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Out of Phase Again

More than twenty years ago I published a short article on Inter-American relations with the title “Out of Phase.”1 Intellectual fashions in thinking on development, I tried to show, tended to go through changes in the United States that were matched, but in the opposite direction, by shifts occurring at about the same time in the mood of Latin America, the result being an “orgy of misinterpretation and misunderstanding.” I was writing about the concrete experience of the five-year period that lay just behind us then, without any attempt to argue that this mismatch has a necessary or permanent character. But looking at the current scene and noting that my title applies more than ever I almost wonder whether I might have stumbled on some sort of law.

In the earlier paper I talked about switches from one set of beliefs to another. This time I am concerned with a more fundamental, if less easily defined, shift: from total confidence in the existence of a fundamental solution of social and economic problems to a more questioning, pragmatic attitude; from ideological certainty to open-ended, eclectic, skeptical inquiry. Latin Americans have of course long been criticized in the North for the ideological rigidity with which they are supposed to approach many issues. And in the field of economic policy—where discussion often proceeds along ideological lines, the consequence of a long history of antagonistic debate in the North—it is probably true that many Latin Americans have tended to take “ideological” positions (of both left and right) on such matters as planning, the market mechanism, foreign investment, inflation, the government’s role in economic development, and so on.

But recently there have been signs of substantial change in this picture, largely as a result of bitter experience. In the aftermath of the repressive authoritarian regimes that came to power in the Sixties and Seventies, many Latin Americans did more than rally to a politics that accommodates a range of opinions (each of which is firmly held). They were sufficiently shaken in their certainties to wish to engage in open-ended dialogue and deliberation, ready to discover something new about their own opinions and values.2 In Argentina, the Latin American society that has had perhaps the most severe internal conflicts over the past fifty years, the idea of social “concertation,” a process involving much give and take on the part of various social groups, has achieved considerable prestige during Alfonsin’s presidency; and I was told that nobody would today proudly give the name Intransigente to a political party—even though a minor party with that name (dating, as might be expected, from the Sixties) still is functioning. At the same time, the spectacular miscarriage of economic policies inspired by ideology (again of both left and right) has given rise to a new experimental spirit among Latin American economists, intellectuals, and policy makers. This spirit, with its readiness to draw on a wide variety of insights, was strongly evident in the monetary reforms enacted to control inflation under Argentina’s Plan Austral in June 1985 and Brazil’s Plan Cruzado in March 1986.

In both Argentina and Brazil inflation had been running at or close to three-digit levels for some years, since 1975 in Argentina and since 1980 in Brazil, Argentina’s inflation rate being in general two or three times higher than Brazil’s. (For example, prices increased 700 percent in Argentina and 250 percent in Brazil in 1985.) To have inflation proceed at such levels for so long without its accelerating to hyperinflation and getting entirely out of control is unusual. It means that both countries were equipped with elaborate mechanisms for indexing wages, salaries, exchange rates, interest rates, etc., which contributed mightily to making inflation both tolerable and self-perpetuating. In the two countries, fiscal deficits played initially an important role in contributing to the inflation, but as some prices continued to rise sharply for a number of years, it could be argued that the deficit, or a very large part of it, was as much an effect as a cause of inflation.

In 1981, the United States economy went into recession, international interest rates rose sharply, and net international lending came to a full stop in 1982 when the Mexican government declared a moratorium on its debt. As a result, the Brazilian and Argentinian economies came under strong pressure to contract in order to adjust their balances of payments. In the course of the ensuing recession, deep cuts in imports were achieved, helped along by some large devaluations. All the while, however, inflation continued unabated, indeed it accelerated. Under these conditions it is easy to understand why the customary advice of the International Monetary Fund to fight the inflation by contracting the economy even further met with enormous resistance.

In the Fifties and Sixties, a group of Latin American economists had proposed a “structuralist” alternative to the “monetarist” analysis and prescriptions of the International Monetary Fund. The structuralists made a distinction between, on the one hand, “fundamental” inflationary pressures arising from domestic social structures (such as antiquated land tenure systems) and, on the other, the more surface “propagation” phenomena such as the wage-price spiral and monetary expansion. Whatever the merits of this distinction when inflation was in the lower part of the two-digit range, as was the case in the Fifties in the more inflation-prone Latin American countries, it lost plausibility and usefulness once inflation accelerated to the three-digit range. It then became obvious that the “propagation mechanisms” had taken off on their own and had themselves turned into the “fundamental” factors that were driving the inflation. They were now dubbed “inertial inflation” and desperately needed to be attended to.

Faced by increasing threat of hyper-inflation, policy makers in Argentina and Brazil were in a quandary. Disliking the IMF model and left without a serviceable countermodel of their own, they looked for a different approach to policy. They were fortunate in being assisted by a group of economists who, drawing on a wide variety of insights (from the sociological theory of inflation to rational expectations theory) and being endowed with considerable theoretical acumen and practical imagination of their own, had conceived of a novel formula designed to bring inflation under control: the “heterodox shock” treatment of inflation, which was first used in Argentina in 1985 and was then applied again, with a few improvements and under rather more favorable circumstances, at the beginning of 1986 in Brazil.3

Here is a very brief outline of the principal elements of the two reform plans:4

1) The old currency is replaced by a new one (one unit of the latter = 1000 units of the former).

2) Prices and wages are temporarily frozen.

3) Indexation of wages, salaries, monetary instruments, etc., is abolished.

4) With the return to price stability, which thereby improves the fiscal position on several counts, and with the help of additional austerity moves, the governments will cut borrowing from the Central Bank—in Argentina the government pledged to give it up entirely.

5) Prereform contracts involving payments at future dates are assumed to have made provision for expected inflation and their terms are changed by applying to future payments in the new currency a conversion table (tabela), which establishes a series of equivalences between the new and the old currency. Depending on maturity these equivalences are set in line with an official estimate of expected inflation under the old and new regimes.

The principal objective of these measures was to break inflationary expectations and to contain any recessionary impact by not relying exclusively on changes in the monetary aggregates. A very important role was to be played by price and wage controls and this was the principal “heterodox” aspect of the plan, while the tabela was its major technical innovation. To a considerable extent, the success of the reform was thought to rest on the hoped-for replacement by a new “social contract” or by “social concertation” of the tug of war for income shares among different social groups that had long fueled the inflation—unionized workers, price-setting producers, and the state, with its taxing and money-issuing authority. It was this tug of war, institutionalized as it was through widespread indexation of wage rates as well as exchange and interest rates, that was thought to be responsible for the ever larger inertial component of the inflation during its accelerating phase.

Both reforms have already made monetary history. During its early months Brazil’s Plan Cruzado has done remarkably well in bringing inflation down to quite low levels. In Argentina prices have recently begun again to rise at rates of 4 to 5 percent per month. But then Argentina has been even more inflation-prone than Brazil in recent decades, and its powerful unions have political ties to the Peronists who are in opposition to the Alfonsín government. Under the circumstances, it was quite an achievement to have brought down inflation from about 25 percent per month before the reform to present levels.

The remarkable parallels between the Brazilian and Argentinian reforms have several explanations. For one, both countries experienced, at approximately the same time, three-digit inflation and the threat of its getting wholly out of control. More significantly, ideas about the “heterodox shock” had been worked out in intensive, often joint discussions among a group of prominent Argentinian and Brazilian economists who, having both strong democratic convictions and new technical proposals to offer, were given influential policy or advisory positions in the two countries when the inflation took a turn for the worse in 1985–1986. But a third common condition of the two countries is the most interesting: both countries had just recently reinstalled civilian government after a long spell of military rule. At the time of the reforms the new governments had held power for some eighteen months in Argentina and for almost a year in Brazil; in both countries inflation had worsened during those periods, causing the new governments to lose prestige and popular appeal.

Actually both phases—the worsening of inflation and the subsequent successful reform move—through which the fledgling democracies of Argentina and Brazil passed can be seen as conditioned by the politics of the postauthoritarian situation. When a civilian, democratic government first comes into power after a long period of repressive military rule, it is normal for various, newly active groups of the reborn civil society—particularly the long-repressed trade unions—to stake substantial claims for higher incomes. The initial impulse of those to whom the demands are addressed is to grant at least some of them, be it for the sake of social peace or out of a sense of obligation to undo past oppression and injustice. New inflationary and balance-of-payments pressures are of course likely to result from the granting of such demands.

Inflation can nevertheless be a useful mechanism in this situation: it permits newly emerging or reemerging social groups to flex their muscles, with inflation acting as a providential safety valve for accumulated social pressures.5 This works only up to a point, however, with the tolerance for additional inflation varying from one case to another. For example, in post-Franco Spain the tolerance for an acceleration of inflation was probably much greater than in post-authoritarian Argentina and Brazil: in these two countries the inflation was already at a triple-digit level when the civilian governments took over, so that the acceleration of the inflation risked a plunge into hyperinflation with obvious dangers for the prestige and survival of the new democratic regimes.

  1. 1

    In Encounter, special issue on Latin America, Vol. XXV, No. 3 (September, 1965), pp. 21–23.

  2. 2

    See my “Notes on Consolidating Democracy in Latin America” in Rival Views of Market Society, and Other Recent Essays (Viking, 1986).

  3. 3

    The term is probably Francisco Lopes’s, whose book with this title was published shortly after the Brazilian reform move. See his Choque Heterodoxo: Combate à Inflação e Reforma Monetáia (Rio de Janeiro: Campus, 1986). Some important contributors to the discussion are: Persio Arida, Edmar Bacha, Luiz Carlos Bresser Pereira, and André Lara Resende in Brazil, and Adolfo Canitrot, Roberto Frenkel, and Daniel Heymann in Argentina.

  4. 4

    A similar plan was applied in Israel in July 1985. See the article by Michael Bruno, Inflação Zero, Persio Arida, ed. (Rio de Janeiro: Paz e Terra, 1986).

  5. 5

    See “The Social and Political Matrix of Inflation: Elaborations on the Latin American Experience,” in my Essays in Trespassing (Cambridge University Press, 1981), pp. 201–202.

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