ARGENTINA: New Economy Minister Sparks Confidence, Doubts

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Mar 6 2001 (IPS) - Argentina’s financial markets soared in response to the naming of a new economy minister, though doubts persist as to whether Ricardo López Murphy, considered a fanatic for fiscal solvency, will be able to halt the country’s 30 months of stagnation.

The new minister, who President Fernando de la Rúa named Sunday, affirmed that the Argentine currency’s convertibility will be maintained and the peso will be kept on par with the US dollar.

The University of Chicago-trained economist also said he would pursue the commitments signed with creditors that were initiated by his predecessor, José Luis Machinea, and stressed he would respect the limits of the already-approved budget.

The Argentine stock market recorded an across-the-board rise Monday, the same dynamic as last Friday when it was announced that Machinea would tender his resignation from the post he had held since De la Rúa took office in Dec 1999.

Left on hold was the designation of Domingo Cavallo to the presidency of the Central Bank. Cavallo served as economy minister under president Carlos Menem (1989-1999) and is not a member of the current governing coalition. It was widely expected that he would replace the bank’s current chief, Pedro Pou, accused of failing to reduce money laundering activity.

De la Rúa presided over López Murphy’s swearing-in Monday, after expressing his appreciation for Machinea’s “enormous efforts.”

Though in the short term the new minister plans to uphold the policies of restricted expenditures and fiscal adjustment, the markets reacted very much in favour of the change at the helm.

But across the border in Brazil, Alcides Tapias, minister there of Development, Industry and Trade, expressed concern about López Murphy’s outspoken defence of greater opening to and direct negotiations with the United States. Brazil is the leading partner in the Southern Common Market (Mercosur), which also includes Argentina, Paraguay and Uruguay.

“In the long term, we all lose,” Tapias commented, pointing out that isolated countries lack the capacity to truly negotiate with Washington. Brazil is also Argentina’s main bilateral trade partner.

In general, however, Brazilian experts see the designation of López Murphy as a natural way out of the Argentine economic crisis. They agree that his performance is not likely to hurt the Mercosur economy, but will probably strengthen the bloc by deepening fiscal adjustment and promoting growth, however gradually, over the next few years.

The president of the Inter-American Development Bank (IDB), Uruguay’s Enrique Iglesias, stated that De la Rúa “made a very good choice” with López Murphy.

Following a year in which the Argentine economy failed to grow and unemployment remained at a high 15 percent, Machinea obtained a 40-billion-dollar loan in December from multilateral financial organisations and foreign governments in order to insure payment on the country’s external debt in the coming year.

The now former minister had thought he would leave his post once the political and economic effects of the massive loan triggered an improvement in the country’s economic indicators, but the desired effects never came.

Analysts specialising in interpreting the market’s mood consider that the problem with Machinea was that he did not generate confidence. In other words, he carried out the required economic adjustments but did not seem to believe enough in them, which made him the target of investors’ distrust.

“The loss of confidence greatly influenced him. The press wondered when he would leave, and that was an influence,” explained De la Rúa following the dissemination Sunday of a survey by the Ibope polling firm that indicated seven out of 10 respondents considered Machinea’s performance, terrible, bad or mediocre.

Meanwhile, the new minister, a liberal who is considered a “fiscalist par excellence,” has always had the nod of the markets as Machinea’s eventual successor.

But when De la Rúa took office in Dec 1999, he needed to put someone in charge of the economy who would satisfy the more progressive wing of the governing coalition.

Leaders of the Frepaso Party (For a Country of Solidarity), which is part of the governing Alianza coalition, enthusiastically accepted the designation of Machinea at the time, but his strategy, limited to fiscal adjustment, was not able to generate confidence among either investors or consumers.

This ultimately alienated him from the politicians who had propelled him to the ministry leadership in the first place.

When the Alianza took the reins of the government, López Murphy was rejected by the more orthodox among Frepaso’s leadership.

Frepaso lobbied against his designation as economy minister then, but De la Rúa, who included López Murphy among his trusted advisers, included him in the Cabinet as defence minister. There he quietly carried out his duties until last weekend, when Machinea presented his resignation.

“This is like reissuing Machinea’s plan, but with someone who is more reliable, which assures an initial push,” explained economist Eduardo Blasco, of the financial consultancy Maxinver.com.

“Machinea had no credibility because he belongs to a sector of the Alianza that does not believe in capitalism, in the markets, in the open economy or the reduction of the State. As a result, he had to leave,” commented economist Carlos Rodríguez, president of the Centre for Macroeconomic Studies of Argentina.

But the orthodox profile of López Murphy, verified by the market response, incites fear among industrial and rural producers, trade unions and Frepaso leaders, who stressed in a communiqué Sunday the need to reactivate Argentina’s internal market, foster growth and create new jobs.

The Argentine Industrial Union, through its president Osvaldo Rial, warned that “adjustment is not enough” to jump-start the economy. “The Machinea resignation occurred because of the failure of the adjustment policies. Now a change is necessary if we are to achieve the reactivation of the economy and the internal market.”

Frepaso president, Carlos Alvarez, emphasised that the middle class and productive sectors cannot continue making every effort to move forward if the government does not find a way to get tax evasion under control and get the economy going.

Alvarez resigned from the vice-presidency last October, setting off a political crisis that nearly ruptured the Alianza formed by Frepaso and the Radical Civic Union, the party of De la Rúa, Machinea and López Murphy.

He stepped down from the post for what he considered a lack of political support in his campaign to root out corruption in the Senate.

Economy-focused newspapers indicated Monday that the naming of López Murphy marks the beginning of a new phase. Though many consider his arrival to the economy post as “a conservative turn,” there are also plenty who categorise the new minister as a “pragmatic” economist who could implement activist measures even if he believes in fiscal solvency.

According to ‘Buenos Aires Económico,’ the problem is not the designation of an economic expert, but rather the lack of presidential leadership and the slowness in taking decisions – failures that led to the early demise of Machinea and which could mean the same fate for his successor.