18
Jul

By Diego Sánchez de la Cruz, IE Master in International Relations Alumnus

Arg GDP_InflationFrom 1975 to 1988, average inflation in Argentina had a yearly average of more than 200 per cent. The situation worsened in the following years: by 1990, inflation even surpassed the 20.000% mark. This led to the set-up of a currency board which began a monetary experiment based on a one-to-one exchange rate between the peso and the dollar.

Known as the “convertibility plan”, the mechanism lasted one decade. Over the next ten years, such regime did succeed in defeating inflation. Prices were no longer rising like they did before, and achieved near-zero levels by 1996.

The following graph shows annual rates of GDP growth and inflation for the 1970-2000 period.Arg Ingreso per Capita

By abandoning the years of recurrent inflation problems, Argentina enjoyed a much greater level of economic stability, leaving behind the times when every “boom” period was followed by times of diminished growth and monetary instability.

The following graph shows the steady growth of income per capita between 1990 and 1998, an increase of almost 40%:

This progress was by no means guaranteed, though. According to economists Pedro Schwartz, Juan Castañeda and Francisco Cabrillo, if the “convertibility plan” was to survive, three conditions had to be met: the local currency should be fully convertible, government spending should not be monetized and central bank reserves should be able to cover the monetary base as measured by M0.

Although the first and third points were more or less followed throughout the 90s, the central bank did end up printing money to bail out national and provincial government debts. Argentinian politicians should have been tied by a budget stability law when the “convertibility plan” first began. Failure to do so obviously ended up in a catastrophic scenario:  the public sector’s unfunded liabilities went from 2% in 1995 to more than 6% in 1998.

The second part of this article will be published next week.

Diego Sánchez de la Cruz is an analyst at Libertad Digital. His work on international economics has been published in different media outlets.

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