinery, equipment, and construction
work still are relatively high-priced in Argentina,
the disparity with other prices apparently has been
reduced since 1966. If relative prices had not
changed, the investment rate would have risen more
than these figures indicate.
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Virtually all of the growth occurred in the public
sector, which accounted for about two-fifths of
the total in 1968, compared with one-third in
1966. Much of the rise consisted of badly needed
expansion and modernization of infrastructure,
especially of the transport and electric power
systems. The share of investment devoted to agri-
culture probably has not risen much yet. The
terms of trade for farmers declined slightly from
1966 to 1968 and rose substantially (and perhaps
only temporarily) in 1969 because of strong export
demand rather than of government policy. Further-
more, the government has made the operations of
the railroads and other state enterprises a little
more rational. it has corrected labor abuses,
reduced employment slightly, discontinued some
uneconomic services, and raised rates to more
reasonable levels. Treasury tra?.isfers to state
enterprises for current expenses consequently have
dropped by one-third.
14. Other structural reforms have progressed
only slowly. The government has provided tax
rebates and other incentives to stimulate exports
of manufactures, but agricultural commodities still
accounted for 94% of exports in 1969, compared with
98% in 1966. Decentralization of industry has been
very slow and did not prevent unemployment in the
Tucuman area -- depressed because of the long-term
decline in the sugar industry -- from rising from
9% in April 1966 to 13% in April 1969. Tax reforms
have been far less radical than promised. The one
exception -- the controversial land tax that was
intended to force underutilized land into more
intensive use -- is too recent to have had much
effect so far. The government apparently has some
goals for redistributing income to the lower classes
but has taken no action.
The Reform Program's Vulnerability
Policy Background
15. The main significance of the 1969 dis-
turbances is not that wage concessions were wrung
from the government but rather that doubt was cast
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on its durability, competence, and commitment to
reform. Although delay and moderation in relaxing
wage control is advantageous to the reform, a
softened policy probably can now be accommodated.
The danger is that impatience with Ongania's economic
program and authoritarian rule will overshadow
feasible, gradual improvements in popular welfare.
Further unrest and violence could bring policy
changes that would hamper further progress or even
cause setbacks.
16. Ongania's inept handling of the riots and
strikes has brought the government's popularity to
a new low. Rumored frictions within the military
establishment have made many Argentines wonder if
a change in government or economic policy is not
likely soon. Some people have interpreted the
leadership's vague references to the beginning of
the economic reform's "Social Phase" as presaging
a return to an easy-going wage policy and large-
scale deficit spending. Businessmen again have
become extremely cautious in initiating invest-
ments, and both friends and enemies of the govern-
ment speak increasingly of the "failure" of the
economic program.
17. Apart from the wage concessions forced on
it, the government has not materially changed the
goals and methods of the economic reform. Emphasis
shifted slightly in 1969, from "stability with
growth" to "growth with stability" -- a reasonable
and expectable change after two years of austerity.
Although officials favorable to free enterprise
may have further strengthened their position in
the government, they are becoming a little more
receptive to "developmentalist" ideas as the reform
proceeds. Economics minister Dagnino recently
stressed the priority of heavy industry, setting
the goals of self-sufficiency in steel by 1974
and rapid development of aluminum, copper, and
petrochemical production. On the other hand, he
said that these industries will not be overly pro-
tected, "hot-house" creations but must be competi-
tive internationally. To spur development, Dagnino
hopes to raise the investment rate by one more
percentage point (to 23%) in 1970 and to maintain
this rate in the future. He apparently believes
that a growth rate of 5/% to 6% must be achieved
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even at the cost of continued moderate inflation
and budget deficits, but there are no indications
that he would allow renewed hyperinflation.
The Inflation Question
18. Although rising prices remain a problem,
the battle against inflation has been successful
by South American standards. Brazil, Chile, and
Uruguay also have attacked rapid inflation, but
only Argentina has cut the annual rate below 10%.
At the same time, it has gradually restored an
adequate economic growth rate. Further progress
in reducing price increases is likely to be slow,
however.
19. The wage raises of October 1969 and March
1970, which total 11% for the average worker, will
put further pressure on prices even though only
part of the resulting rise in costs is supposed
to be passed on to purchasers, under government
guidelines. For a firm with labor costs equal to
half of sales revenues, for example, only about
three-fifths of the rise can be passed on. The
psychological impact of the latest wage increases
also is important. Had the government been able
to grant them voluntarily, without appearing to
give in to labor pressure, Argentines would be
less concerned about accelerated inflation.
20. The newly militant labor organizations may
not be content with the recent wage increases. As
justifications for new demands, union leaders
already are pointing to the rise of 10% to 18%
since the beginning of the year in the price of
beef -- a staple food even for the working class --
and increased prices in January for bread and some
transportation and public services. Although
additional wage hikes would stoke inflation, strikes
or labor disorders could also be detrimental.
Extensive work stoppages would not only reduce
production and increase costs but also dampen
investor confidence and provoke further capital
flight. Such disturbances also would discourage
purchases of government bonds and thus make non-
inflationary financing of the budget deficit more
difficult.
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1 CONFIDENTIAL
Threat of an Overvalued Currency
21. The 40% rise in prices since the last
devaluation in March 1967 and the prospect of
continued moderate increases suggest that the peso
may have to be devalued again during the next
several years. In the 1967 devaluation, which was
larger than necessary, the government established
export taxes of 16% to 25% on traditional agricul-
tural exports to eliminate windfall gains for
producers and to allow leeway for future de facto
devaluations by tax reduction. A part of this
leeway
has
now been used up; current export taxes
amount
wheat,
to
and
13% for chilled and frozen beef,
8% for corn and grain sorghum.
6%
If
for
world market prices for meat and coarse grains
had not increased in recent years, the government
probably would have had to eliminate export taxes
to keep exports attractive to farmers.
22. The government is probably correct in
judging that devaluation will not be necessary in
the near future. A weakening of world prices for
meat and coarse grains -- which does not seem
likely in the short run -- could be offset at
least partly by ending export taxes. Argentina's
foreign reserves and good credit rating and the
likelihood that the government would restrict
imports if exports sagged also favor the peso's
short-term stability. But in order to maintain
financial stability over the longer run, the
government will have to choose between (a) further
reducing the inflation rate; (b) devaluing at
infrequent intervals, at some cost in national
prestige, speculative capital flight, and tem-
porarily less competitive exports; or (c) insti-
tuting a "creeping peg" exchange rate, which
smooths out necessary adjustment but may lessen
fiscal responsibility. Although export success
depends heavily on factors beyond Argentine
control -- notably the weather in Argentina and
elsewhere and proter':ionist barriers in major
markets -- proper valuation of the peso will at
least allow the country to make the best of
circumstances.
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Outlook
23. Because many Argentines obviously dislike
the economic medicine they have been taking and
detest the officials dispensing it, the economy's
prospects during the next several years remain
highly uncertain. The fact remains, however, that
the reform effort was well conceived and has been
carried out effectively, aside from government's
vacillation and sacrifice of Krieger during last
year's labor agitation. More can be accomplished
if it is continued. And if it is not continued,
the gains of the past three years can easily be lost.
24. There is more doubt now than two years ago
that workers will be satisfied with the small gains
that the government can provide without undermining
the reform. The urban working class has chafed
over policies that c'.epressed their real income for
two years and has waited impatiently to share in
the widely hailed economic improvement. The initial
relaxation of wage control seemingly has only
encouraged labor to demand more. Perhaps even more
questionable is the idea that the Argentines will
willingly accepe an authoritarian government as the
price of economic modernization and development and,
eventually, much higher living standards for every-
one. The middle and upper classes, which probably
suffered less from reform than the lower classes
but are more politically conscious, are distressed
that the promised transition to more normal
political life has scarcely begun. Just how the
military caterpillar will be transformed into a
democratic butterfly is unclear, as is the impact
on economic policy if such a change occurs. The
longer the government can stay in power without
radically modifying the reform program and the more
its successor is united and reuponsive to broad
business and agricultural interests rather than to
nationalistic labor or military factions, the
greater is the chance that the reform will have a
lasting beneficial effect.
25. The economy probably will make good progress
in 1970 even if there is some retreat from reform.
Although Dagnino will probably bend wage policy
further to avoid serious work stoppages and might
accept stepped-up public spending and an increased
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I CC)NVI1)li,N'I'IAL
budget deficit if private investment lags, large
increases in wages and the deficit seem unlikely.
Recent public investments and unused capacity in
many private firms should permit continued rapid
industrial growth even though capacity may become
a bottleneck in others. Uxport demand is favorable
for several leading items (corn, sorghum, and meat),
although poor crop conditions and growing protec-
tionism abroad could hurt overall export expansion.
Foreign reserves are sufficient to cushion some
renewed capital flight or declino in foreign
investment, so that highly restrictive measures
would not be necessary immediately. All in all,
the country has a good chance of realizing the
economic minister's expectations of a 5h% to 6%
economic growth rate, a price rise no higher than
in 1969, and a $250 million trade surplus, compared
with $70 million last year.
Conclusions
26. In spite of riots, strikes, unscheduled
wage increases, capital flight, and a change of
economics ministers, Argentina's reform program
generally moved ahead in 1969. In most respects,
the performance of the economy surpassed that in
1967-68, the program's first two years. Real out-
put increased by about 7%, the cost-of-living rise
was held to 6~%, investment rose markedly, and
exports reached their highest level in 30 years.
Although the government granted moderate wage
increases at the beginning of the year after a
two-year decline in real wages, labor militancy
forced additional raises in October. Foreign
reserves dropped by about 30%, partly as an
indirect result of the year's unrest.
27. The economic reform has accomplished about
? as much as could be expected of it in three years.
Its continuation during the next several years is
by no means assured, however. The disturbances
that erupted in 1969 underscored the unpopularity
of both the government and the austerity program.
This opposition, which may surface repeatedly in
the future, could eventually lead to a scuttling
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? (X)NI Il')EN'I'IA1,
of economic reform. Although shaken by he unrest,
the government has made no major economic policy
changes no for. The wage increases forced on it
last October will not in themselves undermine the
reform and probably would have been forthcoming a
few months later anyway.
28. Economic performance in 1970 promises to
be favorable, unless widespread labor disturbances
occur. Export demand continues strong, foreign
reserves remain fairly large, the current harvest
apparently in favorable, and completion of some
public investment projects should compensate for
capacity problems that private industry anticipates.
Over the longer term, the economy's progress
depends mostly on the course of government policy.
If the reforms can be sustained, more can be
accomplished: if not, recent advances can be
largely lost. The population's gains from reform
will not necessarily be decisive in determining
how long the Ongania government and its economic
policies will survive, Economic improvements,
which normally cannot be large over a short period,
do not unerringly insure political stability, an
the recent Argentine disorders demonstrate. Unrest
is likely to continue under the Ongania government.
Whether the present government can retain power
without seriously weakening the reform program and
whether it or its successor will be willing and
able to institutionalize the reforms in a lasting
form remain open questions.
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