ECONOMY-ARGENTINA: On the Mend, Albeit Slowly, Say Officials

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Apr 6 2000 (IPS) - The Argentine government is optimistic that the economy will rally this year, after 18 months of recession. But officials and analysts admit that the rebound will not yet be felt by society at large.

Economy Minister José Luis Machinea said measures taken by the government of Fernando de la Rúa had put the economy on the right track. But he added that just how well the economy was recovering was an object of dispute.

De la Rúa took office Dec 10, after 10 years of government by Justice Party (Peronist) leader Carlos Menem, who dealt a death blow to hyperinflation, privatised public enterprises and renegotiated the foreign debt, while leaving his successor a bulky fiscal deficit, high unemployment and a spate of pending corruption cases.

Machinea announced Wednesday that exports grew 15 percent in the first two months of the year, while bank deposits were up, interest rates were down, the March inflation rate was below zero, and public spending and the cost of the public debt had been cut.

But he acknowledged that the ordinary citizen had felt the impact of the fiscal adjustment and tax hikes implemented by the government more sharply than the incipient rallying of the economy.

The government now plans to more actively stimulate small and medium-sized businesses, and aims to pull down unemployment from the current high level of 14 percent.

De la Rúa has also pledged to reduce the fiscal deficit, which currently amounts to more than 10 billion dollars. Along with the fiscal adjustment programme, the government pushed through tax reforms targeting middle to high-income sectors, although it did not modify taxes on products of mass consumption.

The new administration also introduced in Congress labour reforms designed to make the rules for hiring and firing more flexible, while decentralising collective bargaining with trade unions.

The bill, which has the support of the multilateral lending institutions, has made it through the lower house of Congress, but has not yet been voted on by the Senate.

Miguel Angel Broda, one of the economists most frequently consulted by business leaders, bankers and investors in Argentina, said the government had made a good start by tackling the fiscal emergency, tax evasion and the need for labour reforms, but argued that “it still lacks a strategic agenda.”

In Broda’s view, the government is “heading in the right direction” by focusing on obtaining investment grade status from credit-rating agencies. “In the field of the economy, this government has surpassed expectations. It has made the right diagnosis and has done relatively well,” he added.

There was really no choice, according to De la Rúa and Vice- President Carlos Alvarez, the leader of the centre-left Frepaso (Front for a Country with Solidarity), which is allied with the president’s Radical Civic Union party (UCR).

The Argentine economy began to slump in late 1998. The slowdown was compounded by the January 1999 devaluation of the currency of Brazil, Argentina’s biggest partner in the Southern Common Market (Mercosur) trade bloc, also comprised of Uruguay and Paraguay.

Broda predicted that the economy would only begin to really pull out of recession towards the end of this month, and that the recovery would be consolidated around September. He projected growth of around four percent this year, and slightly higher in 2001.

Argentina is “bogged down” on several fronts, according to the influential analyst. The currency board, which pegs the peso to the dollar, and the fact that 85 percent of the foreign debt was incurred in dollars prevent Argentina from resorting to a devaluation to lower costs, he pointed out.

“That means the costs in dollars are very high,” said Broda, who like Machinea stressed the need to reduce transport costs and utility rates by renegotiating the contracts under which companies were privatised.

But Machinea said he was confident that the costs of telecommunications would drop at least 40 percent next year, because the market is to be opened up to competition in November, according to the contract signed when the state-run company was privatised.

The government’s plan is to boost the competitiveness of the economy, starting with exports and moving on to the domestic market, while maintaining the confidence of foreign investors in order to draw heavier inflows of capital to create jobs.