Since taking office in 1989, President Carlos Menem has moved Argentina a long way toward becoming a competitive country. He has privatized swaths of the economy, imposed fiscal and monetary discipline to cut annual inflation to less than 1% from nearly 5,000%, and forced local companies to become efficient by letting in imports.
But now, Menem is backing away from long-overdue reforms of rigid, costly labor-market rules--the next major step needed to move Argentina into the ranks of modern industrial societies. Instead, he will soon send watered-down legislation to Argentina's Congress that would leave almost intact the existing regulatory maze. It blocks mobility by making it expensive to hire and fire workers, and it discourages creation of jobs to cut the stubbornly high unemployment rate, now at 13.7%.
Behind Menem's shift is presidential ambition. He recently expressed interest in running next year for a third term, and he is currying favor with union leaders whose support will be crucial in winning the Peronist party's nomination. One lucrative franchise the labor bosses are keeping, thanks to Menem, is the unions' monopoly on providing health care to workers, a $3 billion annual business. Although the unions have lost much of their power, labor bosses are still influential within the party. "By getting the unions on his side, Menem is trying to stay at the center of the political stage and avoid becoming a lame duck," says political analyst Rosendo Fraga.
The timing of Menem's flip-flop could hardly be worse, with the world bracing for fierce market scrambles touched off by Asia's turmoil. "We are less prepared to compete than we were before [the Asian crisis]," warns Ernesto Kritz, an analyst at the Society of Labor Studies, a Buenos Aires think tank. Equally important, Menem is forgoing the chance to strengthen the work ethic by helping restore a sense of fairness to the workplace. The existing system discourages hard work from a privileged labor force protected and rewarded by the rules rather than merit. Overhauling the regulations would make Argentina a more equitable, as well as productive, society.
Much of the rigidity in the labor market results from the prohibitive cost of firing workers: severance pay of one month's wages per year of employment. That saddles companies with unproductive employees who know they are unlikely to be fired. And it makes executives think twice before hiring anyone. A more flexible labor market, some analysts believe, could help lower unemployment to less than 10% within three years.
Another headache: Companies with long-standing union contracts are locked into higher labor costs and more restrictive terms than newcomers. Ford Motor Co., which has been in Argentina more than 80 years, is bound by decades-old contracts that limit its ability to assign workers to new tasks and burden it with costly benefits. General Motors Corp. and Chrysler Corp., which have built plants only in the past few years, have been able to forge more flexible agreements with workers.
Worse is the ban on temporary work contracts that Menem proposes. Such contracts, which relieve employers of the heavy cost of social benefits, were allowed as a way of spurring employment when joblessness soared to nearly 20% during the 1995 recession. Last year, 600,000 jobs were created, mostly through temporary agreements. But banning such contracts could reduce job growth this year by almost 200,000, Kritz says.
If Argentina is to hold its own in the tougher global markets, Menem must change course. To start, he should ditch his dream of becoming perpetual President. To allow him to run again, Congress would have to amend the constitution. By making clear he's not a candidate, Menem can free himself of the need to pander to the unions and move ahead with sweeping labor reform. If he does, he will be remembered as the President who gave Argentina high employment as well as high growth.