Volume 43, Number 171,
October-December 2012
Argentina and Brazil:
Macroeconomic Challenges
Eduardo Bastian and Elena Soihet

Differentiating the macroeconomic regimes followed by Brazil and Argentina in the last decade requires, as a first step, taking a second look at the circumstances that originated these regimes. In this context, although it is true that both regimes were adopted following currency crises, we must also keep in mind that the crises were not exactly the same. In Brazil, the crisis was brought under control in just a few months, and by mid-1999 the new regime was already operating normally. In fact, following the 1998-1999 crisis, then-President of Brazil Fernando Henrique Cardoso kept the Treasury Minister, Pedro Malan, and for the post of President of the Central Bank, he invited Armínio Fraga, an economist from the orthodox school of thought with experience in financial markets.

In Argentina, the currency crisis that led the country to abandon convertibility was much deeper and more intense than the Brazilian currency crisis in 1999. Because Argentina had chosen the extreme option of convertibility, abandoning the regime was much more traumatic and was accompanied by default, corralito and corralón.9 In Argentina, the crisis reached immense proportions and normalizing economic life took much longer.10

The differences in intensity and duration of the crises are key issues when explaining the different strategies adopted by the two countries in the following years. In Brazil, the less severe crisis did not affect the prestige of orthodox economics. In this sense, there was continuity and the new regime that emerged after 1999 was nothing more than a new, state-of-the-art regime in terms of macroeconomic policy within the orthodox school of thought, that is, a regime oriented towards controlling inflation and gaining confidence from the international market. The new macroeconomic regime can be called an improved version of the previous macroeconomic regime.11

In Argentina, the profound crisis that followed the end of convertibility weakened the position of those who defended the model in the 1990s and opened the doors to adopting heterodox measures. Throughout the convertibility crisis, the Argentinean government opted not to follow imf recommendations (Bresser Pereira, 2007: 300 apud Lavagna, 2006). Moreover, the government did not adopt dollarization — which in practice would have sunk the choice to implant the convertibility regime in 1991 — nor did they implement the inflation goals regime, which is what Brazil did following its crisis in 1999.

However, it is also important to recognize that due to the severity of its crisis, Argentina had fewer options for economic policy in 2002 than Brazil had in 1999. In other words, the economic crisis and moratorium meant that Argentina had a smaller margin to maneuver than the Brazilians did when selecting a new macroeconomic regime.12 On the one hand, facing a context of moratorium on public debt, the possibility for Argentina to acquire public debt was seriously affected, as Argentina no longer had a foreign market for its public debt. On the other hand, adopting a devalued exchange rate was almost an inevitable path: following the moratorium, options for external financing were extremely limited, which also made it impossible to back deficits in public accounts (Mecon,13 2005: 38). Running surpluses in public accounts was an absolute necessity up until then, as it was the only way to obtain currency. Facing the need to export, the Argentinean central bank started to accumulate international reserves starting in the second quarter of 2002, and acting to stabilize changes in the competitive parity of 3.5 pesos per dollar (Sturzenegger & Zettelmeyer, 2006: 201).

9 The exit from convertibility occurred in two stages: 1) freezing deposits and the banking holiday (December 1, 2001); 2) default on the debt (December 24); 3) devaluation of the peso and converting currency into pesos (between January and March 2002); 4) unification of the currency market and making the peso more flexible (February 2002) (Sturzenegger & Zettelmeyer, 2006: 200-201). The Argentinean default was unique as it included payments that still had not matured. Moreover, it is estimated that 60% of the debt that entered into default belonged to Argentineans (Sturzenegger & Zettelmeyer, 2006: 182; 200-201). In the context of peso conversion, they decided to convert most of the debt contracted in dollars with an exchange rate of 1 peso per dollar (plus indexing to the consumer price index), while banking deposits originally entered in dollars were converted at an exchange rate of 1.40 pesos per dollar (plus indexing to the consumer price index) (Frenkel & Rapetti, 2008: 216). For a detailed discussion of Argentina’s exit from the crisis, see Levy-Yeyati & Valenzuela (2007).

10 The exit from the convertibility system was a traumatic process and was the dénouement of a crisis that caused Argentinean GDP to fall 21% in just over three years, and increased unemployment rates to 21.5% (Frenkel & Rapetti, 2008: 216).

11 When Lula assumed the presidency in 2003, there were no changes to the macroeconomic regime. It was only during Lula’s second term (2007-2010) that it was possible to see inflection in the economic policy, although there were no important changes related to the macroeconomic regime.

12 According to Frenkel & Rapetti, “because the economy was still absorbing the effects of the crisis and domestic financial markets had shrunk so much, the central bank decided not to follow the inflation goals regime” (Frenkel & Rapetti, 2008: 219). Likewise, even if it had opted to adopt the inflation goals regime, the conditions were not in place to do so.

13 Mecon stands for Ministerio de Economía de Argentina (Ministry of Economy of Argentina).

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PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 194 July-September 2018 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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