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.
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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:

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

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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: