ARGENTINA-ECONOMY: Doubters Emerge Over Stability Plan

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Sep 22 1996 (IPS) - Former economy minister, Domingo Cavallo has been the star speaker abroard at recent financial conferences with audiences applauding his stablisation plan for Argentina.

At home, however, many people are beginning to doubt the soundness of his theory because the heart of his strategy – based based on a fixed exchange rate – may not be as effective as initially envisaged.

“I am doing what those who achieve renown and whose opinion is respected in the world do,” boasted Cavello last week.” I am in the same bracket as John Naisbitt, Paul Krugman, Lester Thurow, Rudger Dornbusch and Jeffrey Sachs.

But while Cavallo is earning 25,000 dollars per conference appearance, the International Monetary Fund (IMF) is preparing to present a report on Wednesday (Sep 25) which includes a sceptical look at stabilisation plans based on a fixed exchange rate.

This echoes the criticism of many Argentine entrepreneurs and economists who have started to doubt the value of “a peso equal to a dollar,” and who blame the supposed exchange backlog for the high levels of unemployment.

Cavello launched his economic stability plan in 1991, with the aim of restraining hyper-inflation and the almost daily devaluation and create a framework for development. The ‘law of convertibility’ prevented the issuing of money not backed by reserves and forced the state onto a rigid fiscal diet.

The government of President Carlos Menem showed it was always ready to maintain parity, by selling all the dollars the market required when there was a run on currency. Thus, from 1991 until the present, the rate has not varied – not even when Cavallo was abruptly ousted in August.

The stable exchange rate became one of the pillars of the Argentine economic model. The majority of exchange bureaux, which had mushroomed in urban centres during the 1980’s had to change their mode of operation in the ’90s.

Thanks to stabilisation, trade liberalisation and State reform, the economy grew at a rate of seven percent per year between 1991 and 1994, but in late 1994, the Mexican crisis delivered a hard blow to the process that had begun to wilt, as witness by the high rate of unemployment.

In 1995, growth fell by 4.4 percent, and unemployment reached 18.6 percent – and the previously much-vaunted model is now in difficulties.

The IMF says Argentina, Mexico and Russia took 80 percent of the institution’s funding last year and Argentina’s foreign debt has rocketed to more than 100 billion dollars, with interest payments of 13 billion dollars due in 1997. But even with foreign help, Argentina has a fiscal deficit which will reach six billion dollars by the end of 1996 while unemployment continues to remain high and promised reactivation has not arrived.

This background has led some people to look closely at the exchange rate. They point to Chile where the government, to encourage growth and increase employment, reformed labour legislation and abandonned the fixed exchange rate – despite a small amount of inflation.

Menem has sworn there would be no devaluation during his term in office and Eduardo Duhalde, the Governor of the province of Buenos Aires and Menem’s possible successor, along with other economists and entrepreneurs says change was unnecessary and would only create distrust.

Industry Secretary Alieto Guadgani, said that a real – not nominal – devaluation, would not be possible as it would mean having to change the tariff established in the Mercosur (Southern Cone Common Market) talks between Argentina, Brazil, Uruguay and Paraguay.

At the other end of the scale are the economists who support the IMF comments and state the fixed exchange rate should no longer be dogma. These include experts promoting a nominal devaluation, those who want a real one, and those who believe that, without being extreme in any way, that an open debate is needed of the issue.

The economist Eduardo Curia is one of the pioneers of abandonning the parity. If Mexico – which devalued in 1994 loosing the Tequila effect on the world – has seen growth this year, “then devaluation is no bad thing,” he said.

Business representative Jorge Born, owner of a cereal transnational, spoke of the distortion of market prices due to the “exchange backlog.”

A few years ago a worker could be paid with one cow, but now you need three to pay a salary, he said.

Guillermo Calvo, the Argentine economist who predicted the Mexican crisis – and a former advisor to the new economy minister, Roque Fernandez – is another who favours devaluation – but only if compensation is paid.

He believes a devaluation can be carried out without touching the exchange rate, by increasing import tariffs and granting subsidies for exports, without leaving the convertibility scheme.

“The plan will aviod shocking the foreign investors,” he said, adding that the formula was already in the starter’s gates.

“If, from now until December, the Argentine government does not manage to create employment nor leave the recession behind, then we will ve looking for new options, and this is a good choice,” Calvo stated, adding that he believed Fernandez was ready to try it if necessary.