THE EFFICIENCY COST OF UNCERTAINTY IN ARGENTINA

August 2010

Jorge C. Avila
[email protected]
Universidad del CEMA
Buenos Aires, Argentina
www.jorgeavilaopina.com

Abstract

Based on econometric estimates, we analyze the relationship between fiscal deficit, macroeconomic
uncertainty and growth between 1915 and 2006, and include an estimate of the efficiency cost of
uncertainty for the period 1875-2006. We arrive at two conclusions: a) the fiscal deficit, through the
uncertainty it generates, is a significant restriction on per-capita income growth in Argentina; b) the
welfare cost of the Argentine risk has been extraordinary: for example, in period 1976-2006 it was
26% of GDP, several times larger than the cost of any conventional distortion.

JEL classification codes: O11, O23, O54, D61

Key words: Macroeconomic uncertainty, fiscal deficit, volatility, growth, efficiency cost of
country-risk

Some of the ideas on the efficiency cost of country risk go back to Avila (1989). An earlier version
of this paper corresponds to chapter 2 of Avila (2000). I am grateful for the comments made on
substance and style by M. Conte Grand, M. Gallacher, R. Pantazis and J. Streb, and for the English
assistance of V. Dowding.
 1

The spirit of a people, its cultural level, its social

structure, the deeds its policy may prepare, all this and more
is written in its fiscal history, stripped of all phrases.
He who knows how to listen to its messages here discerns
the thunder of world history more clearly than anywhere else.
Joseph Schumpeter (1954)

Introduction

According to a commonly-held argument, the fundamental cause of Argentina’s economic

decline has been a mixture of excesses: industrial protectionism, state monopolies, public
spending, rapid monetary growth, etc. In our view, however, the Argentine disease consists
of an exceptional dose of uncertainty, in particular since the 70s. Specifically, our thesis is
that the persistence of high fiscal deficits, financed in pendulous way by means of inflation
tax and foreign debt, generated a sequence of violent adjustments in relative prices that
made it impossible to make any reliable evaluation of investment projects; this fact led to a
reduction in capital stock per worker, hindered the incorporation of technical progress and
ended by reducing per capita income. In this paper we advance three hypotheses: the fiscal
deficit is the main source of uncertainty; uncertainty is the source of Argentine economic
decline, and causality runs from deficit to growth, and not the other way around.
Several works provide rather traditional explanations for the Argentine decline in the
th
20 century. Cortés Conde (1997) heads in the right direction in trying to explain the late
19th century miracle, but he goes astray in trying to explain the decline since 1930.
Regarding the miracle, he argues that the end of the civil wars provided the political and
legal stability the country badly needed to assert property rights and cut transaction costs,
and that this achievement was the key reason behind the huge inflows of capital and labor
that built modern Argentina. In explaining the decline, however, he points to mistakes in
the import substitution policy, shortages of foreign exchange, and lack of domestic savings.
Sturzenegger (1984) and Cavallo (1984) provide a suggestive explanation for the 20th
century decline, although they do not provide one for the 19th century miracle. Having had
a mixed economy, Sturzenegger argues that the capitalist sector of Argentina did not have
real markets while the socialist sector did not have central planning; that policy-induced
distortions worsened conditions for competition, appropriability and certainty upon which
the workings of markets is founded, while political instability worsened conditions for
planning where markets fail. Cavallo emphasizes the impact on the rate of growth of some
static distortions (taxes, regulations, and trade barriers), and he may be right in some sense:
even when a static distortion yields a once-and-for-all reduction in the level of national
income, a crescendo of static distortions may yield a long-run sequence of national income
reductions that looks like a reduction in the rate of economic growth. Sturzenegger’s work
broadens this thesis until explicitly including the impact of dynamic distortions, which we
think are the key explanation of investment and growth.
It is well established in the literature that growth comes from investment in physical and
human capital and basic research, from improved organization of production and trade,
from prompt and precise information. The act of investment involves taking low-risk liquid
funds, freezing them in permanent shapes, and betting that they will be recovered with
profit or that at least their opportunity cost will be compensated for. Therefore, the depth of
 2

the horizon is critical. The collapse of fiscal accounts and the consequent uncertainty on the
path of key relative prices distorted the intertemporal margins that determine investment.
On the contrary, restrictions on foreign trade, lack of competition in large sectors of the
economy and public spending beyond the social optimum level do not have a first degree
impact on the rate of growth of per-capita income, as they affect static margins and only
provoke one-time falls in national income.
The structure of this paper is the following. Section I presents the empirical evidence.
Historical comparison and international comparison have given rise to a double correlation:
1) the higher the fiscal deficit, the higher the volatility in relative prices, and the lower the
deficit, the lower the volatility; 2) the higher the volatility in relative prices, the lower the
growth in per capita income, and the lower the volatility, the higher the growth rate. Section
II presents an interpretation of these phenomena. The swinging between inflation and fund
inflows from abroad as sources of public sector financing boosts large variations in the real
exchange rate and the real interest rate, among other important prices; these variations in
key relative prices let the country’s economy adjust to budget innovations. But since risk
aversion is a predominant trait in capital markets, such volatility creates a wedge in capital
market that hinders the process of accumulation. The size of the gap between the demand
price for capital and the supply price of savings is positively linked to the variance in key
relative prices and the degree of risk aversion.1 Section III provides an estimate of the
efficiency cost of uncertainty or country risk. Section IV provides concluding remarks.

I. Empirical Evidence

The purpose of this section is to explore statistically the thesis of the paper. To do so we
have to define uncertainty and measure it. We are going to link uncertainty to the concept
of volatility of a couple of important prices in real terms: the rate of exchange and the rate
of interest. We will then measure volatility using simple statistics such as the variance or
the standard deviation for the respective time series. We will finally claim that a country
undergoes a period of uncertainty when the variance in relative prices is high in comparison
to other stages in its history, or with other countries in the same period. Our purpose is to
explain economic growth focusing attention on the behavior of individual investors and
their restrictions. In this regard, a variance in prices tending to zero would inform that the
flow of future income generated by an investment project could be valued at relative prices
very similar to those prevailing at the time the decision is taken; on the other hand, an
exceptionally high variance will remove any usefulness as a reference from present relative
prices. Hence, we will say that a country is economically “predictable” or “safe” when its
volatility index is low in a relative sense.
The thesis of the paper highlights a firm correlation between fiscal deficit, volatility in
relative prices and long-term growth of per-capita income. As a first step to assess such
correlations, Table 1 shows Argentine macroeconomic performance in seven periods that
cover the last 90 years and Figure 1 shows the paths of the fiscal deficit, the real-exchange
rate volatility index and the growth rate as five-year moving averages for the period 1915-
2006.

1
Our thesis deepens that in Lucas (1981). For Lucas, volatile-price countries like Argentina tend to exhibit
vertical Phillips curves. For him a volatile-price country means a high and volatile inflation country; this is
the kind of environment that generates the volatility in relative prices we refer to.
 3

Table 1: Argentina, 1915-2006

Consolidated Fiscal Deficit Volatility Income per Capita
% of GDP Real Rate of Exchange Cumul. annual %
1915-28 1.4 0.4 1.5
1933-45 3.3 2.0 0.5
1946-58 8.7 8.1 1.4
1959-72 3.0 1.8 2.3
1973-90 13.3 13.1 -0.8
1991-01 2.0 0.3 1.3
2002-06 -1.3 0.6 6.0

Notes
a) Fiscal deficit: simple annual average of the imbalance in the consolidated public sector.
b) Volatility: The volatility coefficient is equal to the variance in the series for the real rate of exchange
divided by the statistical mean for the period. The real rate of exchange is equal to the US wholesale price
index times the free rate of exchange (pesos per dollar) divided by the Argentine consumer price index.
c) Growth in per capita income: to moderate the impact of the peaks and troughs of the economic cycle,
we have calculated the cumulative growth rate between triennial per capita income averages which
correspond to the initial and end year in each stage.
Source: Calculations based until 1979 on data from IEERAL (1986); from then on calculations are based
on Argentina National Income Accounts. Fiscal deficits for the periods 1991-2001 and 2002-06 have been
taken from Espert & Associates. Per capita income data up to 1990 has been taken from chap. 3 of Avila
(2000) and since then from recent calculations based on various issues of the IMF International Financial
Statistics Yearbook.

Figure 1: Argentina: Fiscal Deficit, Volatility and Growth, 1915-2006

20 3000

15 2500

10 2000
Deficit, Growth

Volatility

5 1500

0 1000
1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

-5 500

-10 0

Deficit / GDP Volatility Yearly GDP % Var.

 4

On the base of such annual data we have run three regressions to study in greater depth
the type of relation and the existing causality between the fiscal deficit, volatility and per-
capita income growth, whose results are summarized in Table 2:

Table 2: Results of the regressions

1) VOL = −32.36 + 72.95 DEF + 0.31VOL(−1) − 0.23VOL(−2) + 0.63 AR(1)

(-0.3) (3.6) (2.0) (-2.2) (4.2)

R2: 71% Prob. F-stat: 0.0000 D-W: 1.96

2) GRO = 1.06 − 0.0005VOL(−3) + 0.0007VOL(−4) + 0.74 AR(1)

(1.5) (-1.0) (1.3) (9.8)

R2: 54% Prob. F-stat: 0.0000 D-W: 1.72

3) GRO = 2.44 − 0.24 DEF + 0.69 AR(1)

(3.5) (-2.7) (8.6)

R2: 56% Prob. F-stat: 0.0000 D-W: 1.86

VOL is the five-year moving variance of the real exchange rate. GRO is the five-year moving
average of the rate of growth of per capita income. DEF is the five-year moving average of the
fiscal deficit as a percentage of GDP.

The results of regression (1) tell us that the fiscal deficit is an important variable in
explaining volatility. An increase in the mean deficit by one point of GDP increases mean
volatility by 73 points (18%). Regression (2) tells us that our measurement of volatility has
little or no influence on per-capita income growth. On the other hand, the outcome of
regression (3) highlights that the fiscal deficit certainly does have an impact on growth;
when the mean deficit increases by one point of GDP the mean rate of annual growth falls
by 0.24 percentage point. Regarding the causality between the fiscal deficit and growth, we
would point out that the Granger test throws up results that are definitely favorable to the
hypothesis that the deficit is the cause of growth and not the other way around, for lags of
1, 2, 3, 4, 5 and 6 periods.
As a last step in the analyses of data, Table 3 provides a comparison of the Argentine
performance with that of a group of countries for the period 1974-85 (see next page).

The empirical evidence allows us to conclude that:

There is a seemingly positive correlation between the fiscal deficit and the volatility of
key macroeconomic prices, such as the real exchange rate and the real interest rate. The
correlation appears closer in the historical series for Argentina than in the international
comparison; the difference may be due to the fact that in Table 1 we use a more uniform
measurement of the deficit covering the public sector imbalance than in Table 3.
 5

There is a negative correlation between volatility and economic growth. Exceptions to

the rule include the 1946-58 period in Argentina, when in spite of a large increase in the
fiscal deficit and volatility, growth rose instead of falling. The cause of this unexpected
performance was probably the sharp improvement in the terms of trade in 1948 and the
world-wide post-war boom.

Table 3: International Comparison, 1974-85

Volatility
Fiscal Deficit Real Rate of Real Rate of Income per Capita
% of GDP Exchange Interest Cumul. annual %
Argentina 6.5 (3.2) 19.9 23.3 -1.3
Chile 0.1 (3.2) 5.1 11.3 0.6
Uruguay 2.9 (2.6) 7.6 10.3 0.6
USA 3.4 (1.6) 0.1 3.4 1.5
West Germany 2.0 (0.7) 3.6 2.2 2.1
Japan 6.1 (1.7) 1.0 3.6 3.2
Paraguay 0.1 (1.0) 2.4 7.6 2.9
Singapore -1.4 (1.3) 0.3 2.9 5.9
South Korea 1.9 (0.8) 0.5 4.2 6.2

Notes
a) Fiscal deficit: simple annual average at Central Administration level. Respective standard
deviation is shown in brackets.
b) Volatility: measured in the same way as for Table 1.
c) Growth in income per capita: idem.
Source: Calculations based on IMF data (1987).

Countries or historical stages with good public finances are noted for low volatility in
relative prices and high growth in per-capita income. This was the scenario in the
comparatively stable periods in Argentina (1915-28; 1933-45; 1959-72; 1991-2001),
and in countries such as the USA, West Germany and Japan, and even more clearly in
Paraguay, Singapore and South Korea in the period 1974-85. On the contrary, scenarios
dominated by a high (or unstable) deficit are noted for a significantly greater volatility.
The period 1946-58 and especially that of 1973-90 fall into this category: unusually
high volatility and a fall in per-capita income without precedent. This context repeated
itself, with less intensity, in Chile and Uruguay; both countries experienced a higher
volatility than that observed in the other countries in the sample and very low growth.

The measure for the fiscal deficit employed in Table 3 is the only one available at
international level, but it is not the most appropriate since it only covers the imbalance
of the Central Administration. The problem becomes evident when comparing
Argentina with Japan. While in Argentina the Central Administration deficit in the
period 1974-85 was approximately half the consolidated total, in Japan the strong deficit
of the Central Administration was neutralized by the surplus in the provinces and the
social security system, so that the consolidated deficit became insignificant. The
Chilean case is interesting; here the coexistence of budget equilibrium and high
volatility contradicts our thesis. In this case, volatility is due to the instability of the
 6

deficit; the standard deviation of the Chilean deficit is similar to that for Argentina; in
the period analyzed Chile frequently swung from large deficits to surpluses and vice-
versa, forcing adjustments in relative prices that shortened the investor’s horizon. The
Uruguayan case is similar to that of Chile, although more moderate.

In short, to extend the investor’s horizon and foster growth not only is the mean size of
the fiscal deficit important but also its stability. This assertion carries with it an implicit
causality judgement: the deficit causes volatility and the volatility causes low growth.
Though it is possible to speculate on the existence of a hidden variable the fluctuations
of which dominate the relationship between deficit and growth (such as the terms of
trade), we should remember that the deficit is unequivocally the cause of growth in the
Argentine time series, according to the Granger causality test.

II. An Interpretation

The Australian model, popular in the literature on open macroeconomics in the 70s and
80s, is a good representation of the scenario we have in mind. In a nutshell, the model is
described as follows: the economy of the country is small and open, and therefore takes as
given the prices of exportable and importable goods, as well as the risk-free interest rate;
the country is populated by individuals who produce and consume goods that are traded
with the rest of the world (exportable and importable) and goods that are not traded
(domestic or services); individuals save a fraction of their income, part of which is placed
in local currency and external risk-free assets and the rest is converted into fixed domestic
investment; the fiscal deficit is financed by foreign borrowing or inflation tax; individuals
are risk averse, a fact that explains why they spread their wealth among those three assets;
individuals have rational expectations and incomplete information on the future course of
economic policy (the deficit size and the way of financing it).

A. Deficit and Volatility

Assume the fiscal deficit starts to be financed by foreign debt. How does the economy
adjust to such innovation? Foreign debt leads to an increase in aggregate spending and an
appreciation of the domestic good to ration its supply, which is rather inelastic. And so the
budget innovation leads to a fall in the real exchange rate.2 However, when the horizon for
external financing gets short and the public forecast the return of the inflation tax, the
country undergoes a higher real rate of interest and currency overvaluation. A couple of
factors may explain the emergence of the exchange risk in this situation: a) expectations
regarding an increase in the rate of devaluation of the currency;3 b) the perception that
when external credit is replaced by the inflation tax the nominal rate of exchange will rise
faster that the price level, so that the real exchange rate will recover the level it had before
the budget innovation. The opposite scenario prevails when the deficit starts to be financed
with the inflation tax proceeds. This budget cycle explains to a large extent the successive
inflation and current-account adjustments that Argentina experienced in the second half of

2
Evidence seems to indicate that the private sector behaves as if it does not discount the future tax liabilities.
3
Since international reserves are finite, there exists a relationship between the inflation tax rate and the
devaluation rate. Many authors have written on this matter; see Arriazu (1983).
 7

the 20th century. The bulk of financing swung from one source to another; the phenomenon
got stronger in the 70s and 80s as the deficit literally exploded.4 We think this is the origin
of the volatility in relative prices, a phenomenon that reached very high levels in the 1946-
58 period, and overwhelmingly so in the period 1974-85.

B. Volatility and investment

The intuition of the link between volatility in relative prices and economic uncertainty
seems obvious. The standard assumption that the marginal utility of income decreases when
income increases reflects risk aversion. The classic example of risk aversion consists in a
lottery with 50% probability of winning $100 and 50% of losing $100, so that the expected
value of the lottery is zero. As the utility of income is declining, the utility expected from
participating in the game is negative; in other words, the dis-utility of losing $100 is greater
than the utility of winning $100. The difference between the utility of not intervening in the
lottery and the expected utility of participating represents the loss of welfare experienced
by a risk-averse individual who decides to abandon a safe position to embark on a project
with an uncertain outcome. Such difference measures the maximum price the individual is
prepared to pay in order to make sure that his original wealth will remain unaltered; it is the
maximum premium that he would pay to an insurance company for such a service.5
The peculiar way through which the volatility in relative prices filters into the process
of capital formation is now evident. A project for sinking capital into Argentina would be
subject to a turbulence of relative prices 30 times greater than the turbulence that the same
project would undergo in South Korea, never mind Singapore. Therefore the risk premium
for investing in Argentina will have to be several times higher than the international level.
In weighing the possibility of investing physically in Argentina, informed investors sitting
in New York or Buenos Aires will behave in identical fashion. With a 10 year-US Treasury
bond yielding 4% per year, a project with a return of 12%, excellent in the environment of
security and predictability of the European Union, Canada or Korea, in Argentina would be
promptly discarded as loss. Think of the fate of a project for non-traditional exports during
the incredible revaluation in real terms of the peso in 1979-80, or the fate of a construction-
oriented project in the middle of the strong real depreciation of the 80s. Consider further the
fortune of any such firms when they have to go month after month in the context of an anti-
inflation program with real rates of interest at 4% per month. The instability of key relative
prices is too high in Argentina for the average investor to be attracted by a return of 12%
per year. During the 80s investors required a 22% average return per year on projects to be
carried out in Argentina under Argentine law, or a quick recovery of the capital invested. In
the absence of markets offering insurance against macroeconomic instability, investors self-
insured, demanding from their projects the international opportunity cost of the funds to be
sunk (the interest yield on a long US Treasury bond) plus a risk premium that in the case of
Argentina has been in the order of 15% per year. Hence, lots of projects that would have
contributed greatly to national wealth were discarded until the horizon improves.

4
On the relative importance of each source (money creation, domestic debt bonds and foreign loans) see
Cavallo and Peña (1983). A budget vision of the Argentine economy progress and reversals can be found in
FIEL (1989).
5
Notice that the premium increases with the values at stake, with a less favorable distribution of probabilities,
with a higher risk aversion, or with the combinations of these three elements.
 8

III. An Estimate of the Cost

So far we have explained the low growth rates of the Argentine economy during the
20th century. While the leading group of countries kept growing normally, macroeconomic
uncertainty led to the international decline of Argentina. What is the welfare loss of the
Argentine-risk tax?
Investment is a gamble the outcome of which only becomes evident as time goes by.
Therefore, the intertemporal market of the economy is the appropriate place to notice the
effect of uncertainty. Figure 2 shows the impact of the country-risk premium on the capital
market of a country that is open to international capital flows. On the vertical axis of the
graph we measure the marginal yield on capital and on the horizontal axis, the stock of per-
worker capital sunk in the country. In a certain environment, capital market equilibrium
takes place at E 0 . At this point, the domestic rate of interest is the same as the international
rate and the stock of capital per local worker, k, is equal to the stock of capital per worker
in the group of leading countries, k * . Since investment in the country is not penalized by
uncertainty a social optimum obtains. We speak of a social optimum because the Argentine
risk does not come mainly from foreign but from domestic sources; the relevant uncertainty
has been self-inflicted, its causes having been sudden, frequent and violent changes in
economic policy. In an uncertain environment, a country-risk premium shows up. It filters
into the capital market and opens a wedge between the marginal yield on capital i b , which
is the relevant rate for local borrower of funds, and the marginal compensation for savers
i * , which is equal to the international interest rate. From a social point of view, the
optimum is reflected in the condition: k = k * ; from the private point of view, it implies a
different condition: k = k1 < k * . For investors, the country-risk premium, ρ = i b − i * , is
a provision against imponderables.

Figure 2: The Country-Risk Tax

E1
ib

E 0

i*
'
E 1

*
k1 k
 9

The country-risk premium works in a similar fashion to a conventional tax. On the one
hand, it creates a distortion with a welfare cost that takes the shape of triangle E 0 E1 E1' on
figure 2. As the premium rises, the triangle grows and a real-income loss is accumulated as
the productivity of capital increasingly exceeds the opportunity cost of the resource, i * . On
the other, it determines the rectangle ib E1 E1' i * , similar to that representing the revenue of a
conventional tax; however, this time it symbolizes the economic cost of risk aversion and
the partial insurance that investors are required to suffer and bear when there exists country
risk. Unlike a conventional tax, the revenues of which are transferred to the Treasury, the
country-risk rectangle is a social cost because it represents a drain on resources that benefits
no-one. The sum of the triangle and the rectangle measures the wage increase that labor
fails to receive because of the existence of country risk.
Switching to a one-sector model for the sake of simplicity, placing the problem in the
context of the principle of convergence, and assuming a logarithmic production function
with constant returns to scale, we calculate the welfare cost of uncertainty (WCU) with this
equation:

[ ] [
WCU = ∫ ib (k ) − i* ⋅ dk + ib (k1 ) − i ∗ ⋅ k1
k*

k1
] (4)

The right-hand side of this equation has two terms: the first measures the social cost of
the triangle and the second measures that of the rectangle. The cost of the triangle is equal
to the integral of the country-risk premium over the gap in capital per worker that separates
the lagging country from the leading group. The cost of the rectangle is equal to the
country-risk premium on the capital per worker sunk into the country.6
As shown in figure 3, WCU has been extraordinary in Argentina. In the period 1895-
1905 it was nill; in the period 1915-40 it averaged 5% of per-capita income; in the period
1940-75 it seldom fell below 10%, while for the period 1976-2006 it fluctuated largely with
a mean value of 26%.7 To put our estimate into perspective, some estimates of social costs
of conventional distortions should be considered. Harberger (1974) estimated the efficiency
loss due to the monopolizing of the U.S. manufacturing sector at 0.1% of GDP. Krueger
(1984) reports that the efficiency loss caused by tariff and non-tariff protection in Latin
American countries has fluctuated between 0.3% and 0.8% of GDP; she also points out that
this loss rises to an exceptional level of 7% in Brazil after taking into account the losses in
X-efficiency and the monopolization of markets induced by the same protection. Fernández
and Rodríguez (1980) estimated that the Argentine state telephone monopoly generated in
1980 a welfare loss close to 1.5% of GDP.

6
For a development of the WCU equation, see Appendix II. For the data needed to calculate the WCU, see
Appendix III.
7
Our estimates assume a perfectly elastic supply of capital. Thus the triangle of the efficiency cost of country-
risk is explained 100% by a workers’ earnings loss (recall that we have assumed a constant returns to scale
production function and just two factors of production: capital and labor). Had we assumed an inelastic supply
of domestic savings, savers would also suffer a loss of surplus and the area of the triangle would increase.
 10

Figure 3: Argentina: The Welfare Cost of Uncertainty, 1875-2006

As a percentage of GDP per capita

50%

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%
1875 1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005

IV. Concluding Remarks

Few feel to such a high degree the risks posed by a country, the eventual instability of
its basic political and economic institutions, as do investors who appraise the possibility of
sinking capital within the country’s frontiers for a lengthy period. The fiscal deficit appears
as a likely first cause of macroeconomic uncertainty. The efficiency cost of the Argentine-
risk premium, or the market price of macroeconomic uncertainty assigned by Wall Street to
the country, seems large, much larger than the cost of commercial tariff and monopolies
estimated in well-known studies. That’s why we think the first condition for Argentina to
overcome its stagnation consists in achieving a long-run reduction in her country-risk
premium to the level prevailing in the group of leading countries.
 11

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Económicos, 31, BCRA.
 12

Appendix I

GDP Growth Rate, Real Exchange Rate, Volatility Index of RER, Fiscal Déficit, period:
1915-2006.

Growth rate Real Exch. Rate Volatility Index Fiscal Deficit

1915 -7,8 39,7 17,6 3,1
1916 -1,7 45,0 17,0 3,1
1917 1,3 51,0 23,7 2,3
1918 0,3 44,4 17,6 1,3
1919 2,0 51,2 13,9 1,1
1920 6,5 53,9 13,3 0,7
1921 2,9 47,2 9,6 0,5
1922 4,0 49,2 9,8 0,7
1923 2,5 54,6 9,0 0,8
1924 3,1 52,3 8,1 1,3
1925 2,5 48,4 16,2 1,1
1926 0,8 47,9 11,1 1,2
1927 -0,5 44,2 4,3 1,5
1928 -1,2 44,3 2,4 2,4
1929 -1,9 44,6 29,1 1,9
1930 -3,9 45,9 75,6 2,5
1931 -3,3 56,8 67,1 2,7
1932 -1,7 63,6 138,6 2,4
1933 2,5 47,5 123,7 1,5
1934 1,4 74,3 112,1 1,9
1935 3,5 72,3 114,1 1,7
1936 3,1 63,6 31,8 2,3
1937 2,3 61,2 21,7 3,0
1938 0,1 66,0 17,9 4,1
1939 1,9 70,5 26,5 5,0
1940 0,8 70,8 25,3 4,7
1941 0,6 74,5 19,0 4,3
1942 2,0 79,4 14,5 4,5
1943 1,1 79,3 27,4 4,5
1944 1,8 78,8 47,0 4,6
1945 3,7 67,2 46,6 6,4
1946 4,8 66,2 425,4 9,2
1947 2,2 79,2 1137,6 10,3
1948 2,7 116,9 1618,6 10,8
1949 1,6 142,2 1892,3 10,2
1950 -1,6 160,7 888,3 9,0
1951 -1,6 194,0 802,4 7,9
1952 -0,4 131,4 857,3 7,5
1953 1,1 122,6 810,9 7,8
1954 0,9 132,8 123,8 7,8
1955 3,0 142,4 117,5 7,9
 13

1956 3,2 151,6 52,3 7,7

1957 1,1 139,4 367,9 6,4
1958 1,3 135,9 832,5 5,2
1959 2,2 101,5 921,5 4,9
1960 0,9 82,8 642,3 4,4
1961 -0,7 72,5 125,2 3,3
1962 2,6 80,7 25,6 3,8
1963 2,9 76,3 44,1 4,0
1964 1,7 71,1 59,9 3,8
1965 2,5 87,4 55,6 3,7
1966 3,9 68,0 78,2 3,3
1967 3,5 73,8 90,8 2,4
1968 2,8 64,4 15,0 2,1
1969 3,4 65,1 45,9 2,2
1970 3,2 65,4 221,1 2,2
1971 3,0 79,6 204,5 3,4
1972 2,4 98,7 222,3 4,9
1973 1,2 68,2 1231,6 7,7
1974 0,4 93,9 1107,6 9,8
1975 1,3 158,8 1391,3 10,7
1976 -0,1 109,1 1711,8 11,3
1977 0,3 68,8 2435,4 11,3
1978 0,7 51,4 1013,7 9,3
1979 -0,4 36,8 234,8 8,7
1980 -2,2 29,0 1204,1 11,3
1981 -0,8 51,2 1852,7 13,8
1982 -1,8 116,7 1550,4 16,6
1983 -3,4 115,8 708,1 17,7
1984 -0,9 92,2 317,2 17,1
1985 0,2 96,3 231,8 15,9
1986 -1,0 74,1 79,3 15,1
1987 -2,7 86,8 201,9 15,0
1988 -1,6 80,6 480,6 14,5
1989 -0,8 110,4 877,4 13,0
1990 0,8 49,7 1112,0 9,9
1991 2,5 36,7 1161,7 5,8
1992 5,6 30,9 83,5 1,4
1993 5,0 28,5 15,4 0,8
1994 3,7 27,5 2,2 1,1
1995 3,3 27,2 0,2 1,3
1996 2,8 27,8 0,1 1,7
1997 0,5 27,8 0,2 2,2
1998 1,3 27,3 0,7 2,5
1999 -0,4 28,1 1,6 3,1
2000 -4,2 29,5 423,9 3,3
2001 -3,1 30,4 500,4 2,7
2002 -0,6 74,8 445,4 1,3
 14

2003 1,4 64,4 280,3 0,1

2004 3,9 63,6 39,4 -1,3
2005 7,6 60,3 7,3 -1,7
2006 6,7 58,7 6,3 -1,6
Sources: 1) Calculations based until 1979 on data from IEERAL (1986); from then on based on
Argentina National Income Accounts data. Fiscal deficits for periods 1991-2001 and 2002-06
have been taken from Espert & Associates. Per capita income data has been taken from chapter 3
of Avila (2000) up to 1997; from then on, it has been estimated according to the same sources and
method as in this book. 2) The growth rate and the fiscal deficit are five-year moving averages
centered on the year under consideration. The volatility index is a five-year moving variance of
the real-exchange rate centered on the year under consideration. The real exchange rate is equal to
the nominal exchange rate times the US WPI divided by the Argentine CPI.
 15

Appendix II

Consider an economy characterized in the relevant segment by the following function of

production:

1) y = α ln k ,

where y is income per capita, α is a constant and k is the physical capital stock per
worker (in the estimate we assume that k = 3. y );

α
2) MPK = = ib ,
k

where the marginal product of capital is equal to the domestic interest rate, gross of country
risk;

α
3) i * = = 0.04 ,
k*

where the international interest rate, free of country risk, is equal to the marginal product of
capital in the leading group and is equal, by hypothesis, to an annual 4%;

α 0.04.k *
4) ib = = ,
k k

so that the domestic interest rate is a proportion of the ratio between capital per worker in
the leading group and capital per worker in Argentina.
The final equation for the welfare cost of the country risk premium is:

 
5) WCU = ∫
k*  k* 
[ ]
0.04  − 0.04.dk + ib (k1 ) − i .k1 ,
∗
k1
  k  

from which the following expression arises after the resolution of the integral, application
of Barro’s rule and reordering the first term, and replacing with equations 2) and 3) in the
second term:

k k  
6) WCU = 0.04.k *  1* − ln 1*  − 1 + 0.04. k ∗ − k1 .( )
k k  

From this equation come the annual estimates of the welfare cost of uncertainty, expressed
in the corresponding graph as percentages of Argentine per capita income.
 16

Appendix III

Per Capita Capital Stocks for Argentina and the Anglo-Saxon Group (USA, Great Britain,
Australia and Canada); Triangle, Rectangle and Total Costs as fractions of per Capita GDP,
period: 1875-2006.

Argentina Anglo-Saxon Group Triangle Cost Rectangle Cost Total Cost

Per capita capital stock Fraction of per capita GDP
1875 2816,4 6702,8 0,082 0,166 0,248
1876 2743,2 6596,8 0,085 0,169 0,253
1877 3006,8 6626,7 0,065 0,144 0,209
1878 2800,7 6807,9 0,087 0,172 0,259
1879 2928,7 6912,7 0,080 0,163 0,243
1880 3048,2 7235,3 0,081 0,165 0,246
1881 2973,3 7426,9 0,095 0,180 0,274
1882 3909,8 7293,7 0,036 0,104 0,140
1883 4334,1 7566,2 0,027 0,089 0,117
1884 4643,9 7430,5 0,018 0,072 0,090
1885 5414,8 7439,8 0,008 0,045 0,052
1886 5057,6 7412,6 0,011 0,056 0,067
1887 5281,0 7737,7 0,011 0,056 0,067
1888 6087,8 7678,3 0,004 0,031 0,035
1889 6881,5 8041,0 0,002 0,020 0,022
1890 6051,7 7825,4 0,005 0,035 0,040
1891 5097,8 7994,8 0,016 0,068 0,085
1892 6157,4 7646,3 0,003 0,029 0,032
1893 6369,5 7261,6 0,001 0,017 0,018
1894 7237,0 7324,9 0,000 0,001 0,001
1895 7292,5 7422,9 0,000 0,002 0,002
1896 7423,5 7541,3 0,000 0,002 0,002
1897 6521,4 7556,5 0,001 0,019 0,020
1898 6802,8 7980,5 0,002 0,021 0,022
1899 8552,6 8220,7 0,000 0,000 0,000
1900 7572,5 8315,6 0,001 0,012 0,012
1901 8491,2 8429,4 0,000 0,000 0,000
1902 8083,8 8436,3 0,000 0,005 0,005
1903 9401,4 8640,0 0,000 0,000 0,000
1904 10283,6 8680,6 0,002 0,000 0,000
1905 10836,1 10971,0 0,000 0,001 0,002
1906 10508,3 11669,6 0,001 0,013 0,014
1907 9800,0 11770,9 0,002 0,024 0,026
1908 10671,8 11161,3 0,000 0,006 0,006
 17

1909 10606,5 11854,5 0,001 0,014 0,015

1910 10458,7 12168,2 0,002 0,020 0,021
1911 9763,2 12315,1 0,004 0,031 0,035
1912 11230,1 12537,3 0,001 0,014 0,015
1913 10531,4 12800,2 0,003 0,026 0,028
1914 8894,6 11880,9 0,006 0,040 0,046
1915 9348,9 12095,5 0,005 0,035 0,040
1916 8671,8 13018,2 0,013 0,060 0,073
1917 7355,7 13033,6 0,029 0,093 0,122
1918 9152,3 13106,2 0,010 0,052 0,062
1919 9116,5 12392,3 0,007 0,043 0,050
1920 9124,0 12165,6 0,006 0,040 0,046
1921 9203,0 11746,4 0,004 0,033 0,037
1922 9896,9 12238,9 0,003 0,028 0,032
1923 10511,2 12855,8 0,003 0,027 0,030
1924 11046,2 13165,6 0,002 0,023 0,025
1925 10271,3 13582,6 0,006 0,039 0,044
1926 10633,4 13665,9 0,004 0,034 0,039
1927 11149,2 14012,7 0,004 0,031 0,034
1928 10896,8 14119,2 0,005 0,035 0,040
1929 10709,6 14289,5 0,006 0,040 0,046
1930 9588,3 13407,8 0,008 0,048 0,056
1931 9617,6 12187,1 0,004 0,032 0,036
1932 9103,1 11533,3 0,004 0,032 0,036
1933 9154,6 11479,1 0,004 0,030 0,034
1934 9755,0 12196,2 0,003 0,030 0,034
1935 10793,0 12825,3 0,002 0,023 0,025
1936 10192,5 13705,1 0,006 0,041 0,048
1937 10744,6 14370,5 0,006 0,040 0,047
1938 10594,0 14204,8 0,006 0,041 0,047
1939 10822,8 14608,7 0,007 0,042 0,049
1940 10826,9 15840,2 0,011 0,056 0,067
1941 11209,1 17791,1 0,018 0,070 0,088
1942 11150,1 19895,9 0,030 0,094 0,124
1943 10895,5 21301,2 0,043 0,115 0,157
1944 11920,0 21531,9 0,031 0,097 0,128
1945 11342,4 20629,5 0,032 0,098 0,131
1946 12146,9 18548,5 0,014 0,063 0,078
1947 13265,0 18303,1 0,008 0,046 0,053
1948 13703,6 18677,9 0,007 0,044 0,051
1949 13197,8 18861,1 0,010 0,051 0,061
 18

1950 12884,4 19756,6 0,015 0,064 0,079

1951 13104,7 20643,4 0,017 0,069 0,086
1952 12195,3 20880,8 0,025 0,085 0,110
1953 12592,3 21374,6 0,024 0,084 0,108
1954 12865,1 21315,4 0,022 0,079 0,100
1955 13520,5 22178,3 0,021 0,077 0,097
1956 13648,2 22578,0 0,021 0,079 0,100
1957 14107,0 22594,5 0,018 0,072 0,091
1958 14716,6 22497,4 0,014 0,063 0,078
1959 13538,7 23244,5 0,025 0,086 0,111
1960 14367,6 23704,2 0,021 0,078 0,099
1961 15141,9 23980,2 0,017 0,070 0,087
1962 14669,0 24663,3 0,023 0,082 0,105
1963 14101,0 25510,8 0,032 0,097 0,129
1964 15316,8 26703,3 0,027 0,089 0,116
1965 16470,1 27651,1 0,023 0,081 0,104
1966 16335,4 28522,7 0,027 0,090 0,117
1967 16532,6 29018,2 0,028 0,091 0,118
1968 17000,2 30080,6 0,029 0,092 0,121
1969 18186,3 30980,9 0,024 0,084 0,109
1970 18874,3 31327,0 0,022 0,079 0,101
1971 19270,8 32018,2 0,022 0,079 0,101
1972 19345,2 33202,4 0,025 0,086 0,111
1973 19730,4 34820,7 0,029 0,092 0,120
1974 20445,9 34876,7 0,025 0,085 0,109
1975 19988,3 34780,4 0,027 0,089 0,116
1976 19663,1 35943,0 0,033 0,099 0,132
1977 20582,8 36776,1 0,030 0,094 0,124
1978 19603,4 38005,3 0,041 0,113 0,154
1979 20629,1 38841,3 0,037 0,106 0,143
1980 20626,1 38523,1 0,036 0,104 0,140
1981 19198,8 38884,8 0,048 0,123 0,172
1982 18295,4 38043,3 0,053 0,130 0,183
1983 18746,2 38935,2 0,053 0,129 0,182
1984 18823,6 40736,2 0,061 0,140 0,200
1985 17246,7 42121,9 0,089 0,173 0,262
1986 18201,3 43002,9 0,080 0,164 0,244
1987 18385,4 44329,7 0,085 0,169 0,255
1988 17763,6 45828,0 0,104 0,190 0,293
1989 16283,0 46794,1 0,139 0,225 0,364
1990 15830,8 46688,3 0,149 0,234 0,383
 19

1991 17319,2 45111,8 0,107 0,193 0,299

1992 18914,7 45377,7 0,084 0,168 0,252
1993 19898,2 46150,3 0,076 0,158 0,234
1994 21281,5 47853,4 0,069 0,150 0,219
1995 20056,1 48805,4 0,088 0,172 0,260
1996 20652,3 49857,9 0,086 0,170 0,255
1997 22123,7 51101,6 0,075 0,157 0,232
1998 22714,5 52512,8 0,075 0,157 0,232
1999 21701,2 54045,5 0,094 0,179 0,273
2000 21300,4 55555,0 0,107 0,193 0,300
2001 20159,2 56312,7 0,129 0,215 0,344
2002 17767,4 57421,8 0,187 0,268 0,455
2003 19158,1 58242,4 0,161 0,245 0,406
2004 20691,9 59393,1 0,139 0,224 0,363
2005 22385,5 60298,4 0,117 0,203 0,320
2006 23830,6 61433,5 0,104 0,189 0,293
Notes: 1) Per capita capital stock of a country equals 3 times its per capita income. 2) The per capita
capital stock for the Anglo-Saxon group is the simple average of the per capita capital stocks of the
four involved countries. 3) Triangle and Rectangle efficiency costs are calculated according to Eq. 6
in Appendix II. 4) The k* variable represents the per capita capital stock for the Anglo-Saxon group;
the k1 variable represents the per capita capital stock for Argentina. 5) To put into 1985 US dollars
the Argentine per capita income, we generated time series for the four comparison years suggested
by Cortés Conde op. cit., and averaged them.
Sources: 1) As informed in Avila (2000 III, 68), GDP times series for Argentina were taken from
Cortés Conde (1997), period 1875-1935; Fundación Mediterránea, period 1936-1961; BCRA, period
1962-1997. Population time series for Argentina were taken from Cortés Conde (1997), period
1875-1912; Fundación Mediterránea, period 1913-1990. From then on, GDP and population series
were taken from Espert & Associates. 2) GDP and population series for the Anglo-Saxon group
were taken from Maddison (1991) and updated until 2006 on data taken from the IMF International
Financial Satistics Yearbook, various issues.