One could contend that CEPO, this seemingly perpetual array of currency and capital controls, has emerged as a significant impediment to Argentina’s economic landscape, constraining inflows more effectively than outflows and hindering any form of sustained development beyond a cyclical pattern. We may be approaching the final month of this phase, as indicated by certain forecasts. If the remittances tied to the forthcoming agreement with the International Monetary Fund (IMF) reach the upper limit of expectations, estimated at approximately US$20 billion, the government could proceed with its plans. Economy Minister Luis Caputo has asserted that there are insufficient pesos to trigger a currency run. However, some analysts, including Miguel Kiguel, caution that there may be more pesos in circulation than commonly believed, compounded by the ongoing international volatility exacerbated by Donald Trump’s actions. There exists a significant likelihood that the IMF may not provide sufficient funds, or that the imperative to mitigate inflationary risks associated with an untimely lifting of exchange controls will take precedence. Nevertheless, in anticipation of these developments, today’s column will commence the process of drafting the cepo’s obituary.
The primary objective of this column, as indicated by its title, is to provide a historical and international framework for issues, rather than addressing them head-on or engaging in debates about their merits; the cepo will serve as a pertinent example. Interestingly, the numerous victims of OPEC referenced at the beginning of this column also encompassed its reverse manifestation in the shape of capital controls. These controls were prevalent during their inception in World War I, solidified by the Bretton Woods framework and Keynesian economic principles in the aftermath of World War II, and became more sporadic in the years following the 1973-1974 oil crisis, with globalization acting as a counterforce, although they persisted for a longer duration in various emerging markets. The period following the war, characterized by a Keynesian inclination towards capital controls, transitioned into a consensus favoring free markets over the subsequent twenty-five years. However, as the millennium approached, a notable shift in this trend began to emerge. The impetus for change was the Asian financial crisis of 1997, which originated in Thailand. Malaysia, under the leadership of Mahathir Mohamad, emerged as a frontrunner in the revival of capital controls, demonstrating a remarkable ability to achieve favorable outcomes despite the implementation of questionable policies. In September 1998, Malaysia implemented capital controls, including a fixed exchange rate, which were subsequently lifted the following September. This strategic intervention facilitated a swift economic recovery, with negligible effects on employment and real wages. Argentina may have observed this precedent, yet it appears not to have acted accordingly.
However, the genuine challenge to established norms emerged from the global financial crisis of 2008-2009, which was precipitated by capital flows of unprecedented magnitude through instruments such as derivatives and subprime mortgages. This situation appeared to necessitate some regulatory intervention, leading to the inception of the cepo during the latter phases of the crisis’s aftermath. Quantitative easing, or the expansion of monetary supply to compensate for the destroyed pseudo-assets, has resulted in a fourfold increase in Britain’s money supply and a threefold increase in the United States. This approach necessitates greater oversight to prevent potential currency conflicts. The International Monetary Fund mandated that Iceland implement capital controls as a prerequisite for its bailout, highlighting the significant disruption to established economic norms. In the wake of the financial crisis around 2010, capital controls became prevalent across the BRICS nations, as well as in various G20 countries including South Korea, Indonesia, Mexico, Peru, and Colombia in South America, and even in the market-oriented economy of Taiwan, among others. However, by that time, the European Union had evolved into a sufficiently integrated market to refrain from adopting similar measures, with Argentina being one of the last countries to implement such controls. The overarching inference drawn from this diverse array of instances is that capital controls yield advantages in the short term, yet fail to provide sustained benefits over the long term.
Upon securing a decisive 54 percent victory in 2011, the recently widowed Cristina Fernández de Kirchner declared “Vamos por todo” (“We’re going all out”), with the cepo emerging as a primary focus of her agenda, initiated within the same month. The cepo should not be conflated with currency controls, which have a much longer history. Between 1931 and the departure of José Martínez de Hoz in 1981, it is challenging to identify a year in which the exchange rate remained unaltered, with the exception of the decade from 1955 to 1964. Currency controls re-emerged following the economic collapse of 2001-2002. However, restricting capital movements and preventing capital flight, even at the cost of limiting inflows, was an innovative approach introduced by Cristina. This policy gained momentum starting in mid-2012 and became progressively more bureaucratic, characterized by heightened obstruction from the AFIP tax bureau and the imposition of a 35-percent surcharge on credit card transactions abroad.
In the context of a gradual easing of restrictions during the waning days of Kirchnerism, Mauricio Macri took decisive action by liberating exchange markets within the first week of his presidency in late 2015. This monetary boldness was not, however, matched by a similar approach to fiscal policy, which remained characterized by a gradualist stance. The decision to lift capital controls is typically seen as beneficial, as it tends to invigorate business confidence. However, in the current context of ongoing inflationary pressures, significant national debt—exacerbated by a US$44-billion IMF stand-by arrangement in 2018—and depleted foreign currency reserves, such a move may not be prudent. The peso experienced a rapid depreciation of 30 percent, while capital flight surged to US$86 billion, effectively doubling the IMF’s stabilization measures. In the aftermath of the disastrous “game over” PASO primary in August 2019, Economy Minister Hernán Lacunza was compelled to reinstate the currency controls, initially capping monthly dollar purchases at US$10,000, which were subsequently reduced to US$200 the following month.
The Frente de Todos administration implemented several additional measures, including a 35 percent surcharge on dollar purchases linked to income tax. Although the current libertarian government has introduced some relaxation over the past 15 months, employing a form of monetary gradualism comparable to Macri’s fiscal approach, significant elements persist. This has led Carlos Pagni to characterize President Javier Milei’s policies as “Austro-Kirchnerism.” What is the anticipated timeline for the cessation of the cepo – will it conclude next month, within this year, at some point in the future, or is it a permanent fixture? We must adopt a wait-and-see approach.