# **VI. Possible paths forward**

Recall that in the introduction, three characteristics of policies were suggested that would support credibility: (i) the policy has internal logic and rationale and appears to have the right magnitude to achieve its goals; (ii) the policy is based on reliable data and trusted institutions; and (iii) the policy is consistent with a longer-term vision or strategic direction. The first criterion is really a pure technical viability issue: an informed public or opinion makers should be able to detect whether a policy makes sense. This criterion is not really addressed in the theoretical literature on the interaction between government policy, people’s beliefs, and the credibility inherent in those beliefs.

The other two criterion are addressed in the literature. In one of the earlier papers on policy reform credibility, Rodrik (1989) asked the question why would the public doubt that government would continue with policy reforms, despite repeated assurances from the government. He then suggested three categories of answers, based on purely rational behavior. One is that the policy reform is inconsistent with other policy actions undertaken at the same time. This reminds one of criterion (iii) above that the policy should be consistent with a longer term vision or strategic direction. The second category is the time consistency problem discussed earlier in this paper. If there is a clear incentive for the government to deviate later, then it is rational for the public to expect the government to change its policy later. A solution to this problem is along the lines of the institutional aspect of criterion (ii) above: commitment mechanisms and reputation building can instill trust in the institutions setting policies and implementing them. Rodrik’s third category is the problem of incomplete or asymmetric information. The public may not really know or understand the motivation of the government. Governments may then have to take even stronger reforms than technically necessary in order to “signal” their true intent.

Given the political transition in Argentina, the signaling of a new approach might require a package of policies that reinforce each other in terms of credibility. One of the paths forward might be to consider packages of reforms, each of which comply with the three criteria set out in the introduction to this paper.

Another key consideration in the path forward is the macroeconomic dominance, discussed above in the historical context, which probably persists today. It will be difficult to immediately unwind microeconomic problems created by export taxes and artificially low public utility tariffs unless a credible path for the fiscal accounts is established. It will also be difficult to convince investors that expropriation will not take place unless the government re-establishes access to normal forms of finance from the markets. Finally, a simple step to re-establish confidence would be to publish accurate and externally validated macroeconomic data, starting with inflation.

Since assuming office, the new administration has taken a number of actions. On the data front, the statistical agency (INDEC) resumed the publication of trade data, and the government took steps to restore the technical capacity of INDEC to produce reliable inflation estimates, as well as improve the national accounts. The government moved quickly to reach an agreement with holdout creditors, and the agreement was passed by Congress. The Central Bank has regained its focus on inflation and has been absorbing excess liquidity. In addition, monetization of fiscal 33