Lessons from the stabilization process in Argentina, 1990-1996 By Domingo Cavallo & Sonia Cavallo (h) Jackson Hole, Wyoming, August 29 th , 1996 1 Hyperinflation exploded in 1989. It was the final stage of a chronic inflationary process that began in 1945 and lasted 45 years. From the beginning of the century until the end of World War II, Argentina had been characterized by stable prices. Internal prices only reflected fluctuations related to events in the world economy, such as the two world wars and the Great Depression of the 1930’s. After 1945 the combination of industrial protectionism, redistribution of income based on increased wages, and growing state intervention in the economy touched off the inflationary process shown in table 1. After so many years of inflation, there is a general consensus among economists about the mechanics of this process. A persistent fiscal deficit, increasingly financed by monetary emission, caused more and more frequent devaluations of the local currency. The acceleration of inflation resulted from the demonetization of the economy as the public tried to avoid the inflation tax. During the last decade of this period of chronic and growing inflation, the social and economic costs of inflation became evident. In the 1980s the economy, increasingly disoriented by inflation, declined at a rate of 1% per year. Employment continued to grow 1.6% per year but the 2.6% average annual decline in the productivity of the employed was the clearest evidence that only unproductive activities were expanding. This was especially the case of the public sector but it also existed in the private sector which continued to be strongly protected from foreign competition and involved in financial speculation. Government expenditure during the 1980s represented, on average, 33% of GDP, while the fiscal deficit was about 5% of GDP. In spite of the fact that the currency was strongly undervalued during the whole decade, exports grew at a rate of only 3% annually and imports contracted at a rate of approximately 7% annually. 1 Document prepared for the “Symposium on Achieving Price Stability”, Jackson Hole, Wyoming, August 29 th - 31 st 1996 and published by The Federal Reserve Bank of Kansas City, 1996.