Macroeconomic Volatility during Argentina’s Import Substitution Stage

Abstract

In this article, I analyze the characteristics and sources of macroeconomic volatility for the case of Argentina during the import substitution industrialization (ISI). This case is particularly relevant since Argentina has been one of the most extreme examples of macroeconomic volatility in the Latin American region. I estimated a small vector auto regression (VAR) to approximate the main dynamic features of the Argentine economy during the ISI: the balance of trade improving but the 'contractionary' effect of devaluation, and the short-run persistence of 'political-economic' switching regimes. Counterfactual experimentation showed the impossibility of reaching a complete economic stabilization during the historical period under analysis and the existence of sharp tradeoffs among the internal balance, the external balance and policy volatility. It also indicated that at least a half of the observed policy volatility could be attributed to exogenous shocks. These results suggest that the performance of the Argentine economy during the ISI could have been better under more rational policy management but, surprisingly, that the improvement would not be as large as one would expect.