Pension Fund Plan Underscores Radical Policy Shifts

Argentine President Cristina Fernandez on Tuesday announced a radical reform of the country’s 14-year-old private sector pension system. Though I was at the press conference, I can’t link to the story I did here, but the Wall Street Journal’s Matt Moffett has a good overview here. The NY Times has another here, and Bloomberg another here. 

Matt’s first graph summarizes the situation:

“Hemmed in by the global financial and commodities bust, Argentina’s leftist government may have found a novel way to scrape up the money to stay afloat: cracking open the piggybank of the country’s private pension system.”

Regardless of one’s take on the wisdom of the government’s decision, it is a pristine example of how public policies in Argentina can change dramatically from one government to the next. Instead of successive governments building on and refining the policies of their predecessors (as is done in Brazil and Chile), Argentine governments typically reverse them entirely.

In recent decades this seems to have made Argentine public policy somewhat analogous to an old car that stops and starts in the middle of traffic. Just as it gets going, for good or bad, a different government comes along and stops the car, saying that the entire engine needs to be replaced.

This stop-and-go progression can be seen in the following graph, which comes from a presentation by former Argentine Central Bank President Mario Blejer.

Even though it’s five or six years old, the presentation, which is titled “Argentina: A Case of Extreme Volatility” and written in English, is worth checking out because it underscores the impact that extreme policy changes appear to have on the regularity of economic growth.

All economies experience natural cycles of growth and recession, but Argentina is unique. It tends to leap voraciously toward one extreme or the other, discarding subtle diversions from the median as if they were antithetical to human decency. The following graph, also from Blejer’s presentation, compares Argentina’s cycles with those of Australia, the UK and the U.S.

In the 32-year period between 1971 and 2002, Argentina’s gross domestic product fell in 15 of those years. In 10 of those recessions, GDP fell by more than 4% annually. And in 12 of the 17 growth years, GDP expanded by more than 5% annually.

Argentina appears to have taken literally the biblical admonition about being either hot or cold but never lukewarm.

“The average annual GDP growth rate for the period 1971-2002 was 1.3%, i.e., zero growth in per-capita terms,” Blejer says. After tanking about 11% in 2002, Argentina’s GDP has grown an average of 8.8% annually since then, making it one of the fastest-growing economies in the world. 

What will happen next year?

Link: Mario Blejer’s Presentation

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