Back Matter
Author:
Ms. Christina Daseking
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,
Mr. Atish R. Ghosh
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Mr. Timothy D. Lane
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Mr. Alun H. Thomas
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Language:
English
Keywords:
OP; regime; debt; crisis; deficit
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Abstract

In 2001- 02, Argentina experienced one of the worst economic crises in its history. A default on government debt, which occurred against the backdrop of a prolonged recession, sent the Argentine currency and economy into a tailspin. Although the economy has since recovered from the worst, the crisis has imposed hardships on the people of Argentina, and the road back to sustained growth and stability is long. The crisis was all the more troubling in light of the fact that Argentina was widely considered a model reformer and was engaged in a succession of IMF-supported programs through much of the 1990s. This Occasional Paper examines the origins of the crisis and its evolution up to early 2002 and draws general policy lessons, both for countries’ efforts to prevent crises and for the IMF’s surveillance and use of its financial resources.

Appendix I Argentina’s Potential Output Growth

As a result of Argentina’s strong growth performance following the stabilization at the beginning of the 1990s, and its recovery from the Tequila crisis, by mid-decade it was commonly assumed that Argentina’s potential output growth was in the range of 4½ to 5 percent per year. At least in retrospect, however, there are reasons to believe that this represented a significant overestimate of potential output growth.

Potential output growth is the growth rate of the economy at which, in the absence of monetary impulses, there should be no inflationary pressures. Conceptually, potential output growth need not be constant. Indeed, to the extent that Argentina’s structural reforms (including deregulation, privatization, and labor market reforms) in the early part of the decade gave a boost to the level of potential output, potential output growth would surge initially but then return toward its longer-run rate—especially as structural reforms began to fizzle and in, some instances, to be reversed.

One approach to estimating potential output growth is to fit a smoothing filter to actual real GDP. This allows for some variation in the growth rate of potential output. Given the structural changes of the economy, however, the key question concerns the period over which the filter should be applied. Quarterly (seasonally adjusted) national accounts data are available from 1993, and given that growth in 1991–92 was probably driven by a rebound from the collapse during the hyperinflation, 1993 provides a convenient starting point. More tricky is the choice of the end-point. Figure 14 shows two possible choices, ending the sample period in 1999: Q4 (labeled A) or 2000: Q4 (labeled B); beyond these terminal dates, potential output growth is extrapolated using the final quarter’s growth rate.44

Figure 14.
Figure 14.

Potential Output and Output Gap

1 A Hodrick-Prescott filter is applied to the period 1993:1–1999:4 (Trend A) or 1993:1–2000:4 (Trend B); potential output thereafter is extrapolated using the last quarter’s growth rate.2 Output gap implied by Trend A; positive output gap indicates actual output above estimated potential output.

Using Trend A, output was on average 2 percent above potential in 1997 and, on average, almost 3½ percent above potential in 1998. The growth slowdown brought the economy to 2½ percent below potential in 1999, 5½ percent below potential by 2000, and almost 12 percent below potential by 2001. Using Trend B, output was almost 4½ percent above potential in 1998, close to its natural level in 1999, 2½ percent below potential in 2000, and 7½ percent below potential in 2001. The deceleration in potential output growth in 1999–2000 implied by trend B seems implausibly large, and the small output gaps inconsistent with the behavior of other macroeconomic data. For instance, consumer prices, purged of the effect of import prices, were increasing through the first half 1998, but began to decline in the fourth quarter of the year and continue to fall through 2001 (see Figure 14, bottom panel).45 Likewise, unemployment reached its lowest level in the second half of 1998 (only semi-annual data are available) and started increasing thereafter. The evidence thus suggests that, while output was above potential in the first part of 1998, by end-1998 and early 1999, a clear output gap was emerging—consistent with Trend A, but not with Trend B.

According to Trend A, potential growth decreased from 3½ percent per year during 1993–97 to 3 percent by 1998 and 2½ percent thereafter. For the period 1993–2001, potential output growth averaged 3 percent per year—well below the 4½ to 5 percent potential output growth underlying medium-term debt sustainability projections. This may also be compared to Argentina’s fitted growth rate implied by the cross-country growth regression reported in Box 8 of the text, which also yields an average growth rate of 3.0 percent per year when the effects of deflation are excluded.46

Appendix II Chronology of Key Developments in 2001–2002

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1

During the 1990s, there were four IMF arrangements: an arrangement under the Extended Fund Facility approved on 3/31/92; a Stand-By Arrangement approved on 4/12/96; another Extended Arrangement, approved on 2/4/98; and another StandBy Arrangement, approved on 3/10/00. Stand-By Arrangements are short-term arrangements designed to address temporary balance of payments difficulties, while Extended Arrangements focus on balance of payments difficulties arising from longer-term structural problems.

2

Lessons for crisis management, in particular, based on the experience in a number of countries during the past 10 years, are drawn in a more comprehensive fashion in Collyns and Kincaid (2003).

3

Previous crises and their origins are reviewed in Ghosh and others (2002).

4

While individual commentators differ in their emphasis on various factors, the view presented in the paper overlaps with many of the features stressed by Calvo (2002) and Mussa (2002).

5

The calculations of the structural balance are sensitive to assumptions about potential output growth, which are inherently uncertain. While Table 1 assumes potential growth of close to 3½ percent during this period, the estimated cumulative structural deterioration would be higher (lower) by about 1¼ percentage point, if potential growth was assumed to be 1 percentage point lower (higher).

6

From 1996 on, off-budget transactions by the provinces added another estimated 0.2 to 0.4 percentage points of GDP annually to the public debt ratio.

7

IMF staff’s medium-term scenario in early 1998, for example, explicitly assumed a potential output growth rate of 5 percent.

8

Labor productivity (measured as GDP per employed worker) grew by nearly 3 percent per year over the period 1990–98; this, combined with a steady growth in the working-age population of about 2 percent per year, yields the 5 percent growth of potential output.

9

This pattern is consistent with theoretical models of exchange-rate based stabilizations. The rapid decline in inflation associated with such a stabilization generates a wealth effect that induces consumers to bring forward their purchases of durable goods. Once this stock adjustment has taken place, demand for durables declines until the next replacement cycle.

10

The standard deviation of Argentina’s growth rate fell only slightly from 4½ percent in 1980–90 to 4¼ percent in 1991–98. This compares with a decline from 5 percent to 2¼ percent in Brazil and from 6¾ percent to 2¾ percent in Chile over the same period.

11

The average maturity of the government’s medium- and long-term debt (measured as the ratio of total debt to annual amortization payments) exceeded 10 years even in 1999–2000 (compared with about six years for the United States) and was considerably higher in the mid-1990s, while short-term debt was less than 5 percent of total debt (30 percent in the United States).

12

The pension reform, introducing a funded pillar, served to reduce future government liabilities, but implied revenue losses in the transition period of an estimated 1 to 2 percent of GDP a year.

13

The comparison in Figure 2 is based on value added tax (VAT) revenue only. A comparison of the productivity of personal and corporate income taxes is hampered by different tax brackets and limited data availability. Nevertheless, a rough measure (using average and top rates) for a subgroup of countries confirms Argentina’s comparatively weak revenue collection. Symptomatic, also, are the costs of tax collection, which were about 2 to 2½ percent of revenues in Argentina, compared with about 1½ percent in Brazil and Mexico, ½ percent in Chile, and less than ½ percent in the United States.

14

This argument is forcefully made in Hirschman (1985).

15

It should be noted, however, that the perception of corruption is correlated with the economic situation: Argentina’s deteriorating corruption index (at least after 1998) may thus, in part, also reflect the deepening crisis.

16

Yeats (1998); and Chudnovsky, Lopez, and Porta (1996).

17

A reason for the lower liquidity risk associated with domestic borrowing is the wider range of collateral, such as real estate, that is acceptable to domestic, but not to foreign, lenders (see Caballero and Krishnamurthy, 2002).

18

Throughout the second half of the 1990s close to 60 percent of banking-system assets and liabilities were denominated in dollars.

19

In 2000, the new government reversed some elements of this law, authorizing dominance of collective agreements at the enterprise level over those at the sectoral level, and extending the trial period for subsidized labor contracts from one month to three months.

20

During 1990–94, employment in the manufacturing sector fell by about 20 percent.

21

Heckman and Pagés (2000); Calmfors and Driffill (1998); and Thomas (2002).

22

Caution is required in making strong inferences about the magnitude of wage adjustment, however, as there are questions about the quality of wage data in Argentina. Galiani’s (2001) analysis of micro data from the labor force survey suggests that the average nominal wage in the Buenos Aires area declined by 14 percent between 1994 and 2000, which compares with a 4 percent decline on the basis of official numbers from the National Institute of Statistics.

23

The results are based on a model developed in Ghosh, Gulde, and Wolf (2002).

24

The absence of such restrictions also, in the short run, eased pressures on the currency board itself, by loosening the link between peso deposits and base money.

25

Total capital inflows remained positive, albeit declining, until 2001. This mainly reflects large foreign direct investment projects that were already in the pipeline.

26

Lending rates in Mexico increased from 22 to 35 percent (12 percentage points in real terms) while Chile’s rates rose from 17 percent to 24 percent (5 percentage points in real terms).

27

Also, according to data collected by Burns on political crises across the world, Argentina averaged a major government crisis each year over the 1970–90 period compared to a worldwide average of one crisis every five years.

28

The calibrated fiscal impulse (i.e., the structural fiscal adjustment), while sensitive to uncertain potential output growth assumptions, provides a more appropriate assessment of policies than developments in the actual balance, which were dominated by the economic downturn. The impulse estimates in Table 4 are based on potential output growth of about 2½ percent (see Appendix I) and would be some ¼ percentage point higher (i.e., a smaller withdrawal) or lower, respectively, for every 1 percentage point reduction or increase in assumed potential output growth.

29

In fact, the design of the Argentine exchange rate regime allowed for greater leeway in altering monetary policy than would have been possible under a “pure” currency board arrangement (where changes in base money can occur only through movements of the central bank’s foreign exchange reserves). In Argentina, the central bank (BCRA) could engage in currency and bond swap operations as well as repos and reverse repos with banks. In addition, a discounting facility, whereby the BCRA rediscounted securities and commercial paper from banks at interest rates above the repo rate, served as a limited lender-of-last-resort function. Reflecting the leeway under Argentina’s currency board arrangement, the correlation (over the period 1993: Q1–2001: Q4) between net foreign assets of the central bank and reserve money was only 0.08 and the correlation between the changes in these variables was only 0.45 (instead of unity).

30

This may be contrasted to the experience in East Asia, where the sustainability of public finances was much less of a concern, and where fiscal targets were rapidly loosened as it became clear that activity was going to be much weaker than originally projected. See Lane and others (1999).

31

For instance, it was estimated that a 50 percent devaluation would make half of all loans nonperforming.

32

Appendix II provides a list of the main policy measures undertaken in 2001–2002.

33

In addition, several “competitiveness plans” were launched to increase profitability in the sectors most affected by the recession. These were estimated to cost ½ percent of GDP in revenues, but they proved largely ineffective, and complicated tax administration considerably. Most—though not all—were abandoned later in the year.

34

The authorities also announced that the peso would be repegged to an equally weighted basket of the dollar and the euro, once the euro had reached parity with the dollar (which, however, did not take place prior to the collapse of the currency board arrangement). Indeed, this strategy would have likely worsened competitiveness problems, to the extent that the peso would have been partially repegged from a currency on a depreciating trend (the U.S. dollar) to one on an appreciating trend (the euro).

35

In present value terms, using a discount rate of 5 percent per year (approximating the potential growth rate of nominal GDP), for instance, the operation entailed Argentina saving $12.6 billion debt service obligations in 2001–05 at the cost of $22.1 billion.

36

It was estimated that a hypothetical 70 percent haircut on public debt would be sufficient to wipe out the entire capital of the banking system.

37

On January 11, export surrender requirements were introduced and transfers of funds abroad were blocked unless they related to certified foreign trade transactions or were explicitly authorized by the central bank. On February 11, the dual exchange rate system was abolished and the market opened for the first time under a unified regime; the exchange rate depreciated to 1.8 pesos per U.S. dollar.

38

The government eventually announced the issuance of compensation bonds amounting to about 9 billion.

39

Program reviews were nevertheless completed, as performance criteria were either met on the basis of adjusters or waived.

40

See IMF (2002a).

41

The new exceptional access framework requires, among other things, a rigorous analysis of debt sustainability and good prospects of the member regaining access to private capital markets within the time IMF resources would be outstanding. On prolonged use, the IMF’s Executive Board concluded that the IMF should apply consistently the existing policies on financing for countries with slow progress toward external viability, including that access for such countries should continue to be guided by the need to reduce their outstanding use of IMF resources over time.

42

An extensive review of the IMF’s role in Argentina was prepared by the Independent Evaluation Office subsequent to this report, and was issued in 2004.

43

See IMF (2002b).

44

By 2001, the economy is clearly in collapse and including 2001 in the estimation sample leads to a downward bias of potential output over the entire period.

45

The figure shows the residual from an OLS regression of the logarithm of the consumer price index regressed on the logarithm of the import price index.

46

The model estimated for Box 8 includes a term to capture low or negative inflation, on grounds that deflation may lower aggregate demand. This term is excluded here, since deflation is likely to affect aggregate demand but not potential output.

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Cover Lessons from the Crisis in Argentina
Lessons from the Crisis in Argentina
ISBN:
9781589063594
ISSN:
0251-6365
Publication Date:
10 Feb 2005
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781589063594.084
Pages:
60
Figure 14.

Potential Output and Output Gap

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