ECONOMY-ARGENTINA: New President to Inherit Old ‘Hot Potato’

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Apr 24 2003 (IPS) - The new government that emerges from the coming elections in Argentina will inherit enormous economic difficulties, including a 142 billion dollar foreign debt, high under- and unemployment, and an official poverty rate of 54 percent.

The Argentine economy began a steep downwards spiral in late 1998, which culminated in total collapse in December 2001 with the resignation of Fernando de la Rúa halfway through his four-year presidential term.

Gross Domestic Product (GDP) shrank 11 percent last year, while the peso took a nosedive when the currency board that pegged it to the dollar for over a decade was scrapped.

The decision to float the peso was one of the first measures adopted by the government of caretaker President Eduardo Duhalde, who was appointed by Congress on Jan. 1, 2002 to serve out the rest of de la Rúa’s term.

Nevertheless, a few positive economic signals have appeared this year, especially in industry and agriculture, due to the revival of import substitution measures and an increase in exports thanks to the devaluation and improved competitiveness.

But there is still much to be done, and huge challenges lie ahead for the winner of Sunday’s elections or – if, as expected, no candidate takes 45 percent of the vote – of the May 18 runoff.

”After such an acute crisis, you feel that anything would be better,” Jorge Míguez, a history teacher at a Buenos Aires public high school, told IPS. ”But what is true is that we are not paying off our debt, unemployment remains high, and there are more people living in poverty than before the crisis.

”I don’t think that any of us who are going to vote on Sunday will do so believing that any of the candidates has a magic formula for pulling the country out of this crisis. For the first time, I perceive a strong sense of realism and low expectations among the public,” added Míguez, who with just a few days to go to the elections has not yet decided who he will vote for.

One of the most complex problems is Argentina’s bulky foreign debt, especially the six billion dollars in debt servicing payments to multilateral lending institutions that fall due this year, and the pending renegotiation of what Argentina owes private creditors, which it defaulted on in late 2001.

Although the question of fiscal balance has been pushed to the backburner in the campaign, the main concerns of the candidates are the devaluation of the peso, the restructuring of the banking system, the postponed increases in the rates charged by privatised utilities, and the promised wage rises.

Social aspects are also in need of urgent responses. The official unemployment rate has dropped since last year, but still remains high at 17.4 percent, while a similar proportion of the economically active population is active in the informal economy or only has precarious employment.

The unemployment rate dropped from over 21 percent last year when unemployed heads of household began to receive a small income from the state (150 pesos a month, equivalent to 50 dollars at the current exchange rate) as part of a public works programme.

Although the monthly stipend does not even cover a family’s basic necessities, those who are enrolled in the programme generally no longer seek work, because if they find a job they are immediately disqualified. Thus, those who receive the tiny stipend are not counted as unemployed.

Unemployment will not drop to 16 percent until 2011, and that will only occur if steady five percent annual economic growth is achieved until then, according to a study by the Central de Trabajadores Argentinos (CTA), an opposition trade union whose forecasts are backed by economists and experts who specialise in labour issues.

But the unemployment rate will increase to 24 percent by 2011 if GDP growth fails to reach five percent a year, the study adds.

In order to bring down the unemployment rate to below 10 percent, GDP would have to grow at seven percent a year over the next eight years, said the report by the CTA, one of Argentina’s two central trade unions.

Poverty, meanwhile, which rose steadily since the start of Argentina’s recession in 1998, shot up when the economy collapsed in late 2001, and 54 percent of the 37 million people of this once- rich Southern Cone country are now poor.

The buying power of wages plunged by nearly 40 percent in 2002, according to SEL, a local consultancy.

The economic advisers of the five candidates with a chance of making it to the May 18 runoff differ in their proposed responses to these and other challenges. For that reason, IPS consulted Abraham Gak, director of the Plan Phoenix, drawn up in 2000 and regularly updated by a group of around 30 economists at the public University of Buenos Aires.

”Without a doubt the new government must begin by getting the negotiations with the International Monetary Fund (IMF) going again” to ease the difficulties in acquiring hard currency and avoid the need to print pesos, which would drive up inflation, said the economist.

Gak said there are mechanisms to prevent the uncontrolled emission of currency, which at the same time would avoid an overvalued peso, thus boosting the competitiveness of Argentina’s exports.

After the freeing of the exchange rate, the peso had weakened to nearly four to the dollar by mid-2002, after which it started to rally as timid signs of economic recovery began to appear.

But the Phoenix Group says the current exchange rate of 2.87 against the dollar is not yet favourable enough for exporters.

Argentina is also in need of ”a strong policy” aimed at restarting the economy, and the state must move back to a more active role, with ”public banks playing a fundamental role” in granting productive loans to local businesses at reasonable interest rates, Gak maintained.

”The recovery of the wages of private and public employees and of the pensions of retirees is also necessary, in order to bolster buying power, strengthen the domestic market and rekindle economic growth,” he said.

The Phoenix Group is opposed to the neo-liberal economic policies that call for scaling back spending in order to draw investment and revive economic growth.

”That supposedly ‘virtuous’ circle turned out to be an ‘infernal’ circle and a total fiasco,” said Gak, referring to the economic model followed by Peronist president Carlos Menem in his two terms in office (1989-1999), and by de la Rúa until he was forced to step down in December 2001.

Nevertheless, two of the leading candidates, Menem and independent economist Ricardo López Murphy, are campaigning on platforms based on purely neo-liberal policy proposals.

But the candidate backed by the government, Santa Cruz provincial Governor Néstor Kirchner, proposes economic policies that would focus on the internal market and on reactivating exports and production, in order to generate employment and reduce poverty.

Kirchner and Menem, as well as Adolfo Rodríguez Saá – who lasted just a week in office when he was named interim president after de la Rúa resigned – belong to the governing Justicialista (Peronist) Party.

They, along with López Murphy, are the front-runners in the elections.