The Menem Administration
As Menem initially chose to deliver the Economy Ministry to senior executives of the firm Bunge y Born, Cavallo had to wait a few more years to put his economic theories into practice. He served as Menem's Foreign Minister, and was instrumental in the realignment of Argentina with the Washington Consensus advanced by U.S. President George H.W. Bush. Finally, after several false starts and two further peaks of hyperinflation, Menem put Cavallo at the helm of the Argentine Economy Ministry in February, 1991.
Cavallo was the ideologist behind the Convertibility Plan, which created a currency board that fixed the dollar-peso exchange rate at 1 peso per US dollar. Signing his plan into law on April 1, 1991, Cavallo succeeded in defeating inflation, which had averaged over 220% a year from 1975 to 1988 and had leapt to 5000% in 1989, and remained at 1300% in 1990.
President Menem had already privatized the state telecom concern and national airlines (the once-premier airline in Latin America, Aerolíneas Argentinas, which was later almost run into the ground). The stability Cavallo's plan helped bring about, however, opened prospects for more privatizations than ever. Going on to total over 200 state enterprises, these included the costly state railroads concern, the state oil monopoly YPF, several public utilities, two government television stations, 10,000 km (6000 mi) of roads, steel and petrochemical firms, grain elevators, hotels, subways and even racetracks. A panoply of provincial and municipal banks were sold to financial giants abroad (sometimes over the opposition of their respective governors and mayors) and, taking a page from Chile's successful experiment, the mandatory state pensions system was opened to choice through the authorization of for private pension schemes.
GDP (long stuck at its 1973 level even with a growing population) leapt by about a third from early 1991 to late 1994, and physical investment, depressed since the 1981-82 crisis, more than doubled in this period. Consumers also benefited: income poverty fell by about half (to under 20%) and new auto sales (likewise depressed since 1982) jumped fivefold, to about 500,000 units. This boom, however, had its problems early on. Tight federal budgets kept the budget deficits of the provinces from improving and, though many benefited from Cavallo's insistence that large employers translate higher productivity into higher pay, this same productivity boom (as well as the nearly 200,000 layoffs the privatizations caused) helped unemployment jump from about 7% in 1991-92 to over 12%, by 1994. The 1995 Mexican Crisis shocked consumer and business confidence and ratcheted joblessness to 18% (the highest since the 1930s).
Confidence and the economy recovered relatively quickly; but, the consequences of double-digit unemployment soon created a crime wave that (to some extent) continues to this day. Unemployment and poverty eased only very slowly after the return to growth in early 1996.
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