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Stabilization

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This overview examines Argentina's exchange rate stabilization efforts through heterodox economic strategies, notably the Austral and Cruzado Plans. It critiques the wage-price-exchange rate controls, budget improvements, and import/export tariffs, highlighting the dramatic fluctuations in inflation and public confidence. The analysis chronicles the economic crisis from 1985 to 2002, detailing the interplay between fiscal restraint and inflation trends, alongside the introduction of new currencies. The text also sheds light on the consequences of these measures, including decreased real wages and GDP, and the eventual fiscal reforms under President Menem.

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Stabilization

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Presentation Transcript

  1. Stabilization

  2. Importance of the Exchange Rate

  3. Austral Plan • Heterodox • Set wage-price-exchange rate controls • To improve the budget • Increased public sector prices • Depreciated the exchange rate • Imposed duties imports and export tariffs • New Monetary unit was introduced: Austral

  4. Performance: • Inflation decreased • Real output decreased • Real wages decreased • When price freeze was lifted prices increased • Real tax revenues decreased • Deficit increased • Loss of confidence • Crisis • From 1985 to 1986 annual inflation decreased from 672.5 to 85.7 • By 1989 annual inflation was 3,080.5

  5. In 1989 Menem assumes the Presidency • Fiscal restraint • Prices of public services increased • Taxes increased • Deficit decreased • Inflation went from 2,314.7 in 1990 to -0.7 in 2000 • 1999-2002 Economic crisis • 1999 real GDP decreased • Were not willing to devalue the currency • Capital flight • 2001 Argentina declares a moratorium • IMF bailout

  6. Brazil • Heterodox • In 1986 the “Cruzado Plan” was adopted • General price freeze • Partial freeze on wages • Exchange rate fixed at 13.8 • A new currency was adopted, the Cruzado • Performance: Dramatic decreased in inflation • From 226 in early 1985 to 0.6 by early 1986

  7. However: • Deficit increased • Loss confidence • Inflation back to 394.6 by 1987 and up to 2,489 by 1993 • A new plan was adopted: the Real • Mix of heterodox and orthodox plan • Fiscal adjustment • Indexation of prices • Adoption of a new currency, the Real • Inflation decreased to 5.3 by 2000

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