Will Argentina Stay The Course?

Ricardo Matarese spent his youth hoisting cargo in the steamy port of Buenos Aires and saved enough to open a small coal-exporting business. But when hyperinflation and devaluations hit in 1991, he lost everything except his house and two cars. He's back working at the docks now and moonlighting as a taxi driver. "I've come down a few notches in the world," says Matarese, 49, shrugging his shoulders. But now that inflation is under control, he can buy an airline ticket on credit and take a vacation. "I'd never give up this

economic stability," he adds.

Like many Argentines these days, Matarese is still savoring the fact that prices don't rise daily. But

31/2 years into a stabilization program that turned Argentina around, he also shares with others a nagging feeling that this is as good as it's going to get.

Thus begins the second, more difficult stage of Argentina's economic revolution: persuading an uneasy electorate to keep faith in the long-term payoff of market reforms. It comes just as campaigning begins for the May, 1995, presidential elections. President Carlos S. Menem, the charismatic leader who has led the dismantling of the statist economy, will be facing disquiet over rising unemployment and lagging growth in the provinces. "The social costs of the economic transformation have been very harsh," says economist Miguel Angel Broda.

Argentina's economic policy has been a remarkable success (table). Economy Minister Domingo F. Cavallo has privatized dozens of state-run companies, from telephones to the national oil company. He turned a 5% budget deficit into a surplus. Argentina's manufacturing base was restructured, prompting a 42% jump in productivity. The economy has grown 30% in just three years, faster than any other Latin American nation. And inflation remains low, at 4% this year.

PESO PRESSURES. But the restructuring has hurt, too. Unemployment has doubled, to nearly 11%, affecting mostly the middle class. Industrial exports were up 39% in the first four months of the year, but imports are surging even faster, and the trade deficit is expected to exceed $5 billion this year. That will put pressure on the peso, considered sharply overvalued because of the 56% inflation since the peso was set by law at parity with the dollar in 1991. And public spending has expanded 60% since then, threatening to erode the budget surplus.

Argentina is still better off than many neighbors: Per capita income of $8,100 is the highest in Latin America, and foreign-capital inflows totaled $35 billion in the past 31/2 years. Its well-educated workforce attracts foreign investors who want a manufacturing base to serve the 200 million consumers in the Mercosur free-trade zone, including Argentina, Brazil, Uruguay, and Paraguay.

General Motors Corp., which fled Argentina's economic chaos in 1978, has now returned to open a new, $100 million factory in Cordoba province which will produce 25,000 pickup trucks a year for domestic sale and duty-free export to Brazil. Argentine automobile and truck sales have jumped fivefold, from about 90,000 vehicles in 1990 to an estimated 450,000 this year. GM director Leo Kunigk says he won flexible workplace rules from the auto workers union that would have been unimaginable a few years ago. "Mentalities have changed incredibly," Kunigk says. "Before this surge of modernization, it would have been much more difficult to set up shop here."

Most analysts believe that Argentina's future is bright--if officials stick to tight fiscal policies. But it will be difficult to keep spending under control in an election year, especially in the 23 provinces, where bloated public payrolls contrast sharply with the federal government's cost-cutting. Still, Cavallo vows he won't bust the budget. "We've carried out the huge task of controlling expenditures and reforming the state to permanently eliminate many expenses," he told BUSINESS WEEK (box).

GROWING CONCERN. President Menem, while still popular, is slipping in early opinion polling. A big thorn in his side will be upstart candidate Carlos "Chacho" Alvarez, a dissident Peronist congressman. Alvarez vows to investigate alleged corruption in the Menem administration. And he blasts Menem for failing to offer job retraining and industrial reconversion loans. But Alvarez doesn't question most of Menem's economic policies.

To stave off challengers, Menem will have to address growing social concerns. In a late September speech in New York, Menem vowed to make progress "on the two scourges--unemployment and poverty." He'll need some quick results, especially in the provinces. Warns Francisco Macri, president of Sevel Argentina, one of the country's top industrial groups: "If there is much delay in solving the problems, we could see some unrest." Demonstrations in front of the Casa Rosada, the presidential palace, are frequent, including retirees protesting their skimpy government pensions.

Overall, most Argentines believe the country is finally stable. That confidence is reversing a decades-long brain drain. At YPF, the privatized oil company, President Jose A. Estenssoro has lured home 20 Argentines who fled overseas during the 1970s and 1980s. "They wouldn't have come back to work at the old YPF," says Estenssoro, "but now we can offer them a challenging future at a well-run, private company." The challenge facing Menem--or the next President--is to convince all Argentines that they have an equally bright future.


PRODUCTIVITY is up 42% over three and a half years

PRIVATIZATION has netted $24.2

billion in cash and retired debt

INFLATION has been slashed from 2,300% a year to just 4%


UNEMPLOYMENT is climbing fast, now stands at 10.8%

THE TRADE DEFICIT is rising, totaling $6 billion this year


spending has erased budget surplus


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