Part II: Microeconomic adjustments during the reforms introduction

The macroeconomic interpretations of the Southern Cone Reforms in Part I stressed several stylized outcomes: (1) a growing and persistent shift in relative prices against tradables in all three countries following the implementation of the rabfira; (2) a progressive rise in the real cost of borrowing in all three countries; (3) large capital inflows when controls on capital flows were lifted; (4) persistent spreads between peso and dollar interest rates in Argentina and Uruguay in spite of high capital mobility. Changes of this magnitude in the economic environment must have created major new incentives for resource reallocation within firms (e.g., to retire or contract new debt or to shift from peso to dollar debt) as well as across firms. The task for Part II of this Symposium is to investigate how the microeconomic adjustment to the new set of incentives took place and whether the intent of the reforms to shift resources from nontradable to tradable goods producers and within tradable producers from import substitutes towards exporters did in fact take place. Issues not covered in the stylized outcomes described in Part I that are addressed in the following set of papers include the following: Did reductions in the rate of devaluation have their main effect through squeezing price-cost margins, reducing sales volumes, or changing the real cost of credit? Did freeing domestic interest rates markedly cut net earnings rates, or did firms avoid higher financial costs by shifting their liabilities to dollars? Which effects did firms feel first: those of greater competition in the product markets or those of freeing interest rates? And, of these two effects, which one most affected the rates of return on net worth? Each paper in this Symposium addresses such basic micro empirical questions as these to shed light on the issues of what went wrong in the Southern Cone. and why. The method is, I believe, new in development economics. Each of the three studies uses the financial statements of firms to track the experiences in different sectors through each reform episode. Rather than simply relying on industrial classifications to group firms, interviews with local industrialists and other auxiliary data were used to determine the exposure to international competition for each firm studied. With this information, subsamples of firms were constructed to conform to the familiar distinctions between exportable goods producers, importcompeting producers, and nontradable goods producers. Similar procedures were followed to accomplish other breakdowns, such as between independent and group-affiliated firms in Chile or between firms with high and low tariff protection in both Chile and Uruguay. Each paper compares the experiences of firms across sectors and time, focusing on three issues: First, what were the net earnings rate trajectories of each type of firm? Second, how did demand conditions, interest rates, exchange rates, wages, and regulatory regimes combine to influence these trajectories? And third, what were the associated changes in the financial structures and investment policies of firms? To address each issue, financial indicators were constructed from the raw data, which the reader may view as having consisted of firm and period-specific observations on the accounts presented in Tables l(a) and l(b). The various indicators constructed and their interpretations are now reviewed.