Stagnation
Between 1975 and 1990, real per capita income fell by more than 20%, wiping out almost three decades of economic development. The manufacturing industry, which had experienced a period of uninterrupted growth until the mid-1970s, began a process of continuous decline. The extreme dependence on state support of the many protected industries exacerbated the sharp fall of the industrial output. The degree of industrialisation at the start of the 1990s was similar to its level in the 1940s. In the early 1970s, per capita income in Argentina was twice as high as in Mexico and more than three times as high as in Chile and Brazil. By 1990, the difference in income between Argentina and the other Latin American countries was much smaller.
Starting with the Rodrigazo in 1975, inflation accelerated sharply, reaching an average of more than 300% per year during the 1975–1991 period, increasing prices by a factor of 20 billion.
When Martinez de Hoz assumed power as finance minister prices in the previous month had increased at an annual rate of 5,000% and output had declined sharply. In 1976 the era of import substitution was ended, and the government lowered import barriers, liberalized restrictions on foreign borrowing, and supported the peso against foreign currencies. This opening exposed the fact that domestic firms could not compete with foreign imports, in part because of the overvalued currency, but also because of long-term structural problems. A financial reform was implemented that aimed to liberalize capital markets and link Argentina more effectively with the world capital market.
After the relatively stable years 1976–78, fiscal deficits started to climb again and the external debt trebled in three years. The increased debt burden interrupted industrial development and upward social mobility. Beginning in 1979 the rate of exchange depreciation was pre-fixed with a tablita, an active crawling peg based on a timetable which announced ahead of time a gradually declining rate of depreciation. These announcements were repeated on a rolling basis so as to create an environment where economic agents could discern a government commitment to deflation. Inflation responded to this policy and gradually fell throughout 1980 to below 100%. But gradually, during 1978 and 1979, the real exchange rate appreciated because inflation consistently outpaced the rate of depreciation. The overvaluation ultimately led to capital flight and collapse of the financial system.
Growing government spending, large wage raises, and inefficient production created a chronic inflation that rose through the 1980s, when it briefly exceeded an annual rate of 1,000%. Successive regimes tried to control inflation through wage and price controls, cuts in public spending, and restriction of the money supply. Efforts to stem the problems came to naught when in 1982 Argentina came into conflict with the United Kingdom over the Falkland Islands.
In August 1982, after Mexico had announced its inability to service its debt, Argentina approached the International Monetary Fund (IMF) for financial assistance, as it too was in serious difficulties. While developments looked positive for a while, an IMF staff team visiting Buenos Aires in August 1983 discovered a variety of problems, particularly a loss of control over wages affecting both the budget and external competitiveness, and the programme failed. With the peso quickly losing value to inflation, a new peso was introduced in 1983, with 10,000 old pesos exchanged for each new peso.
In December 1983 Raúl Alfonsin was elected President of Argentina, bringing to an end to the military dictatorship. Under Alfonsin, negotiations started on a new programme with the IMF, but they led to nothing. In March 1984, Brazil, Colombia, Mexico and Venezuela lent Argentina $300 million for three months, followed by a similar amount by the United States, providing some breathing space as it was not before late September 1984 that an agreement was reached between the IMF and Argentina.
In 1985 the currency was redenominated again, with the Austral substituting the discredited peso. In 1986, Argentina failed to pay the debt for several months until ultimately the debt was renegotiated with the creditor banks. During 1986 and 1987 the Austral Plan faded away, as fiscal policy was undermined by large off-budget spending and a loose monetary policy, again falling out of compliance with an IMF programme. A new IMF arrangement was reached in July 1987, only to collapse in March 1988.
The next move by the authorities was to launch the Plan Primavera in August 1988, consisting of a package of economically heterodox measures that foresaw little fiscal adjustment, and this time the IMF, in the absence of firm policies, refused to resume lending to Argentina. Six months after its introduction the Plan Primavera collapsed, leading to hyperinflation, and riots.
Read more about this topic: Economic History Of Argentina