Argentina’s Most Recent Inflationary Cycle, 1975–85

Abstract

Argentina’s present problems are the result of the combination of major external shocks and ‘weak’, ‘wrong’ or ‘delayed’ internal responses. The basic external factors were the two oil shocks of 1973 and 1979, the abrupt increase in interest rates and the reversal of international capital flows that took place in 1982. The main internal responses were persistent deficit financing and the (deliberate) overvaluation of the peso — seen as a painless way of controlling inflation. Two main consequences of this situation were the huge capital remittances from Argentina to the USA (at subsidised rates) during 1978–82, and the collapse of taxable money (M1) from 1982 onwards, which in themselves seriously complicated the internal and external situation. The measures aimed at the correction of the external imbalance were less delayed and more immediately successful than the measures aimed at the control of the internal disequilibrium. Thus, on the one hand, the external situation was speedily improved in both 1975–6 and 1981–2, as a consequence of a series of devaluations; on the other, it proved impossible to control the high and increasing rate of inflation, a result itself not unconnected with the policy of devaluation. Any analysis of the short-term problem has to take into account the longer-run frailty of both the external sector and the growth process. This phenomenon, as we will see once the chronology has been set out, is closely connected with an economic strategy that for many years has emphasised the internal market, assuming the impossibility of industrial exports.