ECONOMY-ARGENTINA: Gov’t Cuts Spending, But It Is Not Enough

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Feb 4 2000 (IPS) - Economic austerity within the Argentine government is evident down to the smallest details, but could backfire as a political gesture if officials do not take action to stop businesses from relocating to Brazil, and taking thousands of jobs with them.

President Fernando de la Rúa, who succeeded Carlos Menem December 10, made his first international tour flying with a commercial airline and a team of fewer than 10 people. The media captured the moment he paid for his excess baggage out of his own wallet.

Vice-president Carlos Alvarez commutes to work each day in a taxi or he takes the subway. In his office, his advisory team – 10 times smaller than that of his predecessor – works on getting legislators and their staff to turn in the cellular phones they continue to use at the government’s expense.

Economist Eduardo Curio told IPS that “these gestures are all very good,” but warned they “do not come close” to solving the deep-rooted problem of the Argentine economy’s inability to compete with neighbouring Brazil.

The situation grew worse in 1999 when Brazil’s currency, the real, depreciated 40 percent as a result of devaluation at the beginning of the year.

Since then, an estimated one hundred companies, primarily auto- parts manufacturers, relocated their factories or production lines to Brazil, where they benefit from low costs and the incentive policies offered by several Brazilian states.

The Argentine Industrial Union affirmed that this process has hurt approximately 10,000 workers, a trend that could continue in coming months if urgent steps are not taken to stimulate competitiveness with neighbouring markets.

“This movement is very pronounced. Many are leaving, others are threatening to follow suit, and the rest quietly wonder how much longer they can hold out,” commented Curia. He added that he disagrees with the government-proposed law, recently approved by parliament, that raises consumer taxes.

Austerity “De la Rúa-style” may appear to be an obvious policy move at first glance, but is an abrupt and drastic change from the Menem government’s lavish spending habits. Cutting government waste was not only the central theme of De la Rúa’s campaign, it was one of the major reasons he was elected president.

Menem flew aboard a private plane worth 100 million dollars, (which De la Rúa promised to sell), accompanied by entourages of up to 100 people, which always included his personal hair-stylist, his daughter, her friends and her dressmaker. Menem’s own friends, business leaders and journalists rounded out the groups.

But the economic problems confronting the new president represent a much greater challenge, and in this sense, his and his staff’s demonstrations of cut-backs are not enough to keep building the confidence of investors or of Argentina’s citizens, according to Curia.

De la Rúa took office in a critical year. The economy declined by nearly four percent in 199, and though experts agree on predicting growth for this year, it will expand to the same degree it fell during the last 12 months.

Unemployment, which last year averaged 14.2 percent, will remain stable, say experts.

The president, who has yet to complete two months in office, acknowledges he has been given a heavy load. The 1999 fiscal deficit, estimated at 10 billion dollars, was the highest of Menem’s decade at the government helm, and forced De la Rúa to inaugurate his term with economic adjustments, even during full recession.

The adjustments were enacted to reduce the 4.5 billion-dollar imbalance, and were key for a 7.0 billion-dollar agreement with the International Monetary Fund (IMF). The accord, in turn, is essential for building investor confidence in this emerging economy.

But alongside these apparent achievements, the government must also initiate severe adjustment measures in the provinces, which have already been hit hard by the social-economic crisis.

It must also further reduce public spending and convince government employees to retire from their posts, even if they must face an uncertain labour market.

Foreign minister Adalberto Rodriguez Giavarini announced he will negotiate a “truce” with Brazil in order to prevent an escalation of pending trade conflicts, but Curia maintained that this status quo position will only aggravate things.

Argentina and Brazil are the two major players of the Southern Common Market (Mercosur), which also includes Paraguay and Uruguay.

Argentina’s business community is clamouring for activist policies, as this is the area where the government has fallen farthest behind. Accessible credits, incentives, tax rebates and support for exports continue to be the topics of debate among officials and representatives from the industrial, agricultural and service sectors.

The Argentine people applaud the austerity measures, which would be an obvious policy move at another time, but they are beginning to lose confidence that the government will be able to reduce unemployment in the short term, an issue that is highest on their list of concerns, according to polls.