StuP 7i$g The Nature of Argentina's Policy Reforms during 1976-8 1 Wh'o i Noguns r~~~~~~~- _ l . -, i t,tj<,j.j4c ''. y4 tr~~'-i last only as long aa the financlal commiunity supplied the furds that were needed 'to finance the -- resulcing imba1ances. A second conclusion is that the long-rnn economic Interests'of those.- who held effective political control were not fadyored by liberalization policies. As a matter of fact, the economic interests of the rAl1itary were sheltered from the competitive forces faced by other parts ct the ,economy. Helpful conments have been received from Vittorio Corbo, Kutlay Ebiri, Jaime de Melo and Peter Wogait. I also appreciate comments from participants at the 25th Meeting of the International Studies Association (Atlanta, Georgia), March 27-31, 1984 where a preliminary version of this paper was presented. TABLE OF CONTENTS Page 1. Introduction ............................................... I 1I. Initial Conditions ......................................... 4 III. Devaluation Episode ........................................ 8 IV. The Changing Nature of Macroeconomic Controls .............. 10 1. Introduction ........................................... 10 2. The u-nanticipated period: 1976-1978 . .10 2.1 Wage policy .................. 10 2.2 Pr7ce controls .................. 13 2.3 Interest rate policies, capital inflows & exchange rate controls .14 3. The oreannounced period: 1979-1981 .16 V. A Quantitative Assessment oi Trade Liberalization .......... 20 1. Indicators of trade liberalization . . 20 2. Export barriers & effective exchange rates on exports .................................... 21 3. Tariff policy & price divergence in import-substitute industries ............................................ 24 VI. Some Political-Economy Considerations . . 33 I., Exchange rate views & policiei ......................... 35 2.. Poficy-segmentation, -administirative rules and - - inter-agency disputes ................................. 39. 3. Trade liberalization & the military industrial * _ - xr '........ .... .................... 43; , . '~~~~~~~~~~~:7P. " ,4 a- ;' '.1"T61'v")-'tf' ,,Rof 45,,,r7 - -' 4.,,le of Institutions'....................... 45, VII. Final Remark .................. .. ;47 Statistical Tables .................. .'. .. . 49-51 Bibliography .......... . ................ 58 r. Introduction The purpose of this paper is to present a critical overview of policy reformis implemented i;- Argentina during 1976-1981. Argentina's attempt with these reforms, which many have interpreted as liberal policies, failed. This failure has been taken as an argument by many people not only in Argentina, but also in other developing countries of why liberalization policies should not be attempted. Any given set of policies can fail for several reasons. A necessary condition for p:;icies to be successful is that they be internally consistent and credible. On the other hand, if policies depart radically from past trends, then it is very likely the case that old administrative arrangements for managing and implementing them will have to be adapted to the new conditions. Finally, policies can fal.l because the political arrangements to manage poverful pressure groups that stand,'to-iose are in some sense, inappropriate. e ,' I ' 4 ,_, , ,,t;,x , The thes"siof the paper is o-trguetha&'on esch of these' dimen" sions, Argentina s cconomic policies]had imporoaAt ihortcomings. -The paper, sions., Argentina 9'es nmcpoii spell!i out 'a nature of the major economic"refoims, And also-presents some- thoughts on the policy decision mechanism and the political economy that accompanied these reforms.- These thought3, Ir hope, will help to understand better why polisies were what they were., I also analyze in this paper the effects of these policies on cbsolute and relative prices, but I do not discuss the impact of Lhese changes oni quantities, i.e., on the real structure of the economy. 1/ Section II is a brief analysis of the initial economic conditions prevailing before th- shift in political power that took place in March of 1976. Section III presents some brief comments on the 1976-77 devaluation episode. Such a devaluation was necessary for restoring equilibrium in the balance of payments and eliminating many of the controls used during the period of severe payments imbalances. Despite the good start with exchange rate policies, very soon policymakers became conc,-rned with the pervasive inflationary trend of the e:onomy. The initial response to this problem was not different from the traditional one, i.e., the implementation of macro2economic controls for stabilization purposes. Section IV describes these controls and the effect they had on absolute and relative macro-prices. The point here is to irgue that the set of mac'ro-policies adopted during these years were inconsistent with the publicized government objectives of liberalizing the economy. I n 'a very uncertain ma-cr -environment, sbme policies-leading-to ;< 'lower'imp'oort barriers' lerreimpl'emented., Sec'tion V. analyzes the extent and-appropriateness:.of these- policies. -When viewed in isolation, these 'policies had, important) shortca-mingst. Maany poliA;ticians and economi'sts-haye, attributed the coscs associated with import pecnetration and the. huge 1980O trade deficit to these import liberali_zation6policies. A point of;this section is to emphasize that import penetration was the result,.f currency, 1/ Corbo, et al (1985) presents a su-vey of findings related to the liberaliza-ion episodes in the Southern Cone including effects on the real, economy. overvaluation as well as lower import barriers. I also emphasize here how trade policy instruments were used to achieve different government objectives. This in turn led to policy instability and increased uncertainty. Finally, section VI presents some preliminary thoughts on questions referring to administrative arrangements and some characteristics cf the underlying political-economy. In this section I make four points. First, the underlying exchange rate models of the period under study differed quite drastically irom the one which some authors have used to interpret the economic events during the previous Peronist government. 1/ Nevertheless, the natural tendency to use the exchange rate as an anti-inflAtion instrument did not disappear. In a sense, economists' models have not been able to sell to the Argentine body politic the importance of following "realistic" exchange rate policies. - Se.oind, the rarift and c change- rate rule which characterized -the last two years of the economic program put important constraints on policy- makers that were in different government offices and managing different instiumehet-.3. "'Tihi 'ed to:'st'rong inter-agency cotnflicts which were at th-e; government' level`the reffecition of socialVte'nsions that developed .from- inappropriate imacro-policies. Because of the dictatorial form by which.. economic policies-;w.ere-desigri4d and± iiiplermented, :these tensions could,not,'6be. addressed-apprbriiatfely, and -as a consequence'corrective sctions %-ere (stubbornly) delayed. The third point is simple but a very important one. The managers, of a liberalization attempt should ideally be free of the economic interests and 1/ See Canitrot (1979). 4-4 pressures aissociated with highly pr:.tected and inefficient industries. An important ,:rt of the manufacturing sector is the property of military industries. Here I show how, by resorting to quantitative restrictions (QRs), these industries managed to escape the pressures to adjust to increased import competition that was being imposed on many other industries. In che final point I stress the importance of institution-building that should acconmpany a liberal policy reform. II. Initial Conclitions During 1975, the Argentine economy was once again suffering the consequences of populist-protectionist policies. Expansionary government policies and a reduction in public revenues led ro a fiscal deficit ,hat was in the neighborhood of 15% of GNP. This implied an increase of 100% from the 1974 figure, and in spite of generalized price controls, the-annual inflation rate measured by the wholesale price index (WPI) reached a record high cf 192%. I/ 'By 1975, the wage-price"agreements-reached-by labor un.ions,and-, entrepreneurs in 197,3 and enforced by.governmental controls had.broken apar.. Di Tella, who was a prominent.member of the economic team in 1975, .Llso gives to inter-sectoral conflicts-~a-centFal role in explaining _ ~~~~~~~~~~~~~. , . l M;. ,,_ . intlation: "... The attempt by different-grbup`s- of wcrkers to maintain th2ai relative position ... were the principal cause 'pf inflation" and ".. Cpch 1/ For this yetar, the consumer price index (CPI) showed an inflation rate of 183%. Recorded wholesale inflation rates during the 70's ha"e been: 1971: 39%; 1972: 77%; 1973: 50%; 1974: 20%; 1975: 192%; 1976: 499%; 1977: 149x; 1978: 146%; 1979: 149%; 1980: 75%. industry tried to increase the prices of their products through higher import tariffs and lower tariffs on their imported inputs." (Di Tella, 1983, p. 269). To s great extent, the pub!;: sector deficit was a reflection of the incapacity of the leadership elite to manage oressures put forward by different groups. T'his inflationary trend plus errors in designing and managing exchange rate policies led to an increasing overvaluation of the domestic currency. rhe extent of this overvaiuation can be assessed from data presented in Table 1, whicn shows alternative exchange rate measures (cGlumn 1 through column 8), for the period 1'69-1981. By 1975, and in relation to 1969 (a year for which there is every reason to believe that the exchange rate was at an appropriate level 1/), the real exchange rat- (column 8) had declined 33X. 2/ T'he currency overvaluation increased excess demand for foreign. exchange. These press"rzc on foreign exchange markets were initially con- fronted with traditional methods of drawing down reserves, and also increasing 't-he degree of rest.ri-ctioons,on international' transactions. -In December 1974,--;, 1/- In controlled exchtangee rate economies, it :is impossible,to'know-how close,, the official rate-,-nt,e', ,rimp -^te 1/ The! effective exchange rare on any given product is defined as the,nomina,l,, exchange rate times one plus (minus) the ad-valorem tariff ,quivalent of all taxes levied un it before it is landed'(exported) into (from) the, country. 2/ J3i.ng only four categories of goods does not allow a close examination of the variance of incentives that typically characterize import-substitution economies. Nevertheless, some comments in this. respect will-be made. - 21 - In *ords: the EER provided to IS industries for their sales in the domestic market (EERi ) is higher than that provided for its export sales (EERnte), I/ which in turn is in general higher than the effective exchange rate applied on imports of :nterrnediate inputs and capital goods not domestically preauced (EERimp ). 21 Finally, this last rate is in turn higher than that r,.ceived by exporters of traditional goods (EERte) which in general are taxed. A necessary condition for there to be trade liberalization is to observe a reduction in the difference between EERi5 and EERtet as a consequence of both a reduction in EERi. and an increase of EERtES. On the euport side, it is also important to observe a reduction in the difference between EE.Rnte and EER te' 2. Export barriers and effective exchange rates on exports Several major changes of export trade policies were introduced. In the first place, in early 1976, the rates of export taration on traditional exports wr:re extremely high. Major grains were affected by export tax rates in the neighborhood of 50%. The corresponding rate for wool was 33Z, while - thsit of meat was'l2'1'V"3/ Duri'ng'l'ate1976 ane 1977, the rates>off export taxation were reduced, drasticalty exceptif-or'Qmeat. In pa'ticuliiV,the _rates applied,on major. grains, were reduced to 16i- ini977 and to'5-6I thereatter. Tax rates on,exports ma'de l/ In protectionist countries such as Argentina;! the height of export, incentives for non-traditional exports isjl,ower than the height of,import. protection for domestic sales. 2/ In many cases, these ii.ports enter duty free or pay a very low tariff. 3/ Export tax rates increased significantly as the fiscal ,deficit soared during the latest period of the Peronist government. - 22 - by exportable manufacturing industries were also reduced. For example, tax rates on exports of vegetable oils were reduced from values ranging from 48% in 1975 to 3% in 1977. Processed meats, hides, and wool were also affected by significant reductions in export taxes. Therefore, agriculture and exportable manufacturing industries received the full impact of real devaluation. The resulting increase in real effective exchange rates was particularly high for these sectors because of the elimination of the multiple exchange rate regime, and the reductions in rates of export taxa'Lon. Between 1975 and 1977 the real exchange rate (defined as the nominal exchange rate deflated by the WPI) increased 29Z (Table 1, column 7). In contrast, the price-level-deflated EER (PLD-EER) of the primary sector increased more than 60% except for meat, and that of manufactured exportables by 39% (Table 4). On the other hand, PLD-EERs of non-traditional exports increased during the same pcriod only 9%. Nevertheless, these estimates do not -1 ,..... - .. .. .. ..-,,- .i ............................... . . . . . . . . . . . ................................................................... ,- incorporate interest rate subsidies forthcomi'ng'ffrom credit lines,granted by,, the Central Batik for export financing. I have. estimated elsewhere (Nogues 1983) that for,4.the great majority of non-.traditional exports, "potential, interest rate subsidies per peso exported-wer'e iot higher than 20%.- Therefore, it'can be con.luded that fiscal and.financial export policies. initially implied a reduction in the bias between incentives.granted,to,! dif'ferent types of exports. Export policies were therefore initially moving in the right direction. After 1977, PLD-EERs for exports closely followed the path-of the retal exchange rate. Letting 1976, the devaluation year, take a value of 100, - 23 - by 1978 th,e PLD-EERs of meat and exportable manufacturing industries had dropped to 60 and 62 respectively (Table 4). Except for grains, where export taxes were! further lowered during this year, reductions of PLD-EERs were also considerable in other exportable industries. I know of no other experience that in such a short time-span has gore through such drastic changes in real incentives. 1/ The Argentine experience is in this regard quite unique. Removal of export barri.,: and real devaluation led to trade surpluses. While the country did en.gage in some external borrowing, this was more the result of market forces than of government efforts to rebuild foreign exchange reserves. While other countries reducing trade barriers initially had to borrow externally, Argentina could have done for some time without additional borrowing. By the end of 1977 policymakers had an important decision to make. In order to achieve a trade balance they could either appreciate the domestic currency, 2/ or alternatively, dismantle import barriers more rapidly. As said, policymakers chose the first alternative. The failure to initially liberal'ize -imports 'is central to the- explanation of the collapse,of the program at' &4;au'ir stage. --If 'i'mports;ha'd- ben liberalized faster, foreign exchange reserves would not have increased-as fast, and therefore, so the 1/ Krueger (1978) analyzes the behavior-of PLD-EER (Table 5.3) for ten.- different countries in twenty-two'different devaluation episodes. In,that sample there is not one single casetof'reduction in PLD-EERs within adjacent two years from the time of devaluation such as the extreme,ones, observed in Argentina. 2/ Some economists argue that the dismantling of export barriers and liberalization of the capital account implied a lower exchange rate than that observed in 1977. Sjaastad and Rodriguez (1979). - 24 - hypothesis goes, policymakers would have been less inclined to follow real appreciation policies. The further deterioration of the real exchange rate that followed preant.ouncement of this variable after 1979 was accompanied closely by similar reductions of PLD-EERs. Table 4 shows that by 1919 the PLD-EERs of all export categories were lower than the value observed in the crisis year of 1975i It might be concluded that the price effects of export liberalization and devaluation that took place during 1976 and 1977 had been eliminated by currency overvaluation as early as 1979. Unfortunately, effective exchange rates continued declining in 1980. 3. Tariff policy and price divergence in import-substitute industries If all goods in the economy were tradables it would be impossible to observe in the long run significant diversions of domestic from international prices adjusted by the exchange rate. If commodity arDitrage takes place through competitive markets, the duration of whatever discrepancy might appear would he a`'unih'cco'' of' the duratibn'of-thela,bitrage process., Table 3.shows' that during the period,when the exchange rate,was preannounced, the change in domestic prices did not equal the;,s*tm of,deva,lua-,- tio&plus- in'tern'ational inflation. 1/ E a -in_the last quarter ,of ,1980when -, the rate of devaluation and internationatlinflation were decreasing, domest,ic inflation was still increasing. The puzzle islstill more astonishing.when account is taken of the fact that import 'tariffs were declining, and also-that, 1/ 1'he economic program lasted until March 1981. Nevertheless, an unexpected 10% devaluation was made in February of t!at year, so in essence-the program ended in January 1981. - 2 5 - commodities included in the WPI are tradables in the traditional definition of not being protected by prohibitive transport cost barriers. Table 5 shows that price divergence was most pronnounced in importable goods. Broadly speaking, there are three hypotheses explaining why there was such a difference between actual price behavior and the one forecasted by the exchange rate rule. 1/ The first hypothesis of why prices behaved sluggishly points to the existence of lags and market imperfections that do not-disappear rapidly, even after an important reduction of import barriers has been implemented. The second hypothesis is based on the credibility that agents put on the economic program and the economic behavior that this credibility might have triggered. Finally, a third non-conflicting hypothesis is that import barriers were not reduced that much, and that, therefore, there never existed a generalized potential threat to domestic producers of competitive imports. I comment briefly on each of these hypotheses. The first hypothesis is built from different lines of reasoning. First, there are some ad hoc stories that stress the existence of lags in the arbitrage pr;. ss. There is first a lag until agents realize that ,profits can 'be made-by engaging in initernatibnal-"commodity -arbitrage activities. A second, lag is explained by the duration of the search process through which the would-be impovte'r, mu'st go. Recall that in 'a typical iimport substitution economy, a great -majority of goods, and particularly consumer, goods, have not 1/ To the extent that capital inflows and fiscal deficits increasead the. relative price of non-tradable, some oiscrepancy between the price behavior of domestic import-competing and imported goods wouled have been observed anyhow (see Corbo et. al. 1985). The discussion that follows analyses other reasons for the discrepancy between domestic and inter- national prices of importable goods. - vso - been introduced to the country for decades. It is therefore not obvious at the beginning of the liberaLization episode which goods to introduce and which foreign suppliers to approach. Closely related stories also haie some appeal for other types of goods. In particular, in an I-S economy, the bulk of imports are non- competing. These usually include intermediate imports and capital goods. These imports are generally made by the sane enterprises that use them in the productive process. For our purposes, this implies that initially the economy is characterized by the lack of importers-wholesalers who presumably would act promptly when opportunities for profit from importing appear. This hypothesis suggests that liberalization attempts cf I-S economies must face rigidities and imperfections of the price mechanism, which can be attributed to the nature of I-S policies and the structural economi' charqcteristics that result from such poliies, and which do not disappear rapidly when import liberalization occurs. A second hypothesis for explaining price divergence is related-to the degree of agents' confidence in policies. We have already presented evidence on the uncertainty that surrounded policymaking and,implementation., In I-S countries in general and Argentina in particular, the greatest-macro- --uincertainty hai historically originated from instability of;the real,excNhange: rate. It,is reasonable to hypothesize, that unless agents were,shortTsighted, from past history they would have forecasted a-high likelihood of_ being,again subjected to exchange rate variability. 1/ In this environment, agents would have second thoughts before investing heavily in international tradable activities. T'his being tthe case, chances are that the international price arbitrage process could be severely impaired when economic policies are not credible. I have pointed above to several characteristics of policy reforms which suggest that this lack of credibility might have characterized agents' expectations during these years. The above problems and explanations of dynamic price divergence are independent of the existence of water in the tariff. 2/ On the other hand, the generalized existence of tariff redundancy and the absence of competitive imports provides an additional explanation for the lack of convergence of domestic to international prices. In presence of water in the tariff, there is no reascn why changes in domestic prices should follow changes in tariff rates, or for that matter, chdnges in the exchange rate. This explanation is independent of market structures and credibility factors and therefore reinforces the above explanacions. 1/ As seen, the' real exchange rate declined all'along the period of preannouncement.- This continued the.trend thAt had already started in 1978, and therefore it is reasonable to hypothesize that agents were_- already in early 1979 forecasting an exchange rate crisis. See.Kaminsky (1983) for an econometric analysis showing that agents did not believe in the maintenance of the Central Ban- preannouncement of the exchlange rate. See also Dornbusch (1984). 2/ There is water in the tariff or tariff redundancy when the value of the legal tariff rate is higher than the value that makes competitive imports prohibitive. I will now describe critically tariff policy and comment on the magnitude of tariff rcdundancy. 1/ The record on dismantling import barriers shows that the first and unexpected move was mrade in November 1976, i.e., six months after the new government had taken power. Even though the new tariff structure was still highly escalated, 2/ the most significant change made in this oc:asion was in regard to maximu.n rates, which was reduced from values that were higher than 200% to a new maximum of 100%. 3/ These rates correspond generally to consumer goods. Nevertheless, the impact of these changes was not reflected in the structure of imports. The percentage participation of consumers goods in the import bill was still very low during 1977. 4/ Thi; was to some extent, as I will show, the consequence of the generalized e4istence of redundant protection, i.e., water in the tari'f. This observation, coupled with the relatively high value of the real exchange rate makes it very doubtful to assert that-t-his initial move had any significant iripact on competitive imports, and therefore on domestic producers of protected goods. In any case, this was the first but also the last ,unexpected moye.* Afte'r this the government moved extremelyt.cautiously. . :Up t.o,December: 1978 - more than 'two2-years after the first tariff - reform- severaL_.part,i.al_tariff changes took place. These reforms were- negoLiated 'directly rb:y,the Secr,tary of Cominerce'with representatives-of. differenlt industries. My own estimates,' and what I have been told of how- 1/ Also, the nexc section will show that import licenses were never totally dissmantled. 2/ Berlinski (1978) for some estimates. 3/ This initial tariff reform was not accompanied by any major move of lifting very protective quantitative restrictions. 4! The participatisn rate increaied from 2.1% in 1976 to 3.3% in 1977. these negotiations took place, show that the net result of all these partial tariff reforms was a reduction in the degree of redundant protection. The Secrctary of Commerce used these partial tariff reforms to put pressures on protected entrepreneurs to limit price increases, and tar;ff reductions were negotiated with this objective in mind. This was a sig.-.L showing that thc tariff was being used as a stabilization instrument. The result of these numerous partial tariff negotiations was not only a reduction in the margins of tariff redundancy, but also an increase in the variance of the legal tariff structure. As to the quantitative estimates backing my assertions, I have measuired elsewhere the average tariff redundancy. 1/ Table 6 reproduces some of my earlier findings. These estimates compare legal tariff structures with the percentage price differentials between domestically produced and foreign CIF prices. The price differentials were estimated for February of 1977. The legaL tariff structures correspond to October 1976 (before tariff reforms had started) and December 1977 (after the Secretary of Commerce had completed the bulk of partial tariff reforms). These estimates show that on average the rati'o of,legal tnriffs to price,di1ferent-ia'Is'declined from 2.5 to 1.4 betw,een, October, 1976 and.December 1?7-7. 2 1/ Nogu6s, 1 9 1,8). 2/ Legal tariffs and price differeni:al's `are' weighed by gross value of production. The reader might be puzzled. b'y the relatively low level, of protection that comes from the estimates,of price differentials., A.couple of comrnents are in order. First, th'e i:high' real exchange rate during 1977 reduced these differentials. Also, as argued, the severe wage controls in, effect at that time kept the domestic price level relatively'low. These, comments imply that in a less controlled environment, price differentials might have been higher and, therefore,'ou'r estimates of water in the tariff would have been lower. Also, the rank correlation coefficient between price differentials and legal tarifis observed in October 1976 was -6%. If, ir.stead, price differentials are compared with the structure of legal tariffs of December, 1977, the correlation coefficient takes a value of 56Z. 1/ Clear1y, therefore, the structure of legal tariffs moved more in line with the structure of relative prices observed in a set of industries producing goods that were at that time protected from international competition. Because the variability _f price differentials was initially higher than the variability of the tariff structure, the implementatiorn of partial tariff reforms implied an increase in the variability of legal tariffs. Therefore, the role attributed to tariff policies during the first two and a half years of military government were quite different from the role of resource allocation and import competition that economists usually attribute to them. In practice, it took nearly three years for the economic team to formulate and implement a relatively more consistent tariff policy. Such a policy was announced in December 1978. Several characteristics of the reform should be stressed. First, this was a gradual preannounced quarterly reduction of-legal tar'if'fs to be implemented.during five years, i.e.v-wel; after'the government :'iactuiIIy starting the refo'irmwas scheduled at tha't c7ime, to-end its term.- Also,;the 'rates of tariff ,reductions were-initially.low, and& accelerated in the la"st years. Table 7 sho,w's 'tihe structure of legal tariffs prevailing at the beginning of the program, and-the proportional reductions scheduled to go into effect up to 1981 and from here to 1984. It is clear 1/ Statistically significar.t with a 5% confidence level. that if the tariff reform was going to be implemented, the burden of the implementation costs was passed over to the next government. In the second place, the target and interim tariff structure had an escalation not very different from the historical one. Simulation analysis presented in FIEL (1980) shows that with the target tariff structure, the level of ERPs computed from legal tariff rates was high and variable. 1/ One important question to raise at this stage is why it took so long to design the tariff program just described. One simple answer is that policymulkers were concerned with the transition costs associated with the implementation of import liberalization policies. This might be part of the answer but is not compatible with policymaker's behavior in other areas. An alternative hypothesis and one that is more consistent with the nature of policymaking that has been described, is that tariff policy was essentially geared by anti-inflation objectives. In fact this role was legally built into tariff policy onfy four days after the preannounced tariff schedule was implementedl In fact, Resolution 6/79 of the Ministry on Economy gave power to the Secretary of Commerce to apply tariff reductions on products whose monthly rate of price increase' exceeded.the- preannounced rate of devaluation. Fol'lowing the guidelines of 'this',;res lution numerous tariff, reductions were implemented. This obviouslyj,exacerbated entrepreneurs, at a time'when, because of the overvaluati'on of'tRe peso, conmpetitive imports;vwere beginning to growvrapidly. Even though)import%,v.introduced as a consequence of the application of Resolution 6 v-re not of magnitude, the associated uncer- 1/ These estimates for 45 manufacturing sectors show a simple average ERP of 432:. tainties accompanying these tariff redjctions must have produced negative economic effects. The uncertainty came 3imply from the fact that after Resolution 6, the confidence of the entrepreneurs on the extent to which the preannounced tariff schedule was going to apply to their productive process had been severely reduced. The tariff was also thought as an instrument to foster investment and technological change. Here there are two pieces of evidence. First, in the preliminary remarks of Resolution 1634/78 that implemented the program of quarterly tarif'f reductions, it is said that "...as an ezception, and wiLh the objective of facilitating the acquisition of industrial equipment, capital goods imports not domestically produced will be allowed duty free during 1979." 1/ Second, tariff protection to domestic producers of capital goods was drastically chtinged four months after the policy of preannounced tariff reduc- tions had started. 2/ The new tariffs applied on these goods was equal to the one that had initially been scheduled to go into effect in January 1984. Given that the rest of the tariff program remained unchanged, and that as we shall see the basic metals industries continiued to be highly protected, this policy shift icmplied a drast'i'c and unexpected reduction of effectiyeprotec-- -tion to producers of these-goods. 3/ If anyone did believe in the polic7-of-preannounced tariff. 1/ Author's translation. 2/ Resolution 493/79. 3/ Simulation of the effect of these policies on ERP is presented in FIEL (1980). reductions when it: was first implemented, this lack of stability uf import policies, associated with the inappropriate roles assigned to the tariff in general, and in particular its anti-inflationary objectives, must have affected seriously the credibility of the whole program. The growing overvaluation of the domestic currency that was taking place must have reinforced agents' expectations that the whole economic prograrm was going to be running into incressing difficulties. The extent .o which tariff redundancy affected the behavior of domestic prices in late 1979 and 1980 cannot be accurately assessed from this data. Thie evidence suggests that in some cases this might have provided at least part of the explanation of price divergence in Argentina. 1/ Finally, it is of interest to note that the failure to dismantle some signiEicant QRs during the liberalization attempt also helps to explain the lack of convergence of docaestic price changes to international inflation plus devaluation. This will be discussed more carefully in the next section, where r take up some political-economy considerations. VI.i Some Political-Economy Considerations The earlier sections have attempted to tackle with one of the- traditional tasks of economists: i.e. to analyze the appropriateness of economic policies. But societies do not determine their policie-s by reference- ta the costs and-Ibenefits that have convinced many economists. Trade and exchange rate poLicies are the result of the _underlying political institutional characteristics of societies. 1/ See MHichinea (1983). In this section I stress some issues of the political-economy of trade and exchange rate policies. Point I calls attention to the fact' that traditionally in Argentina exchange rate policies have been shaped by income- distribution effects. This is in sharp con-rasE to the role that the exchange rate plays in monetary and neoclassical models. These models, it has been argued, are the ones that policymakers had in their minds during 1976-1981. The point here is to emphasize that des?ite the very different roles that the exchange rate plays in these abstract models, there has been a pervasive tendency of the policy decision-mechanism to use the exchang',- . as anti- inflation instrument. The lesron to extrect from this is clear an'd straightforward: until we are not sure that t-. political-economy understands the central role that the excnange rare and the tariff plays in the long-run resource allocation characteristics of the economy, there will be a real danger of implementing trade liberalization policies in an inflationary economy. Indend, the Argentine experience suggests thit for policymakers these instruments might be used sooner or later for stabilization purposes with costly consequences. - A second consideration refers to the fact that traditionally,-dif- ferent government- agencxtes manage -different .trade instruments. - But because of- the nature and relative importance of different controls, some goveriment agenc'ies - che -fol'ovews .-'adjust. the iitriument'sl they'control- to cope -wit:h, the effects of firianacial and exchange rate policie's implemented'by the leeXding agencies. This agency segment&tion was not changed during the period under - study and because of this, inter-agency disputes developed. This argum:La_ is- developed in point. 2. The role of the military and the economic interest they held as ovners of very inefficient and key industrial sectors producing intermediate goods mwles it quite unlikely that governments under their influence w.11 ..ctempt Across-the-board liberalizatioo poLicies. Point 3 argues that the made-tc-measure protection to the military-industrial complex during this period is clear evidence on this hypothesis. The final point stresses the importance tna, new institutions are expected to play when policy reform3 in effect give competitive forces a greater role in the resource allocation process. 1. Exchange rate views and policies Many acholars have concluded that irgentir.a is a sectoralized society. 1/ A Lalor charac.erization of this sectoralization would include s rural-jrban d;.chotomy. A summary view of the underlying political-economy concludes that because Argentina is a resource-rich country, it is reasoniable to redistribute income from the rural to the growing urban sector., Also, because land o-wnership is very concentrated,. such a redistribution is eq u i1 b le.- In this irt..r-sectoral struggle, some' powerful urban groups have shown.great1p6iiticsl ability to organz hemselves. These groups which could be classified as the winners fr r the distorted ecoAomy would include a handful of strong Rnd powerful labor unions on the one hand, and a few-mono- 1/ See among others, Brodershon (1963), Canitrot (1979), Di Tella (1983), an MalLon & Sourrouille (1973). Political scientists have analyzed some aspects of the dynamics of Arguntine sectoralization. See, for example, Wynia (1978). polistic manufacturing encerprises producing the bulk of protected manufacturing output on the other. The effectiveness of these urban groups has been such that, in fact, they have conme to power on many occasions. As a consequence, the government has many times identified the national interest with sectoral interests to an extent that must be quite unparalleled in other countries. 1/ Many economists have abstracted from this political economy when constructing their models. Among these, those including an analysis of the income distribution effects of exchznge rate policies are important for under- standing sor of the pressures that policymakers might face when designing their policies. The best-known and most influential theoretical construct of the eich_,ge rate-income distribution-output nexus has been worked out by Dlaz Alejandro (1965). In one of his influential works on the Argentine economy he concludes that "...by introducing explicitly income redistribution considera- tions into devaluation theory, it has been possible to view devaluation as just another weapon in the struggle of different sectors in the economy for larger shares in the national income." - - ~ This"''cnclusion &omes from th fac&-that the price of food Argentina's exportable - faced by urban workers is tied to the level of the exchange' rate. '.'MA-so, the demand for urban iridustrial products;' which' because of the very high protection they enjoy can be,tireated as non-tradables;,;is - positively reLated to the real wage. In this'contex. a devaluation by increasing the price of food reduces real wages, and because the price' elasticity of food demand is low, the devaluation also reduces aggregate 1! Di Tella (1983). demand for industrial products and, therefore, urban employment. It is usually assumed that the rural sector responds slowly to price incentives. In these circutmstances, it is also possible for a devaluation to trigger recession. It is reasonable to quarrel with each one of the assumptions that are necessary for this result to hold true, but such an exercise escapes the objective of this paper. On the other hand, these n,odels show the economic logic behind some characteristics of the Argentine political-economy that help to explain why a devaluation can be strongly resisted by policymakers. 1/ Ir fact, Diaz Alejandro's exchange rate model has been used to interpret economic policies and consequences of the 1973-1976 Peronist government. 2/ A major and persistent shortcoming of the Argentine policy decision mechanism is that few policymakers believe that in the long-run the exchange rate does not determine income distribution, and that in the short-run it is an inappropriatp instrument for this purpose and for stabilization objectives as well. Thus, the-natural tendency of the political economy has been to fix the exchangeirate and overvalue the&domest;dc, currency. This tendencyis.rein- forced by the strong inflationary bias of the economy and the temptation-which ari5es in suc-h"'circumstances to contrqol,bthe>tinfl iationary process by whatever policy instruments :are deemed appropri'ate ''including exchange rate pplic'ies; 1/ To be sure Diaz Alejandro policy recommendations were to "...divorce exchange rates and other relative prices as much as possible from the determination of income distribution..." (1965, p.192). 2/ See Canitrot (1979). During the years of the military government, exchange rate policies find their theoretical backgrounds in the "monetary approach to the balance of payments." In the recent literature, this point has been stressed by Machinea (1983), and FernAndez (1985). This approach is based on a highly aggregative model that focuses attention on the balance of payments adjustment process of an open economy under fixed exchange rate policies. The model does not distinguish between consumer groups nor between economic sectors and, therefore, income distribu- tion considerations are omitted from the analysis. Also, because these models assume a competitive neoclassical mechanism to be working, full employment is guaranteed, and thus output effects are usually excluded from the analysis. Because of these differences, monetary models stand in sharp contrast to Keynesian constructs such as the one developed by Dlaz Alejandro. Paradoxically, because of the fact that the inflationary trend of the economy had not vanished, one can also rationalize the adoption of a preannounced exchange rate policy as an anti-inflation instrument through an attempt to influence expectations. In fact, Rodriguez (1979) developed-a -tGbr'ei- 1' del'howin 4 o - stylized theoreticai model'showing how thead'justment'process associated vith preannounced exchange rate could work. LInft;conclusion, the Argentine'exp`eri'ence shows that its persistent- inflation' has tempted policymakers of different poiitical regimes-and'holding different economic views to use the exchange rate as a stabilizing instru- ment. But "realistic" exchange rate policies are key to a successfiil"tra'de 1/ Fernandez (1985) has asserted that this model "... can be considered a very close approximation of what the economic team might have had in mind at the time of announcing the devaluation schedule." liberalization attempt. Thus, unless the natural tendency of policymaking is modified, ancd/or the inflation rate is significantly reduced, the Argentine experience shows that a liberalization attempt in an inflatic.nary economy might fail not because of the inflation per se, but because of the natural tendency of the policy decision mechanism to misuse policy instruments for stabilization purposes. 2. Policy segmentation, administrative rules and inter-agency disputes The Central Bank is probably the most powerful governmental office in Argentina. Su!ch power comes from the crucial role it has historically played in implementing economic policies. Such economic policies have traditionally been based on the importance of the governmaent for determining the allocation of resources. In this context, the Central Bank has played a key role in controlling: a) the exchange rate; b) international payments; c) nominal interest rates; and d) credit allocation. Control brings power, and those exercised by the Central Bank are key to explaining historical economic developments of the Argentine economy. But^because these cbntrols are not-always suEficient to achievle balance of payments objectives, other governmental offices are pushed to adjust' tTheinstiuments th y'contro l Thih'eha'sbeen the case, for examfiple, with the Secretary of Commerce. h past when the country payment-s., problems worsened this government -off;ice increased trade barriers by: a) prohibi'ting specific imports, b) raising"tariffs, c) introducing import licenses, and quotas, etc. It is important to stress that this behavior is not constrained by rules. This can be most clearly appreciated from quoting the first article of the Argentine trade law-(20545): "... protection of workers and national output includes tariff and fiscal procedures whose aim is to strengthen the output of enterprises of nationals with the objectives of: finishing with the cultural, technological and economic dependence of the country; seeking autarky in the production of strategic and/or fundamental goods and services ..., and to assure a supply of goods that would guarantee an adequate standard of living to the Argentine nation." The statement shows quite clearly the nationalistic spirit that guides the application of trade policies. An important change of this policy segmentation among government offices occurred as a result of the policy reforms. This time policy behavior of the Secretary of Commerce was constrained by the new trade rules. Nca- tariff barriers were not allowed to be changed, and the path of the tariff structure had been preannounced. But because of the low real exchange rate and resulting surge of import penetration, the Secretary of Commerce received increasing protectionist requests. Initially, the reaction was for this Secretary to favor a real devaluation. The most important piece of evidence that this SecretariatfJpdrepared"for argui'ng in fivor ofrthis policy was purchisings.power: parity *,PPP') estimates' of the exchange6'ra'te. - A ;~' h-What could'have these6estimates shown? Table.8 shows one'amongtheW,'-vv sets of'PPP exchange rate series that can eventually be constructed-.; Heee I take,.1978 as the base period and compute"m6rnth,ly PPP estimates by-using domestic-and U.S. WPI. The estimates s.how that-starting in.January .1979 the domestic currency followed an appreciating trend, and in December 1980, the PPP exclhange rate was 81% higher than the official exchange rate.' Had we chosen ainother reasonable base period the discrepancy would have been higher, simply because in earlier years high export barriers and severe restrictions on capital flows were in effect, and the equilibrium exchange rate was higher than the 1978 rate. 1/ Clearly, the economic minister had to decide between a devaluation or a continuation of policies. His decision was to persist with the Central Bank policies. Inter--agency disputes continued, but became irrelevant after this decision had been made. Because devaluation was resisted, the Secretary of Conmnerce avoided the constrained behavior implicit in a program of preannounced tariff reductions and began granting "import relief" by raising official prices and imposing anti-dumping and countervailing duties. Also, a 15Z across-the-board countervailing tariff on imports from Brazil was imposed. Finally, increased export subsidies to different industries including beef were grantedl In this regard the trade liberalization attempt made even more inappropriate the trade lesson given by the traditional trade policy mechanism. The experiment taught that countervailing and anti-dumping duties could be usedi for granting protection. Several other changes implied important departures from traditional bureaucratic behav-ior and led to other' iner agency disputes. For example, traditionally, as the budget deficit grows, th'e Secretary of Finance raises export tatx rates. But this behaviraii-:hot permitted under the new rules of the gae8. Under these condiation-s the growing deficit which was taking place wa's viewed as a threat-to"th'e instability of preannounced exchange rate policies and more generaLly of the new economic program. As a I/ For example 1969. See Nogues (1985) for jjustification of this base. consequence, inter-agency disputes between the Central Bank and the Secretary of Finance developed. These are referred to in Arriaz6 (1983). I have already suggested that given the problems associated with the sluggishness of the commodity price arbitrage process, which in turn could be attributed to some extent to characteristics of import policies, the underlying model behind preannounced exchange rate policies could not work in practice. But even if these problems had not been present, the underlying model required a great deal of coordination among government agencies thst were managing different instruments. This was not the case in the period under study. It is important to emphasize a final point. There is unanimous agreemen: and abundant evidence that the military government was dictatorial and socially repressive. The dictatorial description also characterized the economic policy decision mechanism. Economic policies were designed by a handful of persons - not more than five - which held absolute power and who were not prepared to discuss and hear criticism to their policies either from inside or outside the government. Itiis reasonable to hypothesize that-;the economic disequilibrium into which the-economy was put during 1980 could not have occurred irn a-mor.* democratLc d'eisiin-making, process. In --surch] an"'environment, .I hypothesize,-, . , _ , . ;, , , t2.. the social te nsions that developed from'-''the inappropriateness of the exchenge rate and other distortion.sry policies w;ould have2been given a higher weight, and probably corrective actions would have bee'n taken sooner. 3. Trade liberalization and the military industrial complex In Argentina, the military own the bulk of output produced by the steel industry. Because of its economic importance and the strong interrelationship it has with other sectors, the efficiency with which this industry operates determines to a great extent the competitiveness of other sectors. Unfortunately, this industry in Argentina can be characterized as an inefficient protected monopoly. Th.e steel market is shared by two enterprises: SOMISA (Sociedad Mixta Siderorgica Ar,entina), and PROPULSORA. The first is owned by the military and is in practice administered by DIRECCION GENERAL DE FABRICACIONES MILITARES (DCFM). PROPULSORA is owned by an Italian group: TECHINT. During several years SOHISA was the sole producer of basic metal products of iron and steel and grew thanks to a myriad of both open and hidden subsidies. After ten years of negotiating with the military, PROPULSORA began in the early 70s producing coils and other steel products for the domestic market. Since then, legal barriers created by numerous decrees have served to eliminate potential competition from domestic output. *~~~ i,I it.,I, 'Around,the same time that PROPULSORA)started its operations, import licenses on the products produced by these enterprises became mandatory. -According to Decrees 4 and 37 of 1968andi 197 0j'timport licenses will he granted when domestic output "... does not-covrer domestic demand ... " These licenses are administered by DCFH. Therefore, the market is completely segmented, and no other enterprise has been able to produce at a significant scale the most important products elaborated by SOMISA and PROPULSORA. This market: can very well be defined as a "sanctuary of protection." In 1980, of the toCdl value of intermediate steel products imported, 52% entered the country with a license. Only one ten-digit Brussels Trade Nomenclature (WTN) position (coilsi accounted for 64% of licensed imports, and 3 BTN positions accounted for 90%. SOMISA and PROPULSORA actually imported 64% of these licensed imports. Not only are licensed imports highly concentrated, but their associated rents are apparently quite significant. For example, in 1977 domestic ex-factory prices of coils exceeded international CIF prices by 62%. In late 1980, the Argentine domestic price exceeded the international price by more than 200% (Table 9). The domestic enterprises were, therefore, collecting the bulk of the rents associated with the licenses they themselves were managing. Finally, according to the most recent ERP's estimates, the basic metal industry was receiving in 1977 above average rates of protection (Nogues 1978). For example, the basic industries of rion-ferrous metals (SIC 372) and iron and steel (SIC 371) had corresponding weighted average estimates of ERP's of 88% and 85% respectively. They ranked secona and third among fifteen three-digit SIC id4-s'Frites. 1/ 5 ' ' Suimming up,'a haridful of 'enterprises in the Argentine'basic metal in'dbustry-are completely'protected from domest-idccompetition by legal .barriers - arid' from foreign cdimpeti:ion by import licenses-. -Issues surrounding these enterprises are assessed by zhe military an'd have been out of the influence of economic ministers. In effect during the military government, the miLitary 1/ The non-ferrous basic metal industry is essentially aluminum, which is also protected with import licenses. reserved for themselves an economic instrument - licenses - to protect their industry. Recall, that during 1979 and 1980 protection to all other import substitute industries was granted exclusively thtough tariffs. For our purposes, it is also important to stress that in a liberaliza:ion process, the steel industry was going to be affected, even if it could escape the tariff rule that had been set for the other import- subtituting industries. This is because demand for its products come from other protected industries such as cars and capital goods that were in all likelihood going to be hurt by lower import barriers. 1/ Thus, in the long run, and in an across the board liberalization process, it appears that the military industrial complex had little chance of sur:iving unless its managers showed the capacity to adjust to import competition. The evidence suggests that they were not willing to confront this challenge. The econem.1c interests of the political power structure were not compatible with import l;.beraliza- t;on policies. 4. Role of Institutions The qcuote in point, 2 of this-' sectiohfnfrom the Argentine trade law shows"'quite c early that economic'self-'skifficien y has been a major ideoldgi'cal forcgof the Argentine economic decision mechanism. Policy reforms that seek- to increase the''role of competi'tive forces and international economic interdependence must include a-major attempt to change the nature of 1/ This might be one reason explaining why the car industry was excluded from the tariff program and, in fact, received above average protection during the military government. See FIEL (1980) for a description of import -policies protecting the car industry. Lhe economic decision mechanism, i.e., to create new institutions. 1/ At this stage I will suggest the importance of two characteristics that should accompany a major shift in trade policies. The first is obvious, and probably b_cause of this it is important. The new decision mechanism must have a clear understanding of the role played by different policy instruments, particularly in regard to their approoriateness for resource allocation, as well as income distribution and stabilization objectives. The paper has offered evidence showing that the economic cabinet of the military government did not show a clear understanding of the role played by the major policy instruments under their control. The second suggestion is to balance the power held by differ?nt groups participating in the policy decision mechanism. It is a balanced and more democratic mechanism - one where corsumers', exporters' and importers' interests have approximately similar weig!its - that is expected to result in a long lasting liberalization. The major risk of not attempting to introduce these changes is that when bad times reappear, policy reforms will be concluded and protectionist policies reintroduced. Attempting to construct a balancedjpolicy decision mechanism is a major challenge which has rot been taken upf'or.decades. Obviously it is not expec.ed for a repressive military dictatorship to do this anyhow. This, L 'ypothesize, explains that when internationa-l`payments problems reappeared during 1981-82, ic proved easy and politically costless to close the economy. This wns done by another military government. 1/ Hamilton defines institution as "...connotes a way of thought or action of some prevalence and permanence, which is embedded in the habits of a group or the customs of a people" (Hamilton, 1936, p. 84). VII. Final Remark This paper has analyzed the nature of economic controls that were imposed by Argentina's military government between 1976 and 1981. Behind these controls was an attempt to bring down the inflation rate. But che government was unable to balance the budget, and as a consequence, the fundamental cause of the inflation pcoblem remained present. Tle first characteristic of controls studied in this paper was their instability. Because of this, the absolute and relative prices of macro variables such as real wages, real interest rates and the real exchange rate fluctuated significautly. A second characteristir refers to the severity of the distortions which these controls created. For example, there does not appear to be in the post-World War [I history of Argentina, nor of other developing countries, fluctuations in real effective exchange rates as great as the one recorded for Argentina. T'he nature of these policy-induced distortions was such, that they could only be sustained with important capital inflows. Therefore, the severity of the controls-lasted as long--as the''international-financial community supplied the necessary financial resources. Unfort"unately, this pro'cess went too far, and by the time when policy reversals began to be implemented, Argentina's foreign debt h'd .ncre'ased to historical high'levels, 'i.e., a level that will be a major economic problem for years to come. T this environment, policie- resulting in reductions of import barriers were introduced. But given the severity of the macro-economy disequilibrium, these policies could not be sustained. In any case, I have stressed that these policies were also ts great extent driven by anti- inflation objectives. I have also argued that the long-run economic interest of those who held effective political control at that time were not compztiZIe with trade liberalization policies. The military industrial complex simply escaped the trade policy rules that were imposed on other tradeable sectors. Tahle 1: EXCHANGE RATES (pesos per dollar) AND F-AEIGN TRADS, AKMWINA, 1969-198; Year Export Inport PYP-FR 2! Black Mr*ct (3)%(2) (4)Z(2) ?_D-FK 2/ P?P-PUrER 3- Ei . £-orts thports Trade BALwnr- (1) (2) (3) (4) (5) (6) (7) (8) (9)(TYoo5°2f DolLA) =-.I . . - __ 1969 3.S0 3.50 3.50> 1.51 1,hO 1.00 3.50 3.50 1,612.1 1,576.1 J6.0 ;9CIO0 3.67 3.79 - 3.894 3.86 1.03 1.02 3.32 3.47 ',7;3.2 1,694.0 79.2 1971 4.58 4.S9 5.25 6.14 '.12 1.31 2.95 3.21 1,740.3 1,868.1 -!27.8 1472 7.95 8.21 8.82 11-.52 1.07 1.40 2.91 3.)7 1,941.1 1,904.7 36.4 1973 9.07 9.36 11.80 11.79 1.?o 1.26 2.21 2.6, 3,266.0 2,229.5 1,036.5 1974 9.10 8.89 11.90 16.25 1.34 1.83 1.75 2.56 3,930.7 3.634.9 295.8 1975 25.80 21.34 31.85 72.16 1.49 3.38 1.43 2.35 2,961.3 3,946.5 -985.2 1976 189.46 149.70 18i.9/ 257.79 1.22 1.7) 1.68 2.92 3,916.1 3,033.0 883.1 1977 402.35 410.01 42E.89 423.13 1.05 1.03 1.85 3.43 5,651.8 4,161.5 1,490.3 1978 792.38 805.37 8PM.29 808.?9 1.00 1.00 1.48 2.94 6,399.5 3,833.7 2,565.8 1979 1,3'6.52 1,361.89 1,794.40 !,?39.92 1.32 0.98 1.00 2.25 7,809.9 tb,7CP3.8 1,109.1 1980 1,333.01 1,855.23 2,756.27 1,849.33 1.49 !.00 0.78 2.03 R,028.0 10,540.6 -2,512.6 1981 4,348.62 - 5,294,3 6,090.96 - 0.7 - 9,150.0 9,170.0 -20.0 1/ The purchasing pnwr parity is constructed .ith wholesale priee irdexes and ttg u.s. as thc reference oLntry. 19/7 we use I as the base year. FY8l`ize 1978 as-the base year. 2/ ITport exchae rate deflated by the wholesale price index. Base 1969=1 3/ Import exchmiar,c rate ailtipLUed by the ratio of U.S. to Argentine wholesale prIcoL In4exs with 1969 as the h1ase year. F=raetbltci'- ftpr-r;lP.n- lr 4 ehit(eea qe) Table 2: ABSOLUTE AND RELATIVE REAL FACTOR PRICES, ARCEN1'INA 1969-1980 Real Annual Interezt ' v-change Rate Ratio of Factor Prices Year Real Wagea 1/ Rate Z 2/ elaise 169 = 100) (1) t (2) 3/ (1) t (3) (base 1969 (1) (2) (3) (4) (5) 1969 100 7.8 100 1.00 1.00 1973 101 -19,4 76 -- 1.33 1974 110 0.8 73 10.73 1.51 1975 107 -24.6 67 -- 1.60 1976 55 -16.5 ,3 -- 0.66 1977 59 3.1 98 1.48 0.60 1178 68 13.7 84 0.39 0.81 1979 84 -0.0 64 -- 1.31 1980 103 24.1 58 0.33 1.78 1/ For 1978, 1979 and 1980 real wages correspond to those observed in the last quarter of each year. 2/ Real ipterest rates,-are nominal lending rates'7defltA ed by the WPIr. 3/ Estimateds'by'equating't'he,1969 real-interest,'ratetto 100 and disregarding nyears,lwrth- negative'val-uei.`s. Source: Column (1): Machinea (1983) Table 2.9;',Co,lumhv,(2): Nogues (1983) Tab,le':8; ' Column (3): Table I-of the paper. Table 3: QUARTERLY ESTIMATES OF DOMESTIC INFLATION, INTERNATIC INFLATION AND DEVALUATION (X), ARCENTINA 1979-198X Quarter Accumulat Year I II III IV (1979 + 19 A. Argentine Inflation as Measured by the Wholesale Price Index 1979 28.3 28.2 29.8 7.2 1980 12.8 17.5 8.8 9.0 260.0 B. International Inflation as Measured by the U.S. Wholesale Price Index 1979 3.8 3.8 4.4 3.7 1980 6.1 1.9 1.7 2.8 31.8 C. International Inflation 1/ 1979 5.8 4.7 5.8 4.3 1980 2.9 2.8 3.9 1.1 35.8 D. Devaluation of the Peso-Dollar Exchange Rate 1979 15.2 13.8 11.8 9.9 1980 7.9 6.1 4.3 3.1 98.3 1/ This series was estimated by appilying imnternational prices to the weighting sche the Argentinean WPI. Essentially, tdeaprice dlta used are quotations-inrinte'rna markets ftor several primary export'ble c'mmodi ien and the U.S..WPI foir`mintuiact Source: Aut.hor's elaboration. Table 4: EFFECTIVE EXCHANCE RATES FOR DIFFERENT CATEGORIES OF EXPORTS, ARGENTINA 1975-1981 1/ Sector 1975 1976 1977 1978 1979 1980 198L I. Norninal Values A. Primary 1. Agriculture 2/ 14 101 340 734 1241 1749 4118 2. Bovine neat 17 176 322 652 1787 1880 4434 3. Raw Hides 13 138 327 656 1086 1425 4254 4. Raw Wool 13 134 318 722 1208 1014 4525 B. Exportables Manufactures 3/ l8 185 374 775 1317 1979 4679 C. Non--Traditional Manufactures 4/ 29 249 472 941 I09 2210 5751 II. Real Values 5/ A. Primary 1. Agriculture 519 620 846 734 498 400 449 2. Bovine meat 630 1080 801 652 516 430 484 3. Raw Hides 481 847 813 656 436 326 464 4. Raw Wool 481 822 791 722 485 415 494 B. Exportable Manufactures 667 1135 930 775 528 453 510 C. Non--traditional Manufactures 1074 1528 1174 941 645 505 627 1/ Except f'or 1981 the individual producE-e-stimates are weighted by FOB export 'values to obtain sectoral estima rs. .For 1981 these estimatesL'are - simple averages'ofi individual products.. -- 2/ Includes wheat, maize, ar,d sorghum. 3/ Includes several-types of vegetable oi'ls, corned bcef, vegetable-tanning;i processed hides,,washed wool and wheat flour.- 4/ Does not include financial subsidies. The underlying produict sample. includes *iire, mctors, general machinery', agricultural machinery, tractors, and synthetic rubber. 5/ Deflated by the WPI with 1978=1. ur (WPI) Source: Nogu.~s (1983) Table 18. (I - Et) (wi Table 5: RATIO OF DOMESTIC TO INTERNATIONAL PRICES, ARGENTINA 1976-1981 Base 1978 IV=1.O Year and Quarter Exportables Importables Ratio (1)Z(2) (1) (2) (3) 1976 I .59 .69 .85 1976 IV .7 .70 1.04 1977 IV .82 .84 .98 1978 IV 1.00 1.00 1.00 1979 IV .98 1.30 .75 1980 IV 1.13 1.58 .72 1981 I 1.07 1,61 .67 1981 IV 1.02 1.13 .91 Source Machinea (1983) Table 3.7a Table 6: LECAL TARIFFS AND REALIZED PROTECTION: ARGENTINA DURINC 1976 AND 1977 Realized Legal Tariff Rates (x) Protection Industry Code and Name October '76 December '77 Rates (I) 321 Textiles 107.7 57.4 41.1 322 Clothing 200.0 95.0 79.2 341 Paper and paper products 28.9 29.0 30.8 351 Industrial chemicals 75.6 35.2 36.6 352 Other chemicals 98.8 17.0 0.0 355 Rubber products 110.0 45.0 29.6 362 Glass 94.3 41.8 12.3 369 Other non-metallic mineral products 66.0 11.0 0.0 371 Basic ferrous metal products 88.8 48.2 60.7 372 Basic non-ferrous metal products 68.5 44.5 47.0 381 Metal products 132.9 45.9 10.0 382 Non-electrical machinery 98.3 65.5 19.7 383 Electrical machinery 89.1 61.3 55.7 384 Transport equipment 127.0 87.2 29.7 385 Scientific and other equipment 80.0 50.0 73.3 Weighted Average 93.7 52.7 37.1 Source: Table A-1in-Noguks- (1978). Table i: SCHEDULE OF TARIFF REDUCTIONS, 1979-1984 Type of Goods l/ Legal Tariff 2/ Proportional Reduction 3/ (x) Structure 1979 (x) 1979-1981 1981-1984 Food, Beverages 1 39 21 61 Tobacco 2 45 18 62 3 52 23 60 Consumer Goods 1 65 17 44 2 75 17 44 3 85 14 44 Intermediate 1 44 35 50 Products 2 46 17 45 3 48 20 40 Agri:ultural 1 21 19 41 Products of 2 25 16 43 Primary 'Origin 3 29 14 44 Other Primary 1 36 22 46 Inputs 2 39 21 45 3 42 19 41 Goods Not Produced in Argentina 10 0 0 Capital Goods 1 46 17 47 2 48 20 43 3' 50 16 6, 1/ There are-t'hree classes within each comno4dity classification. This has traditionally served the purposes of p ovi'di'ng more protection tb'gobds" with high"r value added. 2/ First quarter 1979. 3/ Underlying observations correspond to first quarter of each year. Source: Guia Practica del Exportador e Importador (1979). Table 8: MONTHLY lPP AND OFFICIAL EXCHANGE RATES, ARGENTINA 1979-81 1/ (pesos per dollar) 1979 1980 1981 Month Exchanlge Rate Exchange Rate Exchange Rate Official PPP Official PPP Official ppp January 1,055.50 1,254.51 1,663.50 2,436.18 2,031.ii0 3,714.63 February 1,104.50 1,333.67 1,7U%6.5o 2,510.98 2,2f,0.00 3,843.02 March 1,156.50 1,424.62 1,745.50 2,605.72 2,368.00 4,020.34 April 1,209.50 1,500.95 1,785.50 2,718.74 3,165.00 4,378.17 May 1,263.50 1,603.U4 1,821.50 2,848.43 3,279.00 4,688.74 June 1,316.50 1,747.25 1,854.50 3,004.57 4,425.00 5,287.92 July 1,369.50 1,852.59 1,884.50 3,093.10 4,887.00 5,844.16 August 1,421.50 2,077.05 1,910.50 3,162.92 5,327.00 6,316.33 September 1,472.50 2,175.67 1,9i3.50 3,264.78 5,807.00 6,737.26 October 1,522.50 2,209.37 1,952.50 3,447.25 6,247.00 7,129.06 November 1,571.50 2,285.85 1,972.50 3,551.67 6,774.00 7,764.31 December 1,618.50 2,343.17 1,992.50 3,610.99 7,016.90 8,492.05 1/ PFF corresponcs to an average of estimates-pdr,chaaing power parity exchanget,rates constructed with WPI and CPI indices ofˇiArgentina and U.S. 1978 is the base,period. Source: Noguts (1983) Table 7. Table 9: DOMESTIC AND INTERNATIONAL PRICES OF INTERMEDIATE STEEL PRODUCTS (current U.S. dollars per ton), 1976-1981 Coils 14minsted in hot Coils laminated in cold Year Domestic International (1)t(2) Domestic International (4)t(5) (1) (2) (3) (4) (5) (6) 1976 1/ 441 223 1.98 445 290 1.53 1977 481 198 2.43 516 252 2.05 1978 505 282 1.79 493 313 1.58 1979 626 347 1.80 628 373 1.68 1980 906 333 2.72 828 383 2.16 1981 2/ 859 318 2.70 862 366 2.36 1/ Monthly aLverages between September to December. 2/ Monthly averages between January and June. Source: Estimuated from monthly data presented in Secretaria de Comercio (1982) Table 12. International prices correspond to export prices of the European Community. Domestic prices correspond to ex-factor- orice of the domestic monopolist. BIBLIOCRAPHY ArriAzu, R. "Panel Discussion on Southern Cone", IMF Staff Papers, 1983. Berlinski, J. 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