ARGENTINA: PROSPECTS FOR ECONOMIC STABILIZATION

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• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00589R000400450001-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 22
• Document Creation Date: December 22, 2016
• Document Release Date: April 25, 2011
• Sequence Number: 1
• Publication Date: November 1, 1985
• Content Type: REPORT

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ALA 85-10112
November 1985
Directorate of
Intelligence
Argentina: Prospects for
Economic Stabilization F
An Intelligence Assessment
366
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Directorate of Secret
Intelligence
Argentina: Prospects for
Economic Stabilization [
America Division, ALA,
Office of African and Latin American Analysis, with
a contribution from OCR. It was
coordinated with the Directorate of Operations.
Comments and queries are welcome and may be
directed to the Chief, Research Branch, South
This paper was prepared by
Secret
ALA 85-10112
November 1985
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Secret
Key Judgments
Information available
as of I October 1985
was used in this report.
Economic Stabilization
Argentina: Prospects for
President Raul Alfonsin in June 1985 launched z
program to break the cycle of inflation and econc
gripped Argentina throughout the postwar era. F
yearlong tactic of avoiding economic austerity an
treatment known as the Plan Austral that includ
prices, a currency reform, and budget cuts to halt
soared beyond a 1,000-percent annual rate. Thes
agreement with the IMF that aims to provide Ar,
IMF and foreign bank loans. To the surprise of r
public-not known for its willingness to bear sac
the harsh measures.
We believe that Alfonsin will be able to hold to I
program through early 1986. His success to date
inflation to a 55-percent annual rate during July
receipt of $2.7 billion of the loan package, and tl
political opposition will probably allow Alfonsin';
(UCR) at least to retain its congressional majorit
November. Nonetheless, we and most other outsi
foresee a deepening recession over the next sever
certainly will intensify pressure from labor, busir
tion-and even the more populist members of the
government intervention to revive the sagging ec
which is clearly displeased with the administratii
for opportunities provided by any increases in pu
Alfonsin and counter proposed military budget c
We believe it is likely-perhaps two chances in t
by mid-1986 will slip back into the pattern of st
that historically has prevented the economy frorr.
We envision Alfonsin boosting government invest
the cost of compliance with IMF performance to
Aires obtained waivers from the Fund, we expec
would be halted temporarily, cash problems wou
would be rekindled.
In the worst case, Alfonsin could fully reverse th
a major exercise in pump priming-a 1-in-10 po
an approach would generate rapid short-term gr
forceful new economic
-mic stagnation that has
e ended his government's
d announced a shock
:s a freeze on wages and
an inflation rate that had
moves followed an
;entina up to $6 billion in
nany, the Argentine
-ifice-rallied to support
its economic stabilization
in drastically reducing
-September, Argentina's
ie absence of any unified
Radical Civic Union
y in elections this
de economic observers
it months, one that almost
less, the political opposi-
ruling party-for
)nomy. The military,
rn, probably will also look
blic disorder to intimidate
uts.
ree-that the President
p-go economic policies
realizing its potential.
ent to spur a recovery at
gets. Even if Buenos
that loan disbursements
d resume, and inflation
Plan Austral and opt for
sibility, in our view. Such
wth, but at the cost of
Secret
ALA 85-10112
November
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price and financial instability, and, eventually, Alfonsin's credibility. We
believe that political disorder would spread and the military would be
tempted to intervene. Whether Alfonsin held on to power or not, Argentina
would be likely to turn inward. In a nationalistic tussle with creditors and
investors, Buenos Aires would be likely to lose access to foreign credit and
respond by declaring an indefinite moratorium on debt payments and by
seeking the support of the 11-member Cartagena Group of Latin debtors.
Alfonsin also would be more likely to expand economic relations with the
Soviets, in our view, albeit cautiously.
If Alfonsin can continue to walk the fine line between maintaining the
tough stabilization measures and meeting public expectations for economic
growth-a 1-in-5 chance, in our judgment-Argentina could break away
from 50 years of economic lethargy. With steady economic policies and
thoroughgoing reforms, he could launch Argentina on the path toward
realizing its great economic potential. His ability to do this will hinge to a
large extent on the willingness of the Argentine people to endure prolonged
austerity. Popular tolerance for austerity to date has rested heavily on the
President's personal popularity and his success in consolidating democratic
rule-his administration's stated primary goal.
Under the most likely scenario for 1986-a resumption of stop-go econom-
ic policies-we believe US relations with Argentina would be likely to
experience new strains as Alfonsin responded defensively to domestic and
foreign criticism of his policies. US banks probably would face a slowing of
debt service payments, and any hopes for increased US exports and
investment in Argentina would fade. In the extreme case that Alfonsin's
program failed and he abandoned stabilization completely, democracy in
Argentina and perhaps the region would be jeopardized, nationalistic
economic policies would threaten the interests of US lenders and investors,
and US debt policy toward Latin America would be at risk.
If, on the other hand, Alfonsin can stay largely on track with the economic
stabilization program, he could foster regional economic moderation to
counter radical debt proposals from Cuba's Castro and Peru's Garcia, and
he could burnish democracy's image in the hemisphere. A revitalized
Argentina would provide tough competition for US farm product exporters,
but also would create an expanding market for US manufactures and
technology, attracting new direct investment while providing a steady
stream of payments to US banks.
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Introduction
Alfonsin's Gradual Turn to Stabilization
Economic Policy Realignment in 1984
3
Financial Team Shuffled
3
Mounting Difficulties in 1985
5
Discontent Rises
5
Contents
Key Judgments
Mixed Economic Prospects
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Figure 1
Argentina: Economic Activity
Mandosa San
Luis
Campo
Duran
Santiago
X4%1 Estero
AGRICULTURE
Wheat Cotton
Corn Tobacco
Sugarcane Quebracho
Cattle Sheep
Canadan
Saco
MINING
Petroleum Fe iron ore
C Coal PbZn Lead-zinc
INDUSTRY
Petroleum refining Sugar refining
Lead/zinc smelting Wheat milling
$ Iron and steel tT Wine
4 Cement Edible oils
0
100
i
200 Kilometers
Meatpacking '$
I
I
Motor vehicles
0
100 200 Miles
PIPELINES
Boundary representation is
not necessarily authoritative
Cotton textiles
Chemicals
Petroleum and Natural gas
petroleum products
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Argentina: Prospects for
Economic Stabilization
Table 1
Argentina: Key Economi
The government of President Raul Alfonsin took
power in December 1983 without a coherent economic
stabilization plan and with a philosophical aversion to
tough austerity measures. Alfonsin felt, according to
Embassy reports, that the best way to implant democ-
racy deeply in Argentina was to adopt a populist
governing style that would sustain his personal popu-
larity, thereby keeping his political and military oppo-
nents at bay. Throughout his first months in office, all
other considerations seemed to him secondary, and in
our view he squandered the opportunity to use the
political honeymoon following his inauguration to
coax the Argentine people into accepting unpalatable
economic realities.
By mid-1984, however, the government began to show
public signs of recognizing that major economic ad-
justments were needed, lest mounting inflation fan
public discontent to the point that it could threaten
the new democratic administration. Buenos Aires also
had reached the stage where it critically needed
foreign loans to service its $48 billion foreign debt.
Although the resulting policies proceeded in fits and
starts, the government finally launched a coherent
stabilization program-the Plan Austral-in June
1985, and since then the attack on inflation has been
pressed with surprising vigor. This paper assesses
Alfonsin's chances of staying this course, the potential
for and consequences of alternate policy directions for
Argentine and regional democracy, as well as their
impact on US-Argentine relations.
Alfonsin's Gradual Turn to Stabilization
Two of Alfonsin's economic goals upon taking of-
fice-boosting the purchasing power of workers and
expanding social services-clashed immediately with
his early, modest efforts at austerity. Through mid-
1984, according to the US Embassy, the only concrete
GDP (billion US $) 71 68
GDP (percent change) 2 -5
Consumer prices (percent change) 627 800
Exports (f.o.b.) (billion US $) 8.1 7.7
Imports (f.o.b.) (billion US $) 4.1 4.2
Current account balance -2.5 -2.0
(billion US $)
Budget deficit b (percent of GDP) 15.5 8.5
Unemployment rate 3.8 6.5
(percent of labor force)
a Projected.
b Combined deficit of the publij sector and Central Bank, plus
estimated deficit of public cor rations.
Note: The population of Argentina will reach 30.5 million this year,
yielding a projected per capita DP of about $2,200.
efforts to rein in the large budget deficit Alfonsin had
inherited involved cutting military and nuclear pro-
grams and delaying the payment of government bills.
These moves helped drop the deficit to under 13
percent of GDP, from 17. percent in the last quarter
of 1983, but failed to produce lasting budget gains.
Inflation rose steadily from 434 percent in December
1983 to 580 percent in June 1984, and contentious
debt negotiations with th IMF and commercial
banks reached an impass .' In a last major show of
' Unless otherwise cited, econo
official Argentine sources. F_
Secret
II
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Figure 2
Argentina: Inflation Trends
Percent Change in
Consumer Prices
Over previous year
Percent Change in
Consumer Prices
Over previous month
I i i I I I I i
D J F M A M J J A S O N D J F M A M 1 J A S
1983 1984 1985
Da J F M A M J J
1983 1984
A Sb O N D J F M` A M 1d J A
1985
a Alfonsin takes power.
b First IMF program signed.
c Argentina found out of compliance with program.
d New IMF targets reached and price freeze imposed.
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defiance, Alfonsin bypassed the IMF negotiating
team and publicly announced he was sending a draft
economic program directly to the Fund's managing
director. The IMF ruled the Argentine proposal inad-
equate and refused to accept it.
Economic Policy Realignment in 1984
Faced with these setbacks, Alfonsin altered his public
stance at midyear and acknowledged the need for
belt-tightening.
=in particular, spiraling inflation and the contin-
ued contraction of private investment helped convince
him that a major shift in economic policy was needed.
In a nationwide speech, he told the Argentines that
those in the higher income brackets would have to
Shortly thereafter, Argentina signed a memorandum
of understanding with the IMF, the first concrete step
toward a stabilization program. In return for
$4.2 billion in fresh bank loans and $1.7 billion in
IMF credit, Buenos Aires agreed to reduce the budget
deficit to slow inflation, devalue the peso faster to
improve international competitiveness, and set inter-
est rates above the level of inflation to increase
savings. In addition, Alfonsin reversed his pledge to
boost real wages by introducing a wage formula that
produced real salary cuts during the last quarter.
The government lacked a clear commitment to the
program, however.
Only the wage and devaluation policies
were strictly implemented, while the budget deficit
and the money supply expanded rapidly. The local
press reported that the resulting climb in inflation-
then at 800 percent-fostered a sense of economic
drift.
Figure 3
Argentina: Investment Tdends
(Fixed Domestic Investment as a
Share of GDP)
Percent
25
Financial Team Shuffled
These inconsistencies in part reflected the policy
differences between the President's principal econom-
ic advisers. Economy Minister Grinspun, Alfonsin's
longtime friend, favored policies to maintain employ-
ment and wages,
The head of the Central Bank, Enrique
Garcia Vazquez, supported greater austerity. Regular
press reports on conflicts between the two men further
undermined public confid nce in economic manage-
ment, and Alfonsin final! removed both advisers in
February.
Grinspun was replaced b Planning Minister Juan
Sourrouille, a technocrat who had gained sudden
prominence by proposing five-year recovery plan
that drew Alfonsin's pub! c admiration and national
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Most economic experts believe Argentina has enor-
mous development potential. It is well endowed with
fertile land, is self-sufficient in oil, has a 94-percent
literacy rate among a homogeneous population of 30
million, and is still underpopulated. Much of its
mineral resources remain untapped-a known copper
deposit that would make Argentina self-sufficient lies
fallow for want of investment funds-and much of
the land surface has yet to be fully explored. Its
nuclear energy program is one of the most advanced
among the developing countries, and includes the full
cycle from uranium mining to fuel reprocessing.
Nonetheless, Argentina remains a country of unful-
filled promise. Riding a wave of development based
on agriculture, Argentina reached its economic peak
in the 1920s. Although the country has had growth
spurts since, and various governments have attempted
industrial development, per capita real income has
risen only marginally in the last 50 years.
In 1984, nearly three-quarters of Argentina's
$8.1 billion in exports were either agricultural prod-
ucts or processed foodstuffs. Buenos Aires has habit-
ually siphoned off such farm-sector earnings to un-
derwrite industrial development and repay foreign
creditors. The industrialization drive of 1958-62 was
in part undone by two bad harvests, and, while recent
bumper harvests have ameliorated Argentina's debt
problems, falling grain prices have dimmed the pic-
ture. Argentine governments have failed to plow back
very much into agriculture itself, leaving even this
sector backward. Agricultural experts estimate that
Argentina could boost its grain production by 50
percent by the 1990s, largely through increases in
yields.
Argentina's pattern of interrupted modernization,
which also reflects abrupt policy shifts emanating
from alternating military and civilian governments,
can be seen dangling between buildings.
has left a legacy of deteriorating infrastructure.
Although Argentina has the most extensive rail sys-
tem in South America, the tracks are of three
different gauges and badly in need of overhaul. The
ports need dredging because of constant silting, and
expansion and modernization are needed to relieve
port congestion that is especially severe during peak
grain shipping seasons. Of 650,000 miles of roads and
highways, only 5 percent are paved. There is only one
telephone available for every 10 inhabitants and the
system is antiquated and unreliable; in Buenos Aires
many firms use bootleg systems and bunches of wires
Inflation has been a serious impediment to economic
development, especially over the last decade when it
remained in triple digits. Financial speculation-
known locally as "riding the bicycle "-is common-
place in Argentina, but it absorbs vast amounts of
potentially productive time. In early 1985, the peso
was so shunned as a store of wealth that the money
supply was circulating six times faster than in most
industrialized countries.
Argentina's 350 publicly owned firms are a consider-
able financial drag on the economy, and inhibit
innovation and growth. The railroads lost over
$500 million last year, and the national oil company
YPF, which lost $38 million in 1984, remains delin-
quent in transferring the taxes it collects on petro-
leum products to the federal government. Alfonsin is
coming under pressure to shake up the management
of the larger state fiefdoms, and he has put the firms
on notice that they will have to meet their foreign
debt payments out of their earnings instead of relying
on the federal government.
Note: Factual information in this inset has been
drawn from US Embassy reporting or open sources.
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attention. The Sourrouille plan marked the adminis-
tration's first attempt to look beyond short-term fixes
for the economy and identify the prerequisites for
sustained recovery. It stressed that sharply reduced
inflation would stimulate private investment while
increased agricultural and oil production would boost
export earnings, thus allowing GDP to grow an
average of 4 percent during 1986-89, a rate not
achieved since the 1970s. Although the plan empha-
sized goals rather than prescriptions, it helped per-
suade Alfonsin that fundamental and prolonged ad-
justments were necessary if Argentina were to achieve
its economic potential.
Mounting Difficulties in 1985
Sourrouille's immediate task, however, was to head
off a looming economic crisis. The first shock came in
March 1985, when the IMF-finding Argentina out
of compliance with several fourth-quarter 1984 tar-
gets-halted loan disbursements. Inflation-driven
by rapid monetary expansion-was above target,
causing the government to exceed spending and bud-
get deficit limits, according to US Embassy reporting.
As a result, exasperated creditors suspended comple-
tion of the $4.2 billion bank loan and $14.5 billion
debt rescheduling packages that were keys to resolv-
ing Argentina's debt problems.
Buenos Aires sought to placate the IMF by announc-
ing a hiring freeze for public employees, reducing
public investment, asking Congress to trim another
12 percent from the budget, and introducing reforms
to improve control over the monetary system. These
measures had little immediate impact, while atten-
dant financial reforms nearly precipitated a domestic
banking crisis. For example, according to US Embas-
sy reports, new lending regulations precipitated sever-
al bank failures, including that of the third-largest
private bank. This sparked a run on other banks, led
to increased labor protests-in sympathy with bank
Discontent Rises
The most serious cause of public discontent in early
1985, however, was inflation's unrelenting rise toward
the four-digit level. Monthly consumer and wholesale
price increases are reported quickly in the Argentine
press, influencing pricing ecisions, union wage de-
mands, and individual speculation. Indeed, we believe
this price spiral was the m jor factor compelling the
Alfonsin government to focus greater attention on
managing the economy.
Labor in particular felt th brunt of inflation; between
December 1984 and May 985, real wages fell 12
percent, according to the estimates of a major Argen-
tine statistical service. To allow workers to let off
some steam without disrupting the economy and to
demonstrate union ability to mobilize support, the
National Labor Confederation (CGT}-Argentina's
largest labor organization -staged a general strike in
May. The presence of some 150,000 workers and
sympathizers outside his offices on the Plaza de Mayo
prompted Alfonsin to increase his personal lobbying
with union leaders, according to the US Embassy,
which helped defuse tensions with labor.
Discontent also surfaced
real earnings fell, accordi
ithin the military, where
g to the press, and major
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budget cuts forced the ser
vices to reduce sharply
equipment purchases and
military exercises.
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the military's lack of Oublic prestige and the
high command from press
alry have prevented the
ng the government directly.
The business community lso became increasingly
uneasy about the lack of clear economic policy,
according to the press. W th price controls clouding
the profit picture and the economy already drifting
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Chronology of Economic Events
1983 December President Alfonsin takes office as the first
elected head of state since 1976. He prom-
ises to raise real wages by 6 to 8 percent
by December 1984.
1984 March After a near collapse of debt talks with
bank creditors, Argentina is rescued by a
$300 million bridge loan provided by
Mexico, Brazil, Venezuela, and Colom-
bia, and guaranteed by the United States.
June Argentina fails to generate united support
for joint debtor action. The meeting of 11
Latin debtors in Cartagena, Colombia, is
only able to produce a watered-down con-
sensus statement calling for a political
dialogue between debtors and creditors.
Government issues a unilateral letter of
intent to the director of the IMF after
failing to reach a compromise with the
negotiating team.
Another foreign debt crisis is averted
when Argentina pays $225 million out of
its reserves to cover a $450 million inter-
est payment. Foreign banks and four Lat-
in countries provide short-term loans to
cover the rest.
September In another last-minute maneuver, Buenos
Aires and the IMF agree on a memoran-
dum of understanding that calls for a
rapid reduction in inflation. The pact pro-
vides the basis for a loan package from
banks, governments, and the IMF totaling
$6.9 billion.
The last of the three quarters of economic
expansion under Alfonsin ends. Data
shows consumer spending was the leading
engine of growth.
December A rapid expansion of the money supply
helps d om the IMF program.
1985 February Alfonsi shakes up his economic team;
Sourro ille is named Economy Minister,
Conception installed as head of Central
Bank.
March IMFJi Is Argentina out of compliance
with se eral program targets; disburse-
ments are halted and new negotiations
begin.
Financi 1 reforms are initiated to improve
operati ns of the banking system and
stimula a private savings.
May A majok bank fails. The Central Bank
refuses ko guarantee the dollar deposits
held by the bank, causing a run on other
banks. ollar deposits are frozen for 120
days.
June A new IMF agreement is reached; within
less than a week, Alfonsin announces a
wage a d price freeze and replaces the
peso wi h the austral.
August Econo y Minister announces inflation
fell to .2 percent in July from 30.5
percent in June. Polls show program is
overwhelmingly popular. The $4.2 billion
bank ton package is signed, allowing
disbursement of thefrst $2.2 billion.
Note: phis information is drawn from US
Embas.ly and press sources.
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down, the Embassy reported that Grinspun's replace-
ment by Sourrouille did little to restore business
confidence. New financial reforms in April were seen
as cosmetic, according to the US Embassy. The press
reported that accelerating inflation and the absence of
signs that the budget deficit was being brought under
control left business resigned to a continued deteriora-
tion of the economy. Consequently, the four-year
decline in investment continued into 1985.
Before the Argentine public had time to react to the
new IMF program, Alfonsin augmented it with a
wage-price freeze and the introduction of a new
currency-the austral. After making the austral
equal to 1,000 of the former pesos argentinos, the
government froze the official exchange rate at 0.80
australs to the dollar to demonstrate its determination
to make this a strong currency. Buenos Aires also
announced it would no longer print money to cover its
After 18 months of gradualism and vacillation, Alfon-
sin's decision in June to implement bold economic
measures was sudden and politically risky. We believe
the principal objective of this dramatic shift in policy
was to brake the slide into hyperinflation, and in our
view several factors had a bearing on his decision:
? The administration's concern that the floundering
economy might provide military and civilian opposi-
tion groups with the pretext for a power-grab.
? The influence of discussions Alfonsin had in the
United States during his visit to Washington in
March.
? The quick collapse of the 1984 IMF program,
precipitated by rising inflation.
? The ascendancy of Sourrouille over the mercurial,
populist Grinspun as top economic adviser. F___]
As a first step in the new policy direction, Argentina
reached agreement with the IMF on a new set of
targets this past June after three months of difficult
negotiations. According to the text of the agreement,
the refurbished program called for reducing inflation
to 8 percent per month by the first quarter of 1986
and cutting the budget deficit as a share of GDP from
13.1 percent in the second quarter of this year to
3 percent in the final quarter.'
' Despite the agreement, Argentina needed the assistance of the
United States in arranging a bridge loan of $480 million because
IMF and bank loan disbursements would not begin until August,
and Argentine interest payments had fallen more than 180 days in
arrears. Argentina added $100 million from its reserves to bring its
arrearages to under 120 days, thereby smoothing the way for
Surprising many observers, public support for the
measures quickly solidified. This signified not only the
Argentines' recognition of the increasing peril of
hyperinflation but also the strength of Alfonsin's
personal appeal. When the first opinion polls showed
that three-quarters of the public supported the mea-
sures, criticism from unions and opposition parties
quickly dissipated, according to the US Embassy.
the military
also supported the drastic attack on inflation because
it reduced the near-term chances for economic and
social chaos. Industry saw the move as a necessary
first step toward controlling inflation and permitting
rational planning, according to the press.
Potential Obstacles Ahead
Despite continuing public support to date-an August
poll showed 71 percent in favor of the program-we
believe Alfonsin's stabilization measures will face
cultural barriers as well as direct challenges in the
months ahead. Academic experts agree that Argen-
tines do not suffer belt-tightening well. Many Latin
American specialists see in Argentina the clearest
manifestation in the hemisphere of the Spanish socio-
logical phenomenon referred to variously as the Don
Yo or viva yo (me first) complex. Moreover, in a
country where natural resources and fertile land have
produced an easy prosperity, it is difficult to sustain
popular commitment to an austerity policy that does
not promise some near-term payoff.
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? The state will no longer
print money to finance its
spending.
? You begin to treasure a
coin that has value.
? To beat inflation is the
beginning of growth.
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The labor movement, in particular, has grown accus-
tomed since World War II to deferential treatment
from civilian governments-notably those under Juan
Peron-and to a considerable voice in economic
policy making. This freeze in mid-1985 on wages,
modest price rises, and increasing layoffs led blue-
collar and lower paid public workers to push for a
second general strike on 29 August. Although the
turnout was lower than in May, pointed references by
the unions in the press to the rapid rise in layoffs and
the need for a return to growth-oriented policies lead
us to believe that labor dissatisfaction will grow.F_
We also believe industry will attempt subtly to skirt
some provisions of the reform program. The US
Embassy reports that over the years the business
community has developed a short-term mentality
conditioned by the numerous and rapid policy rever-
sals of various governments. Business, the Embassy
adds, is quick to find loopholes in new laws, many
firms and banks simply ignore government decrees,
and business lobbyists press for policy modifications.
For its part, the largest opposition party, the Peronist
movement, is attempting to make the recessive aspects
of the stabilization program a major political issue.
The Peronists publicly advocate a five-year debt
moratorium and the use of the $4.5-5 billion saved in
interest payments to underwrite major investment
projects. The CGT labor confederation, which the
Peronists dominate, has supported the call for a
moratorium. Both groups are ridden with factional
disputes, however, and these themes have failed to
generate substantial public support. In fact, a recent
poll showed the Peronist party trailing their UCR
opponents 2 to 1. Nonetheless, we believe a consider-
able worsening of unemployment, a wave of bankrupt-
cies, a drop in popular support for the administration,
and a much poorer government showing in the
3 November congressional elections than Alfonsin
expects, could permit the Peronists to exploit the
economic issue.
Political infighting in the ruling UCR is another
potential, but less likely complication in sustaining the
adjustment process. The party has a strong doctrinal
aversion to austerity and contains large factions that
favor government intervention and stimulation of the
economy, according to the US Embassy. Moreover,
the Embassy notes that, with the congressional elec-
tions approaching, various factions are pushing Alfon-
sin to grant wage hikes, assume the debts of troubled
firms, and implement labor-intensive investment pro-
jects in order to attract votes. We believe that,
because he still dominates the UCR apparatus, he will
not be forced by intraparty pressures alone into
yielding significant concessions.
Until widespread public opposition or effective politi-
cal challenges arise, Alfonsin is likely to remain
committed to the economic stabilization course. We
believe his principal incentive is the fact that Argenti-
na will gain the external financing needed this year to
help pay off interest arrearages, finance a projected
$2 billion current account deficit, and rebuild a
cushion of foreign reserves. By submitting to a new set
of IMF targets, Argentina already has received access
to $2.7 billion during August-September from the
IMF and creditor banks. If the Fund finds Argentina
in compliance during all of its coming performance
reviews (we believe the country will pass its October
review), then another $2.7 billion will be doled out
later this year and early next year.
We believe Alfonsin's desire to adhere to the stabili-
zation program also is motivated by his hope of
attracting foreign investment. He has publicly stated
that he wants Argentina to expand its export poten-
tial, restructure its industries, and better develop its
The major domestic payoff for Alfonsin's policies
revolves around the control of inflation. It is particu-
larly difficult to project inflation at this time given the
imposition of price controls and the lack of informa-
tion on how monetary and budget performance have
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Table 2
Argentina:
Balance of Payments
Trade balance
3.7
Exports, f.o.b.
7.8
8.1
7.7
8.0
Imports, f.o.b.
-4.1
-4.1
-4.2
-4.5
Service balance
-6.1
- 6.5
- 5.4
- 5.3
- 5.5
- 4.3
- 4.2
-0.7
-1.0
- 1.1
- 1.1
Current account
balance
Capital account
balance
-2.4
-0.1
1.8
1.6
1.0
New borrowing
(medium and long
term)
1.9
0.6
4.0
2.0
Repayments
(medium and long
term)
-1.5
-0.7
Other, net
-0.5
1.9
-2.4
-1.0
Change in reserves
-2.5
-0.7
-0.3
-0.8
Estimated.
n Projected.
been affected by the economic shock program. If the
government can keep inflation below 8 percent per
month' once price controls are removed-or at least
greatly relaxed-we believe most Argentines would
view this as a success compared with the 25 to 30
percent monthly price rises posted earlier this year. In
fact, we suspect the government will adopt a long
transition period before abandoning the freeze.
In an economy where moonlighting is the norm, any
euphoria on price stabilization will wane quickly if
unemployment mounts to the 10-percent range. The
6.2-percent rate recorded in April was already a
10-year high. US Embassy reporting and the Argen-
tine press indicate, however, that higher taxes, in-
creased fees for transportation and energy, and cuts in
' The IMF-supported agreement calls for inflation to fall to this
rate by the first quarter of 1986. We believe achieving this target
inflation-an annual rate of 150 percent-is possible, but only if
public investment are already
(deepening the recession.
bassy predict that
bankruptcies-and the accom
will increase if money remain,
cost of borrowing will make d
unmanageable for many heavi
firms.
anying loss of jobs-
tight, because the high
mestic debt service
ly leveraged Argentine
Unfortunately for Alfonsin, w see little chance for
any near-term economic recovery. Our assessment is
that real growth will decline i 1985 because:
? Real wages are falling in the face of salary
restraints.
? Private investment is still declining, according to the
press, because of slumping demand.
? Prices for grain exports are weak, which has caused
some reduction in planting, ~ccording to US Embas-
sy reporting.
? Foreign investors are adopting a wait-and-see atti-
tude toward the governments commitment to stabi-
lization before undertaking 1ajor new investments.
As a result, Alfonsin will face an economic decline for
the next several months and will need to maneuver
skillfully to maintain broad popular support for the
program.
According to the US Embassy, the government, in an 25X1
effort to aid ailing public-sect r firms and commercial
banks, already is watering down financial-sector re-
forms. Government-owned fir s are being assured
access to low-cost bank loans, and, to bolster the
profits of commercial banks, t e Central Bank is 25X1
selling them bonds carrying hgh interest rates.(
To foster longer term economic growth, we-and the
US Embassy-believe that the government will have
to eliminate the distortions that have arisen from
years of government intervention and inconsistent
policies. For example, industr reports indicate that
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Argentina's agricultural production is being held far
below potential by a welter of heavy taxes and
controls. Government plans to boost grain production
by 50 percent by the early 1990s will require a
reduction in levies on farm exports to bolster producer
incentives, as well as reduced controls on fertilizer
imports,
Without a gradual dismantling of import controls-
some 5,900 products are covered, according to US
Embassy reporting-Argentina's long-sheltered in-
dustries will not become competitive internationally
and domestic prices will remain higher than they
should be. In addition, once wage and price controls
are removed, the austral must be devalued in line
with inflation to prevent imports from swamping the
Argentine market and undermining the financially
fragile industrial sector. We and other observers also
believe that steadier economic policies would encour-
age economic diversification and help Argentina to
stimulate its manufacturing sector, which accounted
for only 22 percent of exports in 1984.
The Sourrouille plan encompasses many of these
policy imperatives, and President Alfonsin apparently
continues to favor major reform. Nevertheless, we
believe there is a 70-percent chance that by early next
year Alfonsin will begin to compromise on his pro-
gram. As noted, history and Argentine culture suggest
that the domestic consensus in favor of austerity is
unlikely to last. We believe the President continues to
regard the consolidation of democracy as his prime
goal and continues to view his high personal populari-
ty as the key to that objective. Thus, we expect he will
respond to shifting public opinion by gradually intro-
ducing labor-intensive public works projects. He has
already said publicly that he will boost government
investment once current expenditures have been cut.
We doubt, however, that he will be able to find
enough savings elsewhere in the budget to offset a
surge in public investment; the result will jeopardize
compliance with the IMF program. Moves to boost
employment also will probably cause inflation to
only 25 to 30 percent during the next seven to 10 years. Nonethe-
less, Argentina could displace the United States in traditional Latin
Table 3
Projected Changes in GDP
Percent change over
previous year
-2.7
2.5
4.4
WEFA
-5.6
1.0
3.1
-4.5-
2.0
3.0
-5.0
1.0
2.0
Note: Most recent available projections by Data Resources Incor-
porated, Wharton Economic Forecasting Associates, Chase Econo-
metrics, and William Cline.
increase, in part through the larger deficit, but also by
reigniting inflationary expectations.
Alfonsin, in our view, would be able to get a waiver
from the IMF for exceeding budget deficit targets,
but probably only if he agreed to clamp down again
on spending. Delays in final loan disbursements would
be likely, fueling anti-IMF sentiment, calls for a debt
moratorium, and demands for economic stimulation
policies. We see great danger that, once Alfonsin
waters down the program, remaining public support
will vanish, bringing the government back to the
position it faced in early 1985-being attacked from
all sides because of a stop-go economic policy.
If Alfonsin abandons his program altogether and
turns to growth-oriented policies aimed at vigorous
job creation-a 1-in-10 chance, in our view-control
of inflation will be lost, foreign sources of finance will
dry up, and private investment will plummet further.
Alfonsin probably could generate strong, temporary
economic growth by boosting wages, but we believe
that, as in 1984, such a consumption-led boom would
quickly lose momentum, and, as 1986 progressed, the
economy would begin slipping again. More important,
Alfonsin would lose the confidence of the business
community, dooming Sourrouille's objective of gener-
ating growth through private investment.
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We do not rule out the possibility that the Argentines
will be genuinely sobered by their economic difficul-
ties and accept prolonged austerity, but we regard it
as only a 20-percent likelihood. We concur with a
recent US Embassy assessment that Alfonsin's ability
to persist with his economic program would enable
him to go down in Argentine history as the leader who
helped launch the country on the path toward realiz-
ing its vast economic potential. Should Alfonsin be
able to walk the fine line between meeting financial
imperatives and maintaining popular support, he also
could become a force for moderation on regional
economic questions and a counterweight to Peru's
Alan Garcia. Success would additionally help burnish
democracy's image in the region.
Under the scenario we regard as most likely-com-
promises on austerity in favor of growth and job
creation-we believe US interests would suffer.
Missed IMF targets and delays in loan disbursements
would probably lead to increasing lags in interest
payments to banks, and dampen any budding hopes
among US exporters and investors for the emergence
of a healthy Argentine economy. The failure of the
economic program and policy flip-flops would em-
bolden Alfonsin's political opponents, creating uncer-
tainty about the survival of the government. Under
criticism at home and from financial institutions
abroad, Alfonsin could become defensive and turn
away from his new set of technocratic economic
advisers and seek solutions in greater government
intervention. Under these circumstances, relations
with the United States would almost certainly face
new strains.
A renewed Argentine economic slide resulting from
outright abandonment of the stabilization plan-
perhaps a 10-percent likelihood-almost certainly
would mean higher inflation, another financial
squeeze, increased military discontent because of bud-
get cuts, labor militancy, and violent acts by extrem-
ists on the left and right. These are all conditions that
led to the military takeover of the last UCR govern-
ment in 1966, and in this case the Argentine public
might accede to military intervention to halt spread-
ing economic and social chaos. Renewed rule by
generals, either alone or in coalition with Peronists or
various right-of-center politicians, would not only
uproot the new democracy, but also would probably
be highly nationalistic. A debt moratorium, stricter
controls on imports, a d heavy government interven-
tion in the industrial
harm US lenders, snv
could trigger radical d
the region.
nd agricultural sectors would
stors, and exporters, and it
:bt actions by other countries in
If Alfonsin were able to hold on to power, he probably
would solicit support for joint action against creditors
by the 11 member co ntries of the Cartagena Group
of Latin American debtors. Alfonsin might also resort
to economic autarky:
moratorium, and curt
ties to the Soviets-th
laming Argentina's problems 25X1
iling imports. We also believe
e likely to intensify economic
largest purchaser of Argentine
view he would seek to avoid
political and economi
shift. He would also p
barter, which would re
other Latin American
complications from such a
obably put greater stress on
cooperation and the use of
educe US sales in Argentina and
markets.
US interests would bet be served by Buenos Aires's
closely pursuing its I F program once the wage,
price, and exchange rate freezes of the Plan Austral
are dismantled. If, as Alfonsin hopes, bringing order
to public finances help; provide the basis for long-
term economic growth at greatly reduced inflation
rates, this will boost A gentina's political stability and
help consolidate demo racy. Nonetheless, Alfonsin is
looking for concrete si ns that the major creditor
countries understand the domestic political conse-
quences of Argentina' austerity measures. He also
wants assurances that ommercial banks and multi-
lateral credit institutio is will provide credits to under-
write Argentine economic growth. Alfonsin's success
would be an effective counter to the radical debt
proposals of Cuba's C stro and Peru's Garcia.F_
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The revitalization of the Argentine economy would be
a positive development for US commercial interests.
A more efficient agricultural sector would provide
greater competition for US farmers on world markets,
but US manufacturers would benefit even more
through greater sales to Argentina. The United States
is already Argentina's major supplier of capital goods
and industrial inputs, according to the US Depart-
ment of Commerce, and modernization efforts would
boost sales of industrial machinery, computers, and
telecommunications equipment.
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