Argentina's Structural Reforms of the 1990s

• Author: Pedro Pou
• Position: Governor of the Central Bank of Argentina

Argentina experienced serious economic and financial difficulties in the 1980s. Hyperinflation in 1989-90 finally elicited the necessary political consensus for reform. Despite areas of concern, structural reforms implemented in the 1990s have set Argentina on the path to sustained growth.

The Argentine economy fared badly during the 1980s when the first debt crisis was in full swing. Growth of real output stagnated, financial markets collapsed, prices rose as the currency steadily depreciated, and capital fled the country in pursuit of safer havens. Most public enterprises were running large deficits, and the external debt kept mounting. The central government, hampered by low tax collections and desperate for revenues, turned to the central bank for finance through the taxation of deposits and money creation. Inflation, which had risen gradually over the previous three decades, soared-reaching average annual rates of 2,600 percent in 1989 and 1990. In the face of these developments, the banking system practically disappeared. Although it tried a number of times to bring inflation under control, the central government was unable either to balance its budget or to escape its reliance on inflationary financing. The hyperinflation of 1989 and 1990 finally provided the impetus for reform, which began with the Convertibility Plan of 1991.

Trade liberalization, tax reforms

The reforms of the 1990s also included financial system reforms, liberalization of trade and the capital account, and far-reaching public sector reforms.

The removal of most restrictions on trade and capital movements significantly opened the Argentine economy. The government eliminated export taxes and most quantitative restrictions on imports, reduced import duties, and established free entry and exit of portfolio and direct investment. Public sector reform, which substantially reduced the scope of the public sector, entailed privatizing almost all of the major public enterprises and had three main results. Public subsidies to the enterprises were reduced or eliminated; the enterprises' efficiency and provision of services improved dramatically; and funds became available to cover a substantial part of the government deficit while other reforms, including of the tax system, were under way.

Tax reforms increased consumption and income taxes and gradually eliminated many of the more distortionary taxes (such as the one on exports). New and stronger laws increased the government's ability to control tax evasion, while accelerated economic growth increased public revenues. The public pay-as-you-go pension system was replaced by a system combining public transfers and private capitalization. Although the private pension system was optional for current workers, the majority switched to it. The government also reduced most industrial subsidies and encouraged the entry of new, often international, firms into the local market. These measures resulted in a dramatic change in the composition and prices of goods available to the public. The cumulative effect of the reforms was to enable the country to return to voluntary financing of its external public debt, which had been rescheduled under the Brady Plan (named after the then U.S...