Great Expectations and Hard Times: The Argentine Convertibility Plan

he Argentine experiment with convertibility ended in collapse. There is no shortage of after-the-fact explanations of what went wrong, but the search for lessons presupposes that by studying the experience, analysts can gain some knowledge that was not available beforehand. Any analysis of a case like that of Argentina must address the issue of how and why agents behaved in such a way that produced such disastrous aggregate outcomes. This implies asking what expectational “errors ” were made by private individuals and policymakers, why they made them, and how their decisions interacted. One should also consider what incentive problems and gaming might have affected the choice of policies and their impact on private expectations. Such matters are the focus of this paper. Two arguments are often encountered in the discussion of the Argen-tine case: first, that fiscal policies were inconsistent with the fixed exchange rate, implying that the political system was incapable of adjust-ing itself to the discipline of budget constraints and that it let the public debt grow along an explosive path, and second, that the convertibility regime induced a sustained overvaluation of the currency and was thus bound to end in a collapse. There are elements of validity in both argu-ments, but they are incomplete; they cannot by themselves provide the full picture. A government that declares default on its debt has obviously spent beyond its means. In retrospect, public expenditures were clearly exces-sive, especially when measured in dollar terms. The same holds for private spending, however. The persistence of fiscal deficits throughout a period of high domestic demand and real activity points to a lack of policy con-sistency, and it indicates that fiscal policies did not take precautions against adverse disturbances. But if the decade of the 1990s appears no