ECONOMY-ARGENTINA: Nips and Tucks – but no Results

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Aug 22 2000 (IPS) - The government of Argentina has counted on a severe fiscal adjustment to generate investor confidence and growth, attract foreign capital and create jobs.

But eight months after President Fernando De la Rúa took office, the projected “virtuous circle” has failed to materialise, and many are wondering what to do now.

The De la Rúa administration did not start out by adopting populist measures, or indeed any that even vaguely resembled the president’s campaign pledges.

Since the centre-left Alliance — comprised of De la Rúa’s Radical Civic Union and the left-leaning Front for a Country with Solidarity — took office in December after 10 years of government by the Justice (Peronist) Party’s Carlos Menem (1989-99), it has basically implemented a long string of structural adjustment measures.

First came the reforms of the labour laws, aimed at reducing the cost of labour. Then the tax hikes, the dismantling of public agencies, and wage cuts for civil servants — while the promised social programmes and cuts in utility charges are nowhere to be seen.

All of the measures were designed to reduce the fiscal imbalance, estimated at the start of the De la Rúa administration at around 10 billion dollars (it has shrunk somewhat since then), and to generate confidence among foreign investors after more than a year of economic contraction.

But eight months on, the government’s policies, which have triggered heavy resistance from trade unions and even some criticism from within the ruling Alliance itself, do not seem to be providing the hoped-for results, but instead have aggravated the widespread discontent and the slump in consumption.

Studies by private sector economists and foreign investment banks, which closely monitor Argentina’s performance, predict that far from economic growth of four percent this year, this Southern Cone country will be fortunate to log two percent GDP growth, with the unemployment rate standing at 15.4 percent.

Meanwhile, the currency board that pegs the peso to the dollar, designed in 1991 by then-economy minister Domingo Cavallo, has stood in the way of boosting competitiveness.

“In terms of fiscal performance, Argentina is very tight on spending. But the expected revenues have not been forthcoming, and the growth of activity was lower than projected, due to the deflation of prices,” economy minister José Luis Machinea himself admitted earlier this month.

Machinea was recently asked in the United States, where he was meeting with International Monetary Fund officials, if Argentina had failed to attract investment due to a lack of investor confidence or a lack of competitiveness — to which the minister responded “because of both factors.

“Investment linked to the internal market is still waiting for the economy to grow and for consumption to swing upwards, while foreign investment is flowing into the automobile industry and the mining and aluminum sectors,” he pointed out. But, he added, “it is true that people feel they have been let down.”

The minister admitted that despite the structural adjustment programme, the reactivation has not occurred as planned. His acknowledgement of the difficulties the government has run into came on top of the criticism put forth by a number of economists, who question the credibility of the prescription for a return to growth by means of such a profound structural adjustment.

“The Argentine economy is basically stagnated. The credibility of the country is on the decline, and there is no longer any political margin for continuing to insist on pulling out of this by deepening the adjustment measures,” argued economist Miguel Angel Broda, who is frequently consulted by foreign investors.

Another economist with close ties to the financial world, Pedro Lacoste, said that “it is becoming increasingly obvious that no reactivation has taken place,” and that after two years of recession and deflation, “the lack of signs of change are producing political and social unrest.

“After eight months and two restrictive fiscal packages, the economic team should have admitted by now that the route chosen is not working,” contended Lacoste. “The orthodox focus, according to which the ‘virtuous circle’ of improving the ‘country risk rating’ and reducing interest rates brings reactivation, has failed.”

According to JP Morgan investment bank executives, there is a big problem of confidence standing in the way of recovery in Argentina — an observation that confirms some of the fears of minister Machinea, who recently wondered when Wall Street would declare itself satisfied with the adjustment measures carried out so far.

JP Morgan vice-president David Sekiguchi noted that Argentina’s banks enjoyed a high level of liquidity and that there was idle capacity in industry, although that potential for growth ran counter to the prevailing depressed mood.

But Sekiguchi recommended more adjustment measures in order for Argentina to pull out of the slump, and further cuts in public spending.

The JP Morgan executive’s observation regarding the performance of companies that are sitting tight, neither taking out loans nor producing, also applies to consumers, even those with medium to high incomes, who have tightened their belts a notch and cut down on spending.

In recent weeks, local newspapers have published the results of studies on the areas families have focused on to tighten their budgets, while providing advice on how to deal with the tough times.

The recommendations for middle or upper income sectors include going out to eat less frequently, putting children in less expensive schools, suspending tennis or English lessons, cutting back the household help’s hours, or walking instead of taking a taxi.

“I decided to give each of our maids a day off. I can manage anyway. They told me they preferred that to my letting go all but one of them,” Alejandra Ramos, a fashion designer and mother of two, told IPS.

Ramos’ husband is head of production at a local advertising agency which in recent months cut the salaries of its top-earning employees by 20 percent, while dismissing several of them. Like the domestics who work in his home, he preferred to accept a pay cut to losing his job.

No one knows exactly why the defence mechanisms continue to reign among the population — whether it is the fear of losing one’s job, the need to save “just in case,” or because everyone else is tightening their budgets. But whatever the precise reasons, regaining the trust and confidence of consumers will not be an easy task.