ARGENTINA: ECONOMIC PROGRESS UNDER THE JUNTA - 1978/02/21

• Document Type: SPECIALCOLLECTION
• Collection: Argentina Declassification Project - The "Dirty War" (1976-83)
• Document Number (FOIA) /ESDN (CREST): 06628142
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 11
• Document Creation Date: April 3, 2019
• Document Release Date: April 12, 2019
• Publication Date: February 21, 1978

3.5(c)
3.5(c)
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21 February 1978
MEMORANDUM FOR THE RECORD
SUBJECT: Argentina: Economic Progress Under
the Junta
The attached draft article on the current Argentine
economic situation was forwarded on 21 February 1978 to
in response to her request for an Overview
of the economy. If any questions, please contact
Attachment:
� As stated
Distribution:
Chief
Latin America Branch
Developing Nations Division
Lfirrt\I "7"'
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3.5(c)
3.5(c)
3.5(c)
4RM78.7.10120 3.5(c)
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Argentina: Economic Progress Under the Junta
With able economic leadership and a year of favorable
-weather, the military government has restored Argentina's
international solvency and revived economic growth. For
� 1978, the main economic goal is to cut the persistent
triple-digit inflation. Anti-inflation measures will
not, however, be allowed either to jeopardize economic
recovery or to limit real wage growth enough to cause
serious labor unrest. All in all, 1978 should see a
satisfactory economic growth and a moderate reduction in
the inflation rate.
� Junta Economic Reforms
When the junta overthrew the government of Isabel Peron
in March 1976, the economy was near collapse and the country
was on the verge of defaulting on its foreign debt. "The
balance of payments was nearly $1 billion in the red and
foreign exchange reserves were practically exhausted. By
early 1976, private investment was at a low ebb and foreign
� investment nonexistent. Soaring wages and a swollen govern-
ment deficit -- equal to 13 percent of GDP -- had pushed
inflation close to .'.a 900-percent annual rate. Import re-
strictions and sporadic price controls had induced a steep
decline in output.
Under the leadership of Economics Minister Jose Alfredo
Martinez de Hoz, the military regime immediately set out to
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reverse Peronist policies by instituting an economic
reform program that touched nearly every aspect of the
economy. Wages were frozen and labor union activities,
including the rights to negotiate and to strike, were
sharply curtailed. At the same time, most prices were
freed to encourage production and eliminate black markets.
The junta undertook to restructure the onerous foreign
debt and rebuild reserves. Breaking Argentine tradition,
it approached the IMF as well as foreign banks for loans.
To boost exports, the new government reversed previous policies
favoring industry over agriculture. In addition to offering
strong price inducements to grain farmers, it abolished the
state grain board's monopoly of the grain trade and returned
most marketing operations., to private hands.
During its first 21 months, the regime took major
steps to reduce state involvement in the economy and to
increase the role of market forces. Trade restrictions
were eased, exchange rates were freed, banks were allowed
to make their own loan decisions �.instead of acting as
Central Bank agents -- and interest rate controls were
removed. Moreover, new laws eliminated restrictions on
foreign investment that had choked off the inflow of funds.
Finances were overhauled to reduce the vast government
deficit. New taxes were imposed and enforcement tightened.
Several government enterprises -- including the oil
monopoly -- were restructured to make them financially
independent, and a start was made toward selling off
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unprofitable firms nationalized during the Peron period.
Achievements Under the Reform Program
Foreign payments difficulties were overcome quickly,
after Martinez de Hoz persuaded the IMF and commercial
banks to loan the $1 billion needed to restructure the
foreign debt and a good grain-growing season permitted
fa:amrtoharvest a bumper export crop. By the end of
1977, 21 months after assuming power, the junta had:
o Achieved a trade surplus half again as large as
the $1 billion deficit it inherited.
Raised reserves to a level equal to a year's
imports.
0 Cut the budget deficit to 3 percent of GDP.
0 Lowered thd inflation rate to 160 percent.
Reversing two years of decline, GDP grew by 4.4 percent
in 1977. Growth would have been even greater had the
authorities not deliberately slowed the pace when a third-
quarter surge threatened to erase gains against inflation.
Total investment grew 25 percent -- to equal nearly 30
percent of GDP -- and foreign investment was up by $250
million, or nearly 10 percent, for the year. Since wage
restraints enabled businesses to keep workers on payrolls
even though not fully utilized, unemployment reached a
record low of 2.2 percent in October. This was a major
factor in preventing major confrontations with labor despite
the low level of real wages.
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Inflation*-- The Chief Remaining Problem
The main economic stumbling block at present is
inflation, with its related problems of low real wages
and business illiquidity. Real wages are now about 15
percent below the 1975 level. Although they have risen
10-12 percent over the past year, they remain low enough
to keep consumer demand depressed. Many small businessmen
have been squeezed -- some to the point of bankruptcy -- by
declining profits and rising costs, especially financing
costs. Heavy demand for financing caused interest rates to
turn positive in third quarter 1977 -- for the first time
in years-- and many borrowers went abroad for funds at
lower rates.
With inflation control as its chief economic goal
for 1978, the government has taken several antiinflationary
steps. In addition to continuing general wage restraints,
it has cut import tariffs to force Argentine products into
price competition with foreign goods. It has also tightened
export financing procedures to reduce the amount of credit
extended.
Most important, it has prepared a 1978 budget designed
to eliminate the fiscal deficit as a source �of inflation.
The deficit is to be held to 1 percent of GDP and financed
entirely by borrowing. With strict tax enforcement to
keep revenues high, spending is to be further reduced --
a d4ficult goal in view of the huge investment program
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inherited from the Peron regime. Public investment is
budgeted at 12 percent of GDP in order to continue work
on major projects already under, way.. Salary allocations
cannot be cut much, despite a planned reduction in the
number of public employees, because the regime wants to
upgrade salaries to prevent competent people from Moving to
better-paying private sector jobs.
Overall-, the government is maintaining its gradualist
approach to the problem. Private credit restrictions
will not be allowed to greatly inhibit growth, real wages .
will be Permitted to rise slowly, and unemployment will
continue to be avoided. Despite reports that government
working plans for 1978 are based on an inflation Tate of
60 percent, we believe that a rate just under 100 percent
is the best that can be expected -- especially after last
month's inauspicious 13-percent rise.
Toward Sustained Gtowth.
Real growth is now close to the Argentine norm of
4-5 percent. Real GDP spurted 7.9 percent in third quarter
1977 on the strength of rapidly rising exports, a. sharp
upturn in investment, and buoyant construction and industrial
activity; it then was slowed to 4 percent in the fourth
quarter by monetary restrictions. Although the tightened
credit policy continuestb dampen demand, investment is picking
up and should soon offset the sluggishness.
Most businessmen expect the economy to continue to
grow.. Industrial production and exports have been rising.
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Although agriculture as a whole will not do as well as
in 1976-77, because of less favorable weather and lower
international grain prices, increased output of sorghum
and soybeans will partially compensate for a sharp. d."013-111.:
tha whep.t. harvest. Foreign investment will probably rise
as terrorist incidents become less frequent.
The Payments Situation
The balance of payments should remain favorable in
1978, although the trade surplus will be considerably
smaller.. Exports, which reached $5.7 billion in 1977,
will probably not exceed $5 billion in 1978, mainly because .
less grain is available. Increased.exports of Soybeans,
meat, and manufactures will not fully offset the drop
in grains. Meanwhile,-imports will exceed 1977's $4 billion
because of industry's need for more imported materials and
equipment. The trade surplus should cover debt service
payments but will not raise reserves as sharply as in the
past two years.
The Political Backdrop
Continued economic progress depends on continued
political stability. The present economic team has good
credibility and can be expected to follow through on its
plans unless pressure from critics or an eruption of
labor unrest forces a shift.
Labor problems are a definite possibility. Although
the government expects rising productivity to permit
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-noninflationary wage hi es; the size and timing of wage
increases have not been clearly delineated. Workers are
uncertain about their prospects. Their uneasiness is
compounded by the lack of a clear line of communication
between themand the government as long as union activities
reamin curtailed. Terrorist organizations, though decimated,
Could try to exploit this gap.
Some prominent critics feel that workers have already
made excessive sacrifices and should now receive concessions.
Others feel that illegal labor actions, such as sporadic strikes
that have occurred despite prohibitions, should be dealt with
severely. So far, Martinez,de Hoz, firmly backed by President
Videla, has carefully steered between these divergent points
of view, and it does not appear that any critics., either
within the government or outside it, wield sufficient
influence at present to cause a change of line. If, however,
he is forced to yield ground on wages, his efforts to control
inflation will be seriously hampered. If, on the other hand,
lmore repressive measures are taken against labor, not only
would economic recovery be disrupted but the slow restoration
of human rights in Argentina cbuld be jeopardized, with
predictable results for the nation's international reputation.
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.Argentina:
'
Balance of
Payments
1976
STni
1977
1978
1974
1975
(Pe 1.)
(PLuj.)
Current Account
127.2
-1284.6
650.1
1500
500
Trade balance
295.8
- 985.2
883.6
1700
700
Exports (FOB)
3930.7
2961.3
3916.1
5700
5000
Imports (CIF)
-3634.9
-3946.5
-3032.5
4000
4300
Net services
and transfers
- 168.6
- 299.4
-.233.5
- 200
- 200
Capital account
- 241.5
488.0
567.7
600
300
Private
- 111.8
116.8
- 281.9
50
Public and banking
sectors
- 129.7
371.2
849.6
550
Change in reserves
- 51.3
- 791.1
1192.4
2100
800
Errors and ommisions
- 63.0
5.5
25.4
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Statistical Data
Argentina:
-GDP Annual, Growth Rates (%)
1971
-1972
1973
-1974
1975
197.6
1977
3.7
3.8
4.8
7.2
-1.4
-2.9
4.4
Budget Deficits (as ,% of GDP)
1970
1971
1972
1973
1974
1975
1976
1977
1.7
4.3
5.2
7.3
9.4
15.1
6.0
3.0
Foreign Reserves (US $ million, end
1971
1972
1973
1974
1975
1976
1977
374
541
1,462
1,411
620
1,800
4,000 (Est.)
Inflation (% increase)
1971
1972
1973
1974
1975
1976
1977
39
64
44
40
335
348
160
.Money circulation (billion pesos,
1971 22.5
1972 32.1
1973 73.6
1974 122.8
1975 336.3
1976 495.3
762.2
1,050.3
1,363.3
1977 1,739.7
2,99.8
J
of year)
end of period)
(First quarter)
(Second quarter)
(Third quarter)
(Fourth quarter)
(First quarter)
(May)
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Argentina� (cont ' d)
Wheat production (1,000 tons)
1970/71 4,920
1971/72 5,680
1972/73 7,900
1973/74 6,560
1974/75 5,970
1975/76 8,570
1976/77 11,200
1977/78 5,200 (Est.)
Petroleum production (1,000 barrels/day)
1971
1972
1973
1974
1975
1976
1977
Steel production
1971
1972
1973
1974
1975
1976
1977
423
433
420
412
394
397
430 (Est.)
(1,000 tons)
1,915
2,106
2,154
2,354
2,284
2,409
2,673
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