ARGENTINA: Continuism, or Change?

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Jul 7 1995 (IPS) - This Saturday Argentine President Carlos Menem is set to succeed himself, but what analysts call the “political continuism” which this represents masks other important challenges.

These include overcoming the “tequila effect” – the crisis which shook the nation following the Mexican crisis in December. Argentina also must get back onto a path of growth and deal with increasing unemployment – which doubled from six to 14 percent under Menem’s first term.

Experts are also concerned by the serious fiscal crisis in the provinces, a worryingly high level of foreign debt and disagreements with Brazil – the main Argentine export market.

Neither the June deflation of 0.2 percent, nor the 362 million dollar trade surplus in the first five months of this year – up from a 2.5 billion deficit in the same period of 1994 – have reduced the climate of scepticism.

These economic indicators are interpreted by economists and the business sector as symptoms of a deep recession marked by falling consumption and increased exports. The government, meanwhile, is announcing economic success.

Menem was re-elected by nearly 50 percent of the voters in recent elections – approval for policies which reduced annual inflation from 5,000 to 3.7 percent.

During his first term in office, Argentina’s economy grew at an average of seven percent per year, though even the most optimistic predictions are for barely three percent this year.

The “Argentine economic miracle,” hailed by the US “Time” magazine, included the privatisation of national industries, unprecedented economic liberalisation, rigid fiscal and tax policies, and renegotiation of the foreign debt.

Economic expert Marcelo Lascano, International Monetary Fund (IMF) adviser and financial writer, said that future priorities were cutting the rate of unemployment, reducing the foreign debt and tightening relations with other Southern Common Market (Mercosur) members.

However, he explained that all of these issues were secondary to the need to “demystify” the model. The convertibility programme was no longer viable in a world of economic ups and downs.

The convertibility plan, introduced in 1991, obliged the nation to keep reserves equal to the amount of money in circulation, thus fixing the Argentine peso on parity with the dollar. That has been the backbone of Menem’s economic policy.

In his last message to the nation before his reinauguration, Menem stated that the convertibility plan would continue, no devaluation would occur, and no changes would be made in the economic policy.

Lascano criticised these statements, saying that the government must be “flexible” and restrict foreign speculation.

“Those who believe convertibility is a lifelong rule are wrong,” he said. “It was a very useful tool to get out from the hyperinflation cycle, but has become a straitjacket.”

Another economic expert Eduardo Curia and Radical Civic Union deputy Rodolfo Terragno agreed with the need to abandon this “corset,” despite criticism from the government.

Limiting speculative capital is also a well-supported motion, with centre-left Frente Grande economist Roberto Lavagna urging the government to adopt restrictions similar to those in Chile and Colombia.

Even influential voices from the United States are calling for limits to short term investments, with President of the Brookings Institute Barry Bosworth claiming that the Mexican crisis had shown that these could be as problematic as the foreign debt crisis of the eighties.

Bosworth explained that many Latin American countries rely on foreign speculation for make up for shortfalls in internal savings, even though “direct investment has shown itself to be more effective for the economy.”

The Mexican crisis prompted the withdrawal of eight billion dollars from bank accounts in Argentina, seriously affecting banks, industry, trade and disrupting the lives of people.

The government was then forced into debt to support the financial system and meet payments on the 100 billion-dollar foreign debt.

This debt increased 30 percent during Menem’s first term in office, one of the most marked increases in the region according to the Economic Commission for Latin America and the Caribbean (ECLAC).

Loans taken to deal with the “tequila effect” now need renegotiation, and aid to the financially crippled provinces also needs to be withdrawn, and problems in the auto-parts trade with Brazil need to be resolved.

“Without more or less systematic macroeconomic policies and a group of regulations for conflict resolution it is pure fantasy to believe that a tariff union can survive,” said Lascano.

Menem is also talking of investing some 80 million dollars in job creation schemes over the next four years.

These elements mark a series of challenges to the new government that continuism alone cannot answer, and as such may possibly mark the beginning of a new chapter in Argentine economic history.