ARGENTINA: FADING HOPE FOR BASIC ECONOMIC REFORM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700010061-2
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 15
• Document Creation Date: December 22, 2016
• Document Release Date: February 1, 2010
• Sequence Number: 61
• Publication Date: June 1, 1971
• Content Type: IM

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L' I P10 07/--0
Confidential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Argentina: Fading Hope For Basic Economic Reform
Confidential
ER IM 71-109
June 1971
Copy No. 5$
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WARNING
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defense of the United States, within the meaning of Title
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Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
')IOUP I
redud.d Iron uu~ommlt
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_ dcdouifm~ion
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
Juno 1971
INTELLIGENCE MEMORANDUM
ARGENTINA:
FADING HOPE FOR BASIC ECONOMIC REFORM
Introduction
I. Recent events have further dimmed the hopes raised by
Argentina's good economic performance during the first four years of
military rule. Increased political instability, dating from serious student and
labor disorders in mid-1969, has been reflected in the ouster of two
presidents and four economics ministers. Nationalistic programs and political
expedients are replacing thy; original, largely successful policies emphasizing
free enterprise and financial stability. An unresolved crisis in the beef
industry is affecting the entire economy, and rapid inflation is once more
the order of the day. Nevertheless, the nation is still in a far better economic
position than when the military took over in 1966. This memorandum
examines the present economic situation and assesses the outlook for the
next few years.
Discussion
Background
2. Once the showcase of Latin American development, Argentina
has suffered from erratic economic performance, chronic inflation, and
periodic balance-of-payments crises since the 1930s. Its stop-go cycles have
been especially pronounced since the 1950s, when basic structural
distortions were significantly magnified by Peron's dramatic and probably
irreversible shift of economic and political power from the pampas to
industry and the urban masses. Because Argentina's large, inefficient
manufacturing sector contributes little to export earnings and is heavily
dependent on imports, industrial growth - if not accompanied by increased
agricultural exports - leads rapidly to balance-of-payments crises. When
such crises occur, the government usually responds with a growth-killing
mixture of devaluation, export taxes, import restrictions, and credit
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence.
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limitation. The ensuing recession, typically accompanied by inflation and
capital flight, continues until the government is forced to spur production
with Increased imports, and the cycle begins again. Attempts to break this
cycle before 1966 - most importantly during the Frondizi administration
(1958-62) - failed largely because governments lacked the power to take
remedial actions opposed by powerful segments of the Argentine populace.
3. When General Ongania seized power in June 1966 After three years
of ineffectual rule by President Illia, the military was given a tacit mandate
to make basic changes in the political and economic system. The relative
quiet that prevailed in the country until the May 1969 riots in Cordoba
was the result not so much of military force as of apathy mixed with hopeful
waiting on the part of the populace. From the economic point of view,
this time was well used. By early 1967, Adalberto Krieger Vasena, then
Minister of Economy and Labor, had launched a well-conceived'and complex
program designed to achieve both financial stability and enduring economic
growth. Its measures included wage and price controls, conservative fiscal
and monetary policies, reduced tariffs and exchange controls, and policies
favoring foreign as well as domestic private investment. J Although many
of these measures were similar to those earlier attempted by Frondizi, the
program differed in one essential respect: it had the unified support of
a military government that promised continuity in policy for as long as
needed to achieve its goals. Results were gratifying with regard not only
to price stability, investment, production, and foreign reserves but also to
employment and real wages (see the table).
4. Contrary to the slogans voiced by students and workers at the
time, the disorders of mid-1969 were political rather than economic in
origin. In the face of high employment, a sharply reduced inflation rate,
and the highest real wages in more than a decade - the result of substantial
pay hikes at the beginning of the year - there was little economic
justification for heightened public discontent at that time. In an
ill-considered reaction to the disorders, Krieger was dismissed and replaced
by Dagnino Pastore who espoused essentially the same liberal economic
line. The economy quickly recovered from the shock of the riots, but
political instability was clearly on the rise and organized labor was beginning
to regain much of its earlier muscle. Perhaps most important, the
government's sacrifice
of the key arc tect of the economic program gave rise to a credibility
gap that widened considerably in the months that followed. J In June
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Argentina:
Selected Economic Indicators
Percentage
change in cost of living
Percentage change in GDP (December -_December)
1965
1966
1967
1968
1969
1970
9.4
0.1
2.3
4.7
6.9
4.9
Investment
as a Percent of GDP
1965
19.0
1966
18.0
1967
18.6
1968
20.2
1969
22.2
1970
22.5
1965 38.2
1966 29.9
1967 27.4
1968 9.6
1969 6.7
1970 21.7
Index of real wages
(1960 .= 100)
1965 138.3
1966 139.4
1967 132.8.
1968 131.8
1969 143.2
1970 135.0 (est.)
End of year
Unemployment rate
(Aril)
gross foreign reserves
(Million US $)
1965
6.0
1965
285
1966
6.5
1966
266
1967
6.4
1967
767
1968
5.5
1968
810
1969
4.5
1969
579
1970
5.5
(est.)
1970
740
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1970 the junta of commanders-in-chief removed Ongania because it feared
he intended to form a corporate state and perpetuate himself in power.
Economic Policy Under Levingston and Lanusse
5. The new president, General Roberto Marcelo Levingston, and the
junta that selected him apparently had no well-developed economic views.
Nationalists and free-trade liberals vied for influence in the government with
the result that the new economics minister, Carlos Moyano Llerena, received
no firm backing for his policies. More important, Moyano - although a
highly regarded liberal economist and former advisor to Kreiger and
Dagnino - seemed overwhelmed by the responsibility for dealing with the
nation's problems. After carrying , out an early, unexpected devaluation
(which was severely criticized as unnecessary and inflationary by Argentine
economists and businessmen alike), Moyano avoided major decisions, and
economic policy drifted. His resignation was willingly accepted in October
1970.
6. During the summer of 1970, President Levingston had steadily
moved toward a more nationalistic stance in an effort to create a power
base independent of the junta that had selected him. His appointment of
Aldo Ferrer as Moyano's replacement was an important step in this
direction. Ferrer, an internationally known economist and economic
historian who previously had been Levingston's Minister of Public Works
and Services, immediately set about reversing the policies of the preceding
four years. No longer was financial stability considered the precondition
for economic growth, but rather growth was the precondition for stability.
To achieve his announced goal for an 8% annual growth, Ferrer stressed
"Argentinization" of the economy - essentially a return to discrimination
against foreign goods and industry - and income redistribution. Given the
existing political and economic uncertainty, a crisis in the meat industry,
and the resurgence of rapid inflation, conditions for implementing Ferrer's
plan were far from ideal. Nevertheless, when Levingston was ousted in March
1971 by General Alejandro Lanusse, earlier reputed to be an economic
liberal, the new president retained both Ferrer and his policies. Although
Ferrer has lost power in the still incomplete reorganization of the economics
ministry, it is doubtful that this signifies a major shift in direction.
The Economy's Performance in 1970
7. Despite a marked deterioration on all fronts at the end of the
year, overall economic performance in 1970 was good. Investment increased
by more than 6% from 1969's high level and output rose by about 5%,
less than in 1969 but well above the average of pre-coup years. Construction,
petroleum production, farming, and manufacturing led the way with
increases of 14%, 9%, 6-1/2%, and 6%, respectively. By contrast, livestock
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production declined by almost 4%. Aided by a 10% gain in export earnings
and a reversal of the capital flight that followed the mid-1969 riots, foreign
exchange reserves increased by some 28% to $740 n;illion. Performance
on the price front deteriorated sharply, however, pushing the inflation rate
to 22%, compared with an 8% average in 1968-69.
Emerging Economic Problems
The Beef Crisis
8. Beef ?- Argentina's most important export, principal staple in the
domestic diet, and main symbol of national well-being -? is in short supply,
and the ramifications are shaking the entire economy. Both exports and
domestic consumption were able to increase from their 1965 lows without
greatly affecting herd size until 1969, when a sudden upsurge in demand
cut the herd from 51.5 million head to 48.3 million (see Figure 1). Despite
continuing high international prices and rapidly increasing domestic prices,
cattlemen sharply reduced slaughter in 1970 in order to build up their
herds - thus driving prices still higher.
9. About three-fourths of total slaughter is consumed domestically.
Largely because of the government's more liberal incomes policy, retail beef
prices, which weigh heavily in the cost of living index, jumped 377x, in
1970 and are still rising rapidly - a fact that is not lost on labor leaders
who are demanding still higher wages. Suffering from credit limitations,
large debts, and rising wage bills and unable to buy cattle cheaply eno"giI
to make a profit after producer prices rose by 50`%, three major export
houses have shut down. Beef exports in December 1970 were less than
half the volume of the previous year and have continued low during the
first quarter of 1971, leading to predictions of a 20'/ drop in beef earnings
for the year. Although domestic per capita beef consumption is still the
world's highest - 180 pounds yearly compared with about 90 pounds in
the United States and less than 50 pounds in West Germany -- it has
declined by more than 10170 from its 1969 record level, leaving the typical
Argentine with a feeling of deprivation and maltreatment. "Meatless days" -
the imposition of which has shaken previous governments - have been
extended into "meatless weeks."
10. There is no easy solution to the beef crisis. High beef export
earnings are economically essential but can be sustained only if politically
unpopular restrictions on domestic consumption are effectively maintained.
Both internal and external demand cannot be fully met without depleting
the herds upon which a long-term solution depends. Past attempts to limit
domestic demand and rising prices have been largely unsuccessful. Early
in 1970, when beef prices began their rapid rise, the Ongania administration
responded by establishing two meatless days a week and putting price
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Slaughter and Live Export
Ole
Herd Size
200 Index (1961=100)
1961 62 63 64 65 66 67 68 69 70 71
(projected)
.Beef Exports and Consumption
200 Index (1961=100)
/,'
Total Domestic
Beef Consumption
Per Capitao
Beef Consumption
L-50---l-
511432 E- 7 1 CIA 1961 62
63 64 65 66 67 68 69 70
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Beef Eports
/ ,\
N
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ceilings into effect. These regulations were never fully observed, and the
government fell shortly thereafter. Levingston's first economics minister
established a compulsory 15% reduction in slaughter for the domestic
market - a move that was largely meaningless because it only approximated
the expected seasonal decline. After a series of unsuccessful half-measures,
economics minister Ferrer in March 1971 restricted domestic beef
consumption to 15 days per month and established a graduated tax on
beef exports sold at abuve a given parity price. The intent of these measures
was to maintain export levels but not allow an export boom that would
further increase pressure on domestic prices or deplete the herds. After
Lanusse took power, Ferrer lifted the tax but left in effect domestic
consumption and price controls - measures that are difficult to implement
and thus have not been markedly successful in the past.
Quickening Inflation
11. Last year's 22% inflation rate and the accelerated price rise in
1971 (currently running at a 30% annual rate) signify a return to the
wage-price spiral of the pre-Ongania period. The economy was able to absorb
relatively large wage hikes in 1969 mainly because businessmen and
consumers believed that the overall economic program remained intact. This
faith received a sharp setback when Ongania was removed from power in
June 1970. In the same month the new economics minister devalued the
peso without taking adequate compensatory measures. As a result, the
inflationary mentality - never completely broken - was renewed with
vigor. The cost-of-living index, which was the same at the end of June
as at the end of December 1969, rose by some 22% during the next six
months. Ferrer's official downgrading of the goal of price stability in
October - as well as his relaxing controls on wages, rents, and public utility
and transportation rates in early 1971 - contributed significantly to
accelerating inflation.
12. Wage hikes and budget deficits arv more important factors in
1971's inflation than they were last year. Average money wages increased
only about 15% in 1970 - considerably less than the rise in the cost-of-living
index - whereas the gains allowed in recent collective bargaining agreements
average about 24% in addition to a 6% across-the-board raise given at the
beginning of the year. With the pace of inflation quickening, union leaders
already are beginning to question the adequacy of these wage hikes. Under
prevailing rules of the game, organized labor is unlikely to stand still for
a deterioration in real wages - as occurred in late 1970 when the accelerated
price rise outstripped earlier wage gains.
13. The government also has adopted more expansionary fiscal
policies than it followed last year, when the budget deficit was held to
about 12% of expenditures - about the same level as in 1969 and far below
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the 36% average of the pre-Ongania period. Although the government has
been able to keep the budget deficit within bounds during the early months
of 1971, wage increases for government workers are expected to average
more than double the 14% anticipated at the time the budget was
formulated. The rapidly rising wage bill and increases in other current
expenditures will almost certainly cause serious overruns if funds are not
diverted from the capital account - a problematic option in the face of
flagging private investment. Waning investor confidence also has made the
floating of domestic and foreign bond issues far more difficult, and thus
inflationary borrowing from the central bank - already up in 1970 - is
once again becoming the primary means of financing the government deficit.
Waning Investor Confidence
14. The return to rapid inflation, political instability, and vocal
nationalism is responsible for a marked deterioration in the business climate.
Estimates of deferred or canceled foreign investment range as high as $200
million, and domestic private investment - supposedly favored by the
government's nationalistic policies - shows few signs of taking up the slack.
Moreover, inflation and the high cost of credit already are causing increasing
resource misallocation by diverting funds to short-term, high-yield
investments. Although government capital expenditures helped buoy up
overall investment levels in the first quarter of 1971, output increased only
a little more than 2% compared with almost 6% during the same period
last year.
15. Political uncertainty and dimming prospects for economic growth
are the main determinants of reduced foreign investment, but the
government's nationalist stance is also a factor. Diatribes against "foreign
monopolies" - particularly frequent during the last months of the
Levingston administration - and vague threats of further discriminatory
actions were probably more important than actual measures proposed or
taken in creating this negative atmosphere. Nevertheless, anti-foreign
discrimination is inherent in three recent government actions: the "buy
Argentine" law, the new petroleum policy, and the draft automobile law.
16. The "buy Argentine" law, signed in December 1970, is intended
to force state entities to buy from domestic sources whenever possible.
The law discriminates both against imported goods and services and output
by local companies with a substantial amount of foreign capital. Recognizing
that the state accounts for about one-third of capital goods purchases and
some 40% of construction contracts, Ferrer reasoned that channeling this
demand exclusively to local firms would greatly stimulate their production
and eventually lead to economies of scale and increased efficiency. It is
doubtful that the law will be rigidly enforced; an almost identical law in
1963 became a dead letter as soon as it was written because of resistance
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from the state enterprise managers. These managers markedly prefer
imported goods for reasons of both cost and quality and so far have had
little difficulty in avoiding the new law's restrictions.
17. The new petroleum policy, while moderate compared with
petroleum laws in other Latin American countries, has further dampened
the investment climate. The new policy does not affect exploration, drilling,
and production contracts but limits crude oil supplies to foreign-owned
facilities in an effort to keep refineries of the state oil company (YPF)
working at capacity. Because YPF produces most Argentine crude, this
policy should be fairly simple to implement. Of the three foreign companies
affected - Esso, Shell, and Cities Service - only Cities Service is a
substantial producer of crude oil, accounting for about 10% of Argentine
output. Whereas these companies formerly were allocated crude oil based
on their share of the retail market, they now will receive only the surplus
that YPF cannot process. Under this system, private refineries will be forced
to reduce operations from 91% of capacity to about 70% and will suffer
substantial financial losses until Argentine crude oil output expands
sufficiently to take up the slack. Esso, for one, claims to be reconsidering
its Argentine investment plans because of this factor.
18. The proposed automotive industry law, which is unlikely to be
signed without some modifications, would effectively oust foreign
manufacturers from the parts industry and would restructure the automobile
manufacturing sector. The clauses dealing with automobile manufacture seek
mainly to eliminate production of "non-rational" models. The law as
written, however, requires Argentine ownership and control of the parts
industry by 1 January 1972, prohibits foreign licensing arrangements, and
restricts profit remittances. Given the state of Argentine technology in this
field, it is unlikely that the law could be enforced in the time allowed
without shutting down the parts industry.
Overvaluation of the Peso
19. Because of the rapid deterioration in domestic price stability since
the 12-1/27o devaluation in mid-1970, the peso at present is overvalued.
For the first time in more than four years, an active and extensive parallel
market for the peso has developed. This market, which began to establish
itself in October 1970, has continued even after the adoption of the crawling
peg 3/ and small devaluations in April, May, and June of 1971. The
3. Under the crawling peg system, large devaluations are avoided and
frequent small devaluations are used to equalize the internal and external
purchasing power of the currency.
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unofficial rate now hovers at about 5.00 pesos to the dollar - some 20%
above the official rate of 4.20.
20. Foreign exchange reserves have declined steadily since October
of last year, largely reflecting capital flight to safer and more profitable
investments abroad (see Figure 2). Currency overvaluation has negatively
affected the trade balance as well, although the beef crisis and hedging
against expected import tightening are more important factors. Continuing
a trend apparent since late 1970, exports declined 14% while imports rose
some 16% during the first quarter of this year. A subsequent slight
improvement in trade performance has not been sufficient to offset the
continuing deterioration in capital transactions.
Outlook for 1971 and Beyond
21. Inflation - expected to average at least 30% for 1971 - should
sustain output during the next few months, but thereafter economic growth
is expected to fall off sharply as cut-backs in investment make themselves
felt. The growth rate of gross domestic product may fall below 3% for
the year, compared with 5% for 1970. Despite massive wage increases, the
rapid pace of inflation threatens a fv-ther reduction in real wages - thereby
nullifying the effect of Lanusse's popularity-seeking measures. Even if
organized labor succeeds in its efforts to outpace the price spiral,
unemployment will continue its rise from 1969's historical low as economic
growth slows. Exports will probably fall to about $1,600 million from
1970's record $1,770 million, while imports may rise above last year's
$1,680 million level, thus bringing about the nation's first trade deficit since
1962. Even if the trade account fares better than now indicated, the
worsening business climate find currency speculation make an overall
balance-of-payments deficit almost inevitable.
22. During the next thre: years, we expect a steady but not dramatic
deterioration in all aspects of the Argentine economy. This decline will
be more a function of the "lame duck" nature of the Lanusse administration
than of the particular policies or attitudes of that government. Even if it
were politically pos-.ible to do so, a return to sound economic policies would
have only a marginal effect as long as the government's tenure is limited
and its successor uncertain. Given Argentina's resources and stage of
development, it probably could follow the Mexican example of pursuing
nationalistic policies without discouraging growth and investment, provided
that political stability and continuity in economic policies were assured.
Because investors can be expected to resume a "wait and see" attitude
at least until the guidelines for the return to democratic rule are clarified,
Argentina's greatest economic problem once again is its political problem.
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Foreign Trade.
(Million US Dollars)
Exports (F,O.B.)
1,500
.?"? .. Surplus
1,000
500
1,000
Im arts (C,I.F,)
Fig are 2
01 1 I . I L. 1 _ . _... .._... _ J ..._...I. _ _ _ _ I-__. _ ._ _..I_._.. _..
1961 62 63 64 65 66 67 68 69 70 71
(projected)
Gross Foreign_Ex"hange_.Reserves.
(Million US Collars)
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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr
1970 1971
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23. , Several favorable factors will limit the speed and extent of the
decline. The trend toward higher world prices for meat and coarse grains
will buoy Argentine exports, while imports will probably be restricted by
increasingly pr.stectionist policies. The increasing size of the Argentine herd
should release greater supplies of meat for export by 1972, provided that
domestic demand is curbed. Farmers will undoubtedly continue to shift
resources out of low-value wheat production into beef, corn, and grain
sorghum that are in greater demand on the international market. Most
important, the country's large foreign reserves provide a cushion that the
economy did not have in previous periods of cri jis. Moreover, the crawling
peg exchange rate system, although inadequately used at present, provides
a relatively easy means of limiting peso overvaluation.
24. There appears to be little or no possibility of a substantial cut
in the inflation rate in the intermediate future. The government - intent
upon gaining popular support -- seems disinclined to oppose inflationary
wage hikes. "Voluntary" price controls, so essential to Krieger's successful
stabilization program, have been allowed to lapse except for a few popular
ccsnsumption commodities. Inflationary budget deficits will increase not
only because of wage raises in the public sector and the government's
ambitious investment program but also because a probable decline in
ec:nnomic activity will reduce tax returns. Moreover, the crawling peg system
will tend to eliminate external constraints on fiscal and monetary policy.
25. On balance, the outlook for investment and output is poor.
Inflation, nationalism, and polit, al instability already have altered domestic
and foreign private investment j.1ans. In the future the trend toward less
investment will probably accelerate, despite increased government spending
and the availability of some international loans. Because investor confidence
has been shaken, relatively minor crises can trigger large capital outflows.
Declining investment and import constraints in turn will slow growth of
the gross domestic product. The stage is set for a return to the stop-go
cycle of the pre-Ongania period.
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