Crises, Reforms, and Reversals in Argentina, Chile and Peru Saki Bigio

Crises, Reforms, and Reversals
in Argentina, Chile and Peru
Saki Bigio1
Thomas J. Sargent2
April 2014
1 Columbia
GSB
2 NYU
1
A Personal Story
Before I begin with the motivation let me tell you a story...
2
A Personal Story
1970
1975
1980
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1985
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Before I begin with the motivation let me tell you a story...
1990
2
A Personal Story
1970
1975
1980
-I
ar
ci
a
e
1985
A
la
n
G
nd
B
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au
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M
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Before I begin with the motivation let me tell you a story...
1990
Balance of those decades and the decades after...
2
Peru in Figures
Figure : Peru: 1980-2013
3
Luck?
Has success been luck?
4
Chile in Figures
Figure : Chile: 1980-2013
5
Argentina in Figures
Figure : Argentina: 1980-2013
6
Three common histories
Argentina, Chile and Peru remarkably similar histories:
50-70s era of classical Latin American populism
Crises followed: hyperinflation, GDP decline
Violent Transitions
7
Three common histories
Argentina, Chile and Peru remarkably similar histories:
50-70s era of classical Latin American populism
Crises followed: hyperinflation, GDP decline
Violent Transitions
All three adopted very similar reforms (constitutions):
1.
2.
3.
4.
5.
Fiscal Discipline Reforms
Privatization
Social Security
Central Bank Independence
Others: market-based price systems, labor reform, tariffs
7
Three common histories
Argentina, Chile and Peru remarkably similar histories:
50-70s era of classical Latin American populism
Crises followed: hyperinflation, GDP decline
Violent Transitions
All three adopted very similar reforms (constitutions):
1.
2.
3.
4.
5.
Fiscal Discipline Reforms
Privatization
Social Security
Central Bank Independence
Others: market-based price systems, labor reform, tariffs
...but Argentina is different
Why?
7
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Reversals in Argentina
1990
1995
2000
2005
2010
8
Inflation in Argentina
Figure : Argentina: Official and Unofficial (Internet) CPI index
9
Our Paper
Historical Narrative
Study three parallel histories
10
Our Paper
Historical Narrative
Study three parallel histories
Review Descriptive Work of Reform Period
Differences in reforms
10
Our Paper
Historical Narrative
Study three parallel histories
Review Descriptive Work of Reform Period
Differences in reforms
Contribution
Employ economic theory to interpret events → systematically
To answer why Argentina?
10
Our Paper
Historical Narrative
Study three parallel histories
Review Descriptive Work of Reform Period
Differences in reforms
Contribution
Employ economic theory to interpret events → systematically
To answer why Argentina?
Postulate: Argentina’s inability to fix its political economy of
budget deficits
Common theme in other countries...
10
Three Quotations...
“Keeping books on social aid is capitalistic nonsense. I just use
the money for the poor. I can’t stop to count it.”
- Attributed to Eva Perón. Circa 1950s.
“Placed in a historic transition, I will pay for loyalty to the
people with my life.”
- Salvador Allende. Final words delivered September 11,
1973.
“My government policies have been described as liberal [i.e., free
market] by certain individuals who like to label reality. I am
sorry but you have the wrong label. My government and I are
simply pragmatic. This means that I do not pay homage to
theories, dogmas or myths. I am an agronomist, but I do not
breed cows and I do not believe in sacred cows.”
- Alberto Fujimori, Inaugurating speech of the
Constituent Congress. July 28 1993.
11
Negotations
Pinochet in Chile: faced virtually no opposition
12
Negotations
Pinochet in Chile: faced virtually no opposition
Fujimori in Peru:
Shining Path
Fujimori shut’s down Congress
12
Negotations
Pinochet in Chile: faced virtually no opposition
Fujimori in Peru:
Shining Path
Fujimori shut’s down Congress
Menem in Argentina:
Menem had to negotiate approval of reforms with Congress
Provincial Governments
No hard evidence
To understand this → Argentina’s political institutions
12
Popular Opposition in Chile
Figure : Chile: Worker Strikes
13
Electoral Rules
Chile: Electoral Rules after 89 Constitution
Electoral districts with only two slots (similar to US)
Coalition formation
Municipal elections - same day
President appoints local governors
14
Electoral Rules
Chile: Electoral Rules after 89 Constitution
Electoral districts with only two slots (similar to US)
Coalition formation
Municipal elections - same day
President appoints local governors
Peru: Electoral Rules after 93 Constitution
Regional Proportional Representation
Fragmented Unicameral Congress
Caudillo-based parties
One traditional party - APRA
Regional Governments - Low Budget, low participation
Limits on infrastructure investment
14
Electoral Rules
Argentina: Electoral Rules after 94 Constitution
Kept Historical Strong Federalism
Local congress, constitutions etc. (US Model)
In charge of large fraction of spending
15
Electoral Rules
Argentina: Electoral Rules after 94 Constitution
Kept Historical Strong Federalism
Local congress, constitutions etc. (US Model)
In charge of large fraction of spending
Regions key for congressional campaigns (Spiller and Tomassi, 2003)
Negotiations
At all steps of reforms
15
Electoral Rules
Argentina: Electoral Rules after 94 Constitution
Kept Historical Strong Federalism
Local congress, constitutions etc. (US Model)
In charge of large fraction of spending
Regions key for congressional campaigns (Spiller and Tomassi, 2003)
Negotiations
At all steps of reforms
Provinces can issue debt ⇒ bargaining instrument
15
Budget Assignment in Argentina
Muni 7%
Muni 9%
Provincial
13%
Common
Fund
18%
Debt 11%
Provincial
37%
Payroll 13%
Pensions 34%
National
55%
National 47%
Transfers
34%
GSE 7%
GSE 6%
Revenues
Expenditure
Figure : Argentina: Revenues and Expense Decomposition - 2004
16
Who determines budgets?
Scartascini and Stein (2009)
1. Proposal
Executive
Negotiations and Approvals
2. Execution
3. Performance Balance
17
Proposals
Chile - Strong Executive:
Proposes Budget
Congress can only reduce individual accounts → no reassignments,
increments
Short approval period (30-60 days) → automatic approvals otherwise
Explicit fiscal rules in recent years
18
Proposals
Chile - Strong Executive:
Proposes Budget
Congress can only reduce individual accounts → no reassignments,
increments
Short approval period (30-60 days) → automatic approvals otherwise
Explicit fiscal rules in recent years
Peru - Strong Executive:
Strong Executive. Proposes Budget.
Strong role of Finance Ministry → negotiations between different
budget offices
Short approval period
Explicit fiscal rules
18
Proposals
Chile - Strong Executive:
Proposes Budget
Congress can only reduce individual accounts → no reassignments,
increments
Short approval period (30-60 days) → automatic approvals otherwise
Explicit fiscal rules in recent years
Peru - Strong Executive:
Strong Executive. Proposes Budget.
Strong role of Finance Ministry → negotiations between different
budget offices
Short approval period
Explicit fiscal rules
Argentina - .... is different
18
Budget Proposals - Argentina
Argentina - Nominally Strong Congress, but...
19
Budget Proposals - Argentina
Argentina - Nominally Strong Congress, but...
According to Abuelafia, Berensztein, Braun and di Gresia (2009):
De facto powerful executive bargaining with...
Powerful Provincial Governors
Executive vs. Provincial Governors
19
Budget Proposals - Argentina
Argentina - Nominally Strong Congress, but...
According to Abuelafia, Berensztein, Braun and di Gresia (2009):
De facto powerful executive bargaining with...
Powerful Provincial Governors
Executive vs. Provincial Governors
Mechanism - Spiller and Tomassi (2003):
Governors and local party leaders: propel congressional careers
Short lived congressional terms
Tricky part, not formal institution
19
Budget Proposals - Argentina
Argentina - Nominally Strong Congress, but...
According to Abuelafia, Berensztein, Braun and di Gresia (2009):
De facto powerful executive bargaining with...
Powerful Provincial Governors
Executive vs. Provincial Governors
Mechanism - Spiller and Tomassi (2003):
Governors and local party leaders: propel congressional careers
Short lived congressional terms
Tricky part, not formal institution
On the other hand...
19
Formulation - Execution
Argentina - Manipulation by Executive
1. Forecast Manipulation
Extra surplus: assigned to Federal Accounts
2. Administration of Quota System
Tax Collection by Federal Government
Choice in timing delivery
3. Use of “Decretos Ley”
For emergency purposes
Used during 1995-2003 almost all years
20
Formulation - Execution
Argentina - Manipulation by Executive
1. Forecast Manipulation
Extra surplus: assigned to Federal Accounts
2. Administration of Quota System
Tax Collection by Federal Government
Choice in timing delivery
3. Use of “Decretos Ley”
For emergency purposes
Used during 1995-2003 almost all years
Once Provinces have their shares
Hard to coordinate in Congress
ex-ante: credible commitments?
20
Checks and Balances
Chile: Budget Office of Finance Ministry
Systematic Assessment of Performance
Punishment: determines spending ceilings following year
21
Checks and Balances
Chile: Budget Office of Finance Ministry
Systematic Assessment of Performance
Punishment: determines spending ceilings following year
Argentina: two audit and control institutions
Abuelafia et al. (2009):
SIGEN (Executive‘s office) ⇒ controlled
AGN (Congress‘s office) ⇒ bargaining tool
21
Social Security
Emergence of Safety Nets:
Similar historical evolution
Group by group
Emerge together with ability to tax
22
Social Security
Emergence of Safety Nets:
Similar historical evolution
Group by group
Emerge together with ability to tax
Fiscal Burden:
Use of entitlements for political leverage
Eighties: Tanzi-Bresciani-Turoni effects for SS
22
Social Security
Emergence of Safety Nets:
Similar historical evolution
Group by group
Emerge together with ability to tax
Fiscal Burden:
Use of entitlements for political leverage
Eighties: Tanzi-Bresciani-Turoni effects for SS
Need to Reform:
Temptation to use Funds
Temptation to Promise entitlements
22
Social Security
Emergence of Safety Nets:
Similar historical evolution
Group by group
Emerge together with ability to tax
Fiscal Burden:
Use of entitlements for political leverage
Eighties: Tanzi-Bresciani-Turoni effects for SS
Need to Reform:
Temptation to use Funds
Temptation to Promise entitlements
Privatization:
Chile: national level
Peru: parallel system
Argentina: tranch system
22
Social Security - Fiscal Burden
Transition from Pay-as-you-Go to Individual accounts
Chile
Forced participation of new workers to private system
Choice between private and public fund for pre-reform participants
Incentive scheme to join private funds
96% by 1999
Peru
Private System modelled on Chile
Original failure to attract majority of pensions
Majority switch to private system (76%) after incentive scheme
23
Social Security - Fiscal Burden
Argentina
Public vs. mixed schemes
Mixed schemes: pay-as-you-go up to limit
Individual account, after-limit of contribution
Reversed in 2008
Portfolio-Investment limits
Subsidy to public debt - 2006 IMF debt repay
24
Social Security - Fiscal Burden
Fiscal Burden
Contributions
Figure : Argentina: Pension Self-Funding Deficit, Source: Centragolo and
Jimenez (2003)
25
Privatization
Arguments: - Free markets, no government intervention
Efficiency?
Revenue source to stop inflation quickly
Argentina raising revenues explicit goal
91-94: Average Privatization Revenues 1% GDP
26
Efficiency or Fiscal Deficits?
Figure : Peru: Budget Deficits of GSE (% of GDP)
27
Privatization in Argentina
Fiscal accounts needed those revenues...
28
Privatization in Argentina
Fiscal accounts needed those revenues...
Fiscal accounts needed those revenues...
28
Monetary Independence
“I believe we should put a final end to the convertibility plan with a
Central Bank that is not limited to preserve monetary stability, but that
also preserves fiscal and production stability. A Central Bank that
interacts with the real economy is what we need.”
Cristina Kirchner, 01/03/2012
29
Past Experiences...
I don’t think I have to say much
Sargent, Williams and Zha (2009)
Illustrate statistically how seigniorage financing is a risky (fragile)
game
30
Conclusion
Figure : Argentina, Protests Against Inflation 04-10-14
31
Conclusion
Pecking-order theory of populism funding
32
Conclusion
Pecking-order theory of populism funding
Pecking order ⇒ reversal of reforms
32
Conclusion
Pecking-order theory of populism funding
Pecking order ⇒ reversal of reforms
As revenues sources disappear, potential social unrest
32
Conclusion
Pecking-order theory of populism funding
Pecking order ⇒ reversal of reforms
As revenues sources disappear, potential social unrest
Argentina will see this cycle, let’s hope Peru is already on Chile’s side
32
Argentina - Pension Fiscal Burden
Fiscal Burden
Contributions
Figure : Argentina: Pension Funding 1987 - 2001. Source: Centragolo and
Jimenez (2003)
33
Peru in Figures
Figure : Peru: 1980-2013
34
Chile in Figures
Figure : Chile: 1980-2013
35
Argentina in Figures
Figure : Argentina: 1980-2013
36