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Economic Policy

Economic Stability
Economic Liberalization
Economic Results

Economic Stability

When José Alfredo Martínez de Hoz took office as Minister of Economy, inflation –which had existed in Argentina for many decades and which tends to generate vicious spending habits and a spiraling cycle- was very high; 50% per month in March 1976 (i.e. 16,000 p.a. when annualized) and 920 p.a (when calculating the preceding 12 months) Additionally, a closed economy, with no competition, hinders stability because there are no efficient restraints to prices increases.

On the other hand, since he took office in April 1976, Argentina recorded trade surpluses due to increased exports. Those surpluses had two main effects: on the one hand, they were beneficial for Argentina, but on the other hand, they delayed efforts to curb inflation because the inflow of foreign currency was converted into pesos thus expanding the monetary base, particularly, since the market was not yet sufficiently opened up to imports so as to balance this situation.

Contrary to common belief, the –much criticized- import tariff reduction was excessively slow. Simultaneously, an explosive growth of exports -particularly agricultural products- resulted in the inflow of large amounts of foreign currency, in excess of the amounts that the market could absorb.

Therefore, the program’s own positive features actually became a hurdle to curb inflation. During the first stage of his office, inflation dropped to 150% p.a. and remained at such level.

There were two possible solutions: an absolute restriction of monetary expansion, which could trigger recession, or a measure that was deemed a novelty at that time, which consisted in a fixed exchange with a scheduled crawling peg to the dollar. Thus, the burden of the effort would fall on the exporters, who were going through a time of prosperity and could shoulder a medium sacrifice for the benefit of economy as a whole, and ultimately for the sector itself. However, such program had to accomplish its objectives within a short period since, otherwise the pressure of the sectors called to make the largest contribution could increase and became unsustainable.

This program, later known as “la tablita”, also responded to demands from the industrial sectors, who requested more certainty in the evaluation of economic variables, so as to be able to reasonably plan their activities. Thus, the referred “tablita” intended to be, above all, an instrument against inflation. It was a program devised by the Argentine Central Bank (BCRA) towards the end of 1978, consisting in pre-announced foreign exchange and tariff guidelines, starting from January 1, 1979. Such guidelines led to a gradual reduction of the foreign exchange adjustment rhythm (i.e. the rate of devaluation of the Argentine peso).

The purpose of the program was mainly to attain a better balance in international trade accounts, which would favor the reduction of inflation, as earlier described. The program also sought to promote the modernization and re-equipment of the Argentine production capacity, in order to allow the industry to enjoy a competitive structure. The program was, thus, pro-industry and not anti-industry.

However, there was an event that significantly jeopardized the success of the program: the fall of the Shah of Iran in March 1979, and the outbreak of the revolution of Ayatollah Khomeini; this triggered an oil shock causing oil prices to treble. Such significant sudden rise of oil prices caused a general increase of international prices, an event that also affected Argentina. The crawling peg (“tablita cambiaria”) was thus neutralized by such unforeseeable and uncontrollable event.

As a result, the sectors mostly affected by the program demanded a correction of what was known as “a gap or delay in the exchange rate” -meaning the actual appreciation of the Argentine currency against the dollar- that is to say, they began to insistently ask for a devaluation. However, the economic team decided not to validate increases in the price index with the exchange rate. On the contrary, the idea was for production units to make serious cost reduction efforts through market competition.

This decision was adopted, inter alia, because the foreign exchange rate is the result of several causes that impact on its level, prices being only one of them. A devaluation that would have accompanied price increases would have only stimulated the recycling of inflation due to cost increases.

But, also, Minister Martinez de Hoz believed that the State should set the example by reducing costs, curbing down bureaucratic inefficiency and lowering the tax and tariff burden. In his message to the country on July 10, 1980, the Minister announced the elimination of 23 taxes, most of them levying production. On the other hand, VAT –which due to its nature did not tax exports- was generalized.

As to public utility rates, public utility companies –which at that time were state-owned- reduced the monthly adjustments imposed on electricity and gas supplied to industrial consumers.

Most of existing “extra” tariffs –which had a large impact on both exports and imports- were eliminated. Additionally, import tariffs on non-domestically produced raw materials, capital goods, medical surgical and scientific research were reduced to 0%.

The economic team encouraged companies to discuss their prices with their respective suppliers, instead of accepting them and automatically passing them on to the next stage.

As from September 1979, with the stabilization of international prices, the positive results of a more competitive market began to be perceived in terms of monetary stability.

Thereafter, retail and wholesale price indexes gradually began to drop month after month.

In the last quarter of 1980 –discounting the VAT impact which began to be levied on a general basis- wholesale price increased by 26% per annum and the average increase of the consumer and wholesale declined to 38.8%. During that same period, the foreign exchange rate adjustment plus 1.5% for international inflation, represented 37% on an annual basis.

Thus, a convergence was obtained, between the adjustment of the foreign exchange rate and price increases, without sharp sudden changes or artificial remedies.

The crawling peg (tablita) was terminated on December 31, 1980. Thereafter, its prolongation became unnecessary and another foreign exchange policy could be adopted.

In fact, the Argentine Central Bank allowed for a administered floating currency or “dirty floatation” (“flotación sucia”), within minimum and maximum bands. The foreign exchange rate floated within bands, without reaching any of its limits; thus no Central Bank intervention became necessary.

This evidenced that, if a change of government had not occurred, with General Viola taking office and changing the whole economic team, the foreign exchange system could have been finally normalized, without resorting to large devaluations, as the one decided by the new administration on March 29, 1981.

Economic Liberalization

The spirit underlying all of the reforms implemented during José Alfredo Martínez de Hoz’s term in office was the liberalization of the economy.

Precisely, economic freedom –a tenet that is from time to time criticized in Argentina depending on the ideas and trends of the time- was what enabled the achievement of the best results, contrary to what was said by the subsequent criticism of several interested political sectors. Actually, if economic freedom was bad per se it would have been impossible for many countries to progress and become developed countries thanks to the adoption of such policy.

The program of Minister Martinez de Hoz was, in sum, based on twelve fundamental pillars:

  1. Freedom of prices, which followed the elimination of all price controls and government sponsored price agreement systems. The implementation of free prices resulted in the elimination of the black market and shortages, which had characterized prior periods and had led to strong public unrest.
  2. Free foreign exchange market, as a consequence of the repeal of the exchange control system; this resulted in the elimination of the foreign exchange black or non-official market, giving rise to a single foreign currency market, with the free inflow and outflow of capital.
  3. Free trade that abolished the state export monopoly of significant products such as grains and meat.
  4. Free exports abolishing existing prohibitions and quotas, as well as export taxes.
  5. Free imports, involving the elimination of existing prohibitions, quotas and licenses. Simultaneously, a gradual import tariff reduction program began to be implemented.
  6. Free interest rates and reform of the financial system, by opening up the market to competition and eliminating with excessive state intervention.
  7. Freedom of leases, both for urban housing and rural lands, a policy that cured injustices and resulted in a larger offer of real estate and land for lease, as well as in a reactivation of the construction industry and market, which –as widely known- is a job source multiplier.
  8. Elimination of artificially low utility rates fixed for political purposes, as well as fuel subsidized prices, for the purpose of transparency of the economy.
  9. Elimination of subsidies and overprotection granted to certain privileged sectors of the economy and which were paid by taxpayers.
  10. Freedom for agreeing on wages, above a minimum level fixed by the Government, in a context of gradual elimination of mass wage rises. The intention was that wage rises were to be made in the context of increased production and productivity. This policy led to full employment and large mobility of workers, something that did not occur again in subsequent administrations.
  11. Freedom for foreign investments, under fair and equitable rules, both for the investor and for domestic interests.
  12. Free transfer of technology, under regulations intended to promote technology instead of obstructing it.

All the above measures achieved extraordinary results that were spoilt in subsequent periods when Martínez de Hoz´s policies were abandoned, thus creating the wrong impression that the program had provoked more damage than benefits, when it was precisely otherwise.

Details of the results herein below


Economic Results

The economic liberalization measures adopted by Minister José Alfredo Martínez de Hoz produced -within longer or shorter periods- a series of extraordinary results in favor of the people; however, such measures were later discontinued as results of the abrupt termination of the program. Such discontinuation, coupled with an ensuing negative propaganda, generated in many the belief –which continues up to these days- that the program had failed, when it was actually the contrary what was happening, and the public at large enjoyed benefits at that time which had been previously unknown. Some of such results were:

  • GROSS DOMESTIC PRODUCT: The highest annual absolute levels, in constant currency, were recorded in gross domestic product, between 1979 and 1980 and in gross industrial product in 1979; such figures compared with the period 1970-1991, inclusive. This patently contradicts propaganda that speaks of de-industrialization of Argentina.

  • FIXED GROSS INVESTMENT: In 1980, fixed gross investment stood in excess of 25% of gross domestic product, in constant pesos , a rate that was never surpassed and represents the highest in Argentina’s modern times. Such rate is still high when compared with international parameters. As from 1981, when Martínez de Hoz was no longer in public office, this index started to decline rapidly.

  • PRODUCTIVE INVESTMENT: Between 1976 and 1980, investment in durable production equipment increased significantly, amounting to 38% in the public sector and 20% in the private sector. The purchase of such equipment is a clear evidence of industrial development and growth. Again, this indicator represented levels that were not later surpassed and contradicts the criticism that speaks of de-industrialization.

  • INVESTMENT IN BUILDING: Between 1976 and 1980, Minister Martínez de Hoz’s term in office, investments in building increased significantly: 59% in public building and 30% in private building, as compared to the prior five-year period, once again, reaching record levels.

  • REAL WAGES: In 1980, and again against all that is said, real wages reached their 15 year period peak, in a context, since September 1, 1979, of absolute freedom between the parties to agree upon wages. If instead of measuring real wages per category, we consider the average, the result is even higher, because the proportion of technical and qualified personnel grew above the aggregate employed and their salaries increased in excess of the average.

  • FULL EMPLOYMENT: The unemployment rate reached its lowest level, according to INDEC (the Statistics and Census National Institute) -which at that time had not been tampered and was administered by the same technicians and methods- from 1974. Unemployment, during 1979-1980, again, as opposed to the negative propaganda on the matter, was lower than 2.2%. The same happened with underemployment. Moreover, at that time there was an acute scarcity of personnel, thus driving wages up and fostering education.

  • AGRICULTURAL AND AGRIBUSINESS EXPORTS: In the agricultural sector, grain exports (cereals, oilseeds, and fodder) also reached record levels. With the operation of a single foreign exchange market, the reaction was immediate. Production increased, in comparison with the preceding five-year period, from 23 million to 30 million tons; and exports from 9 million to 17 million. Such extraordinary increase was not only due to the repeal of export taxes but also to a significant technological-farming research by INTA and CREA groups. Such research could not bear all of its fruits because a good cost-price relation incentive was lacking, that was obtained thanks to the measures adopted during that period. As to oilseed grains, after the repeal of the ban on exports in 1976, sunflower and soy sky-rocketed their production. The oil industry, faced with competition, invested in new equipment and modernized, and almost trebled its production capacity. Thus, the market share of seed oil products and by-products in the aggregate Argentine exports, grew from less than 6% in 1975, to 25% during Martínez de Hoz's term in office.

  • PORTS: With the storage and cargo means existing until the beginning of Martínez de Hoz’s period, port bottlenecks were frequent; since they could not absorb more than a million tons per month. As a result of the enhancement and efficient coordination of such means, export capacity increased to 3 million tons per month through Argentine ports.

  • MEAT EXPORTS: Meat, by-products and livestock exports ,increased by 40% during the 1976-1980 five year period, compared with the preceding five year period, in spite of a reduction in cattle stock resulting from the international market conditions and the competition for land between grains and livestock.

  • PRODUCTIVE LAND: More than one million hectares were incorporated to the productive agricultural and livestock land, land that in the past remained unexploited.

  • EXPORTS IN GENERAL: Total annual exports grew by 200% between 1976 and 1981, again this being a record level in Argentine modern history. During Martinez de Hoz’s term in office Argentina ranked third worldwide in terms of growth of exports. This rebuts the criticism that characterizes his term in office as having exclusively favored imports.

  • INDUSTRIAL EXPORTS: It could be still hypothetically argued that only primary goods exports increased. However, figures show otherwise: the exports of industrial manufactures doubled, at constant values, when comparing the 1976-1980 with the preceding five year period.

  • CAPITAL GOODS IMPORTS: Also in 1980, Argentina recorded a record level in the import of capital goods, which foster industrial development. The figures of such imports also doubled at constant currency, reaching US$2,300 million. This was eased by the reduction of tariffs to “zero”.

  • INTERNATIONAL GLOBAL EXCHANGE: The international global exchange (exports and imports) grew to an annual average of 26% of GDP between 1977 and 1981, as compared to 16.5% during 1971–1975.

  • INDUSTRIAL PRODUCTIVITY: Industrial productivity doubled between the first quarter of 1976 and the first quarter of 1981. This figure was evidenced in a report prepared by FIEL that calculated productivity dividing the industrial aggregate production value in constant currency by the aggregate number of industrial workers, multiplied by the average number of hours worked by each of them.

  • INDUSTRIAL INVESTMENT: Precisely, a survey conducted by the Argentine Industrial Union in August 1983, through FIEL, revealed that industrial investment, during the 1976-1980 period was 19% higher than in 1970-1975. Also, the industrial production capacity increased by 20%, compared with the capacity existing in early 1976.

  • INDUSTRIAL PROMOTION: Between 1976 and 1980, 370 industrial promotion projects were approved throughout the provinces of Argentina, involving investments in excess of US$3,000 million, generating employment for 30,000 people. This is a large figure, particularly when compared with the US$2,000 million of industrial promotion projects during the preceding 17 years (1959-1975).

  • ACQUISITION OF INDUSTRIAL TECHNOLOGY: Due to the new policies implemented on transfer of industrial technology, the approval of contracts for the transfer of technology increased from 116 in 1976, for an aggregate amount of US$32 million, to 500 contracts in 1980, for an amount of US$580 million.

  • CRUDE OIL: During Martínez de Hoz’s term in office, production was significantly fostered, and particularly, oil exploration. Production had declined to 23 million m3 in 1975, but grew by 24% between 1976 and 1980, exceeding the volume of 28 million m3. As a result of such growth, 90% of domestic demand was satisfied. This was attained by replacing the monopoly of the state owned company YPF for a regime ensuring greater freedom and participation of several domestic and foreign companies that acted as contractors in different manners. The enactment of the Law of Risk Oil Exploration resulted in record levels in seismic exploration and recorded seismic positions, both in land and offshore. In 1980, the number of drilled wells reached a peak since 1962.

  • NATURAL GAS: Proven natural gas reserves tripled during Martínez de Hoz’s term in office, from 200 million m3 to 625 million m3. Due to such growth, Argentina became a prospective natural gas exporter. Additionally, the natural gas pipeline network was completed, placing Argentina as a self-sufficient natural gas producer, with capacity to export to Brazil, Uruguay and Chile.

  • ELECTRICITY: The efforts and investments carried out during Martínez de Hoz’s term in office, resulted in the incorporation of nearly 2,800 kw, of which 2,090 were hydro. Hydro’s share in electricity generation increased from 21% in 1975, to 42% in 1980. Large investments were also made in nuclear energy foreseeing a significant growth in the share percentage of such source in total generation.

  • DIRECT FOREIGN INVESTMENTS: Direct foreign investments, i.e., risk capital, grew substantially; once again, contrary to the criticism that states that all investment entering Argentina at that time was merely volatile or speculative. Between 1977 and 1979, the volume of risk foreign capital investments doubled and later trebled in 1979 and 1980. In 1980, capital inflows reached their highest levels in constant currency, in comparison with the whole post-war period. Between April 1976 and March 1981, foreign investments were approved for an aggregate amount of US$3,000 million (in the case of US dollars, as nearly any other currency, progressive devaluation must be taken into account, thus the referred figure represented a much higher amount at that time).

  • REAL PUBLIC INVESTMENT: Finally, and contrary to the criticism stating that Government participation was scarce at that time, real public investment, during the 1976 -1980 period reached its highest historical five year peak, since public accounting records are kept, both in absolute terms as in terms of GDP: it exceeded US$50,000 million. Such investments were made to recover the under-invested economic-social infrastructure, including, for the construction of electricity generation plants (mainly, hydro-electrical and nuclear), electricity transmission lines, roads, bridges, trains, maritime and airline transportation, port works, facilities and dredging of port access channels, telecommunications, water works, re-equipment of state owned companies and public utilities, hospitals, and other health and education establishments.

  • ECONOMIC STABILITY: From the outset of his term in office, Minister José Alfredo Martínez de Hoz had to face a very high inherited inflation rate -920% p.a., which he managed to reduce to 57% p.a., a rate that may seem exasperating today, but that at that time resulted a success, compared with earlier and many later experiences. By the last quarter of 1980, convergence between the exchange rate adjustment and domestic price increases had been achieved. For more details, see Economic Stability



    Economic Policy

    Economic Liberalization
    The spirit underlying all of the reforms implemented during José Alfredo Martínez de Hoz’s term in office was the liberalization of...
    Read more
    Economic Stability
    When José Alfredo Martínez de Hoz took office as Minister of Economy, inflation –which had existed in Argentina for many decades and...
    Read more
    Economic Results
    The economic liberalization measures adopted by Minister José Alfredo Martínez de Hoz produced -within longer or shorter periods...
    Read more

    Controversial Issues

    External Debt
    The alleged de-industrialization
    The Scheduled Crawling Peg (La Tablita)
    Sweet Money (Plata Dulce)
    Grain Embargo
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