Since the return of democracy, without going further, Argentina’s upcoming goal is to reduce inflation to single digits annually as is the case in most countries in the region (except Venezuela and Bolivia), which require a macroeconomic stabilization plan implemented with political and social support. To date, the two most important programs have had the common denominator that they led to explosive crises. One of these was the Austral Plan, launched in mid-1985, which initially enjoyed broad popular support but failed to prevent growing fiscal imbalances from forcing the application of corrections two years later that led to the hyperinflation of 1989.
Another reason is the convertibility of the peso-dollar, which was maintained for just over nine years since 1991, together with the wave of privatization, which drastically reduced inflation. But its continuity with the next government and its promise to maintain the 1-to-1 ratio, when its shortcomings and economic consequences were already obvious, did not last for two years, because President De la Rúa resigned in the face of the serious political outbreak at the end of 2001, which ended with the default decided and celebrated by Congress.
From then on, economic policy was a worrying swing. Things improved from the “dirty work” of 2002 to 2005 with the renegotiation of foreign debt and high international prices Were, This opened a period of “double surpluses” (financial and external), low inflation and high growth, leading to progressive deterioration with growing K-populism, which was extreme between 2011 and 2015 with the exchange rate trap. The subsequent government attempted to correct this with destocking, devaluation, tariff unfreezing, inflation targeting, increased government spending, economic opening and debt. But the 2018 crisis forced him to turn to the IMF and adjust budget accounts until he lost PASO and the possibility of re-election in 2019. So K-populism returned, leaving as its legacy a colossal fiscal and monetary mess, twin deficits, delays in exchange rates and tariffs, and controlled prices, even though 2023 ended with inflation of 211% year-on-year and more than 1,400% in four years.
In the first two years of his term, the economic plan of the Javier Milei-Luis Caputo tandem, focused on the budget surplus, managed to reduce the national consumer price index to almost 118% in 2024 compared to last year, to just over 31% this year and to just under 20% in 2026, according to forecasts from private consulting firms, although the budget calls for 10%. Despite several phases announced over time (such as the partial end of stocks and the next indexation of the trading band), the index has not managed to break the monthly floor of 2% since September. The president himself surprised days ago when he predicted zero inflation for August next year.
Similarities with Uruguay 1990
A number of participants at the event were also surprised. FIEL Annual ConferenceMid-November, with the presentation of the Uruguayan economist Ernesto Talvi. As in the legend of back to the futureshowed the There are striking similarities between the starting point of Argentina’s economic plan at the end of 2023 and that of Uruguay in 1990. These included a high budget and quasi-budget deficit, triple-digit annual inflation, negative international reserves, prohibited access to foreign credit, a stagnant economy, strong dollarization, foreign exchange (and capital) controls, and a strong distortion of relative prices.
The parallelism prepared by the specialist (current principal researcher at the Elcano Royal Institute and former chief economist of the central bank of his country between 1990 and 1995) It was also extended to the original instruments of both plans.
In both cases there was a strong fiscal adjustment (previously in the case of Uruguay), flexible bands as an exchange rate anchor, a contractionary monetary policy, the accumulation of reserves (still pending in the case of Argentina), structural reforms (taxes and social security) and injection of international liquidity (arrangements with the IMF), as well as a restructuring of Uruguayan debt (which was later achieved). Investment grade) and, in Argentina only, support from the US Treasury.
Referring to the results of the 1990 program, Talvi explained this Within seven and a half years, inflation approached single digits and currently remains at less than 5% per year. However, it took two years to reduce it to 40% per year and another five and a half years to reach single digits. Furthermore, in the period 1990/2024 Per capita income in Uruguay rose 50% more than in Argentina.
In his opinion the most important lessons were extracted “strategic patience” (do not force a decline in inflation through very high real interest rates and/or exchange rate appreciation) and Continuity of state policy. For example, when the then left-wing president José Mujica received a group of Spanish businessmen, he dedicated a striking sentence to them: “I came to the presidency, but not to power. I can’t change anything. Would you like to hear something better than that, in which you can invest?”
Nelson Fernández, well-known Uruguayan journalist, author and correspondent for THE NATION It takes a 25-year look at how the plan that the then-President launched in 1990 came to be. Luis Lacalle Herrera and continued with Several governments of different political stripes are pursuing the same course.
“With the looming threat of a hypermarket on the horizon, the axes were to reduce inflation, limit the deficit, open the economy, encourage investment through tax incentives and transfer activities from the hands of the state to private companies. A high budget deficit emerged (7% of GDP), which was also complicated by a constitutional amendment with broad popular support for the indexation of pensions and pensions.”
He also explains that “the main ideologue of liberalism in Uruguay, Ramón Díaz, was appointed president of the Central Bank (BCU) and in his eyes the single-digit inflation target was set, which seemed impossible with a trend of price increases of 130% annually. Díaz was a man of shock, Lacalle was worried – he adds – but both understood that they had to have a gradual plan to succeed.”
Swimming band
In the spring of this year, the BCU introduced a floating exchange rate band with a floor at which it bought any dollars it wanted to sell and a ceiling at which everyone who wanted to buy from it sold dollars. These values rose at an officially established rate, which, however, only became explicitly known to the market in 1992. In six months the range increased from 2% to 7%. The system then set two percentages (which changed over 12 years) to separate the lower and upper bounds, as well as a preset monthly rhythm for both limits and a decreasing rhythm over time so that inflation approached a lower rate of depreciation.
As for the political and social support for the plan, Fernández believes that “in reality there has been more of a habituation than an explicit support. But it is also true.” The steady decline in the annual CPI showed that the government was achieving its target“.
“Perhaps it was saved from the political and union tug-of-war,” he adds, “because the struggle was focused on the privatizations promoted by Lacalle, which, after being approved by the Senate and deputies in two previous instances, was subjected to a referendum and a referendum at the end of 1992. For the Left (Frente Amplio and the PIT-CNT union), the main objective was to stop the privatization of state companies, and so the plan remained intact and successful.” Effect.”
Although there were debates and complaints about the delay in the exchange rate – he adds – “Díaz was tough and the president knew that there was a lot at stake in the plan. The success was that Uruguay does not experience a “refoundation” with every change of government, The economic team of Julio María Sanguinetti, who took office again in 1995, ensured continuity of the plan“.
In October 1998, the annual moving rate of the CPI was 9.9% and the target of a single-digit percentage was achieved. “The Minister of Economy Luis Mosca (of the Colorado party, Batllista) received in his office his predecessor, Ignacio de Posadas (of the Blanco party, nationalist), and they celebrated the success with a few pizzas from the bar on the corner.” The plan was maintained under President Jorge Batlle and in December 2001 inflation fell to 3.59% per year.“, emphasizes the journalist.
Nevertheless, the Uruguayan program suffered from the effects various external shocksmainly from Argentina after the convertibility outbreak in late 2001. In June 2002, the end of the exchange rate band was announced (following the previous devaluations of the Brazilian real and the Argentine peso), and the free floating caused the dollar to rise from 17 to 32 Uruguayan pesos and increased interannual inflation to double digits, an event that was not repeated.
A little over two months ago, Nelson Fernández presented his latest book in Montevideo (Freedom too!) for the 40 years of democracy in his country. There were two moderators: former presidents Julio María Sanguinetti and Luis Alberto Lacalle Herrera, representatives of their respective political parties. Acting President Yamandú Orsi also wanted to attend but was unable to do so due to scheduling problems, but Vice President Carolina Cosse was present. A fact that is as enviable as it is impossible in Argentina. where three politicians of different views cannot share the same space without offending each other.
About The Author
