NCPA - National Center for Policy Analysis

Advice to Argentina: Follow Chile's Policies

January 25, 2002

In order to hoist itself out of its current economic mess, experts say, Argentina should follow Chile's example set in the 1980s -- when it initiated market reforms and began attracting foreign investment.

Chile's predicament then was hauntingly similar to that faced by Argentina today. The peso had been devalued by 78 percent, farms and households could not pay their debts, banks were failing, and there was a huge default of private external debt. These events followed free-market reforms initiated eight years earlier that involved privatization, deregulation and encouragement of competition.

Some observers blamed the reforms for Chile's woes and urged a policy of populism --high tariffs, increased regulation and subsidies for domestic producers. For a time Chile took that route and the results were dismal.

  • Then in early 1985, Chile launched a major debt-restructuring program and a deepening of market reforms.
  • Taxes on retained corporate earnings were slashed from 46 percent to 10 percent.
  • Over the next four years, growth in gross domestic product averaged 7.3 percent annually and unemployment declined to 6 percent.
  • Between 1985 and 1998, investment grew better than 12 percent annually -- contributing to the recovery and subsequent GDP explosion.

Chile also adopted a sound monetary policy and refused to bail out the owners of banks. Rather, it made cash infusions and became the owner of the banks. Then it sold its stake -- making sure that the new ownership was dispersed and that the new banking environment was competitive.

Trade liberalization was another key to Chile's miracle. Import tariffs were cut by almost one-half in 1985.

Source: Sebastian Edwards (Universidad Austral, Argentina), "A Simple Answer for Argentina: Follow Chile's Example," Wall Street Journal, January 25, 2002.

For text (WSJ subscribers)

http://online.wsj.com/articles/SB1011919143932601000.htm

 

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