Macroeconomic shocks and regulatory dilemmas: The affordability and sustainability constraints and the Argentine default experience

The regulatory framework of privatized utilities in the 1990s in Argentina was constructed under the implicit assumption of macroeconomic stability and sustainability. The paper studies the challenges that the macroeconomic crisis of Argentina in 2001 posed to policy-makers. We discuss the alternative policies for tariffs adjustment and compensations with a Computable General Equilibrium and reconsider the definition of Universal Service. It is shown that: (1) the short-run impact of the devaluation is a generalized loss of welfare; (2) renegotiation conditions of the debt of the firms denominated in foreign currency become a key element; (3) temporary investment reductions are not enough to reach sustainability of the firms; (4) cross-subsidies, though inefficient in the long run, can help to reach affordability for the poor; and (5) full indexation of tariffs could induce self-exclusion of the poor.