Stabilization Tactics in Latin America: Menem, Cardoso, and the Politics of Low Inflation

Abstract

In the 1990s presidents Carlos Menem of Argentina and Fernando Henrique Cardoso of Brazil both accomplished something of a macroeconomic miracle. They managed to bring their countries' chronically high inflation rates down close to zero and keep them very low for more than five years, after decades of price instability and unsuccessful attempts at stabilization. Some of the shine has since come off both achievements. A currency crisis forced Brazil to devalue in 1998, and in 2002 fear of a left-wing victor in the presidential election roiled markets again. In Argentina Menem's successor, Fernando De la Rfia, struggled in vain to generate growth and fend off a debt default, currency crisis, and run on the banks. He left office in late 2001 amid street violence and a plummeting peso. It is thus worth emphasizing just how historically unusual the reemergence of price stability in Brazil and Argentina in the 1990s was. As of 2002, Brazil's inflation had been under 10 percent for five years, and Argentina's had for eight. In each country, inflation for the first time in forty years stayed this low for more than one year. No equivalent eight-year spell of low inflation had occurred in Argentina since 1944. Brazil had not had a five-year period with such stable prices since before 1937. Argentina's commitment to stable money was so entrenched by the late 1990s that it survived a four-year recession and 18 percent unemployment. It took a major political crisis-and three presidents-to break the dollar peg. Even if this recession is taken into account, Argentine growth in the 1990s was higher than in any decade since the 1950s. How did these political leaders stabilize prices when so many before them had failed? Political economists have offered a number of explanations. Some emphasize crisis, social wars of attrition, or the electoral cycle. Others contend that Menem's left-wing Peronist credentials gave him greater credibility in demanding sacrifice from the working class. Although these factors may contribute to an answer, they do not provide a convincing account. Both achievements rested on a particularly effective political strategy that demobilized key beneficiaries of inflationary policies and created confidence in the durability of reforms.

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