A Talk With Argentina's Domingo Cavallo

`I do not think there will be a backlash against the reforms'

In Latin America's vast shift from statism to freer markets, Domingo Cavallo has played a star role. As Argentina's Economy Minister for five years under President Carlos Saul Menem, he blazed a trail for the region's economic reformers. He also became a lightning rod for resentments and protests by Argentines against the economic and social pain caused by economic austerity. Bowing to such pressures, Menem replaced Cavallo on July 26 with former central banker Roque Fernandez, a less-controversial free-market advocate. But Cavallo, 50, intends to keep a high public profile, from lecturer during the current academic year at New York University's Stern School of Business to free-market adviser, for a $300,000 fee, to Ecuador's newly elected President, Abdala Bucaram. And he may run for President of Argentina in 1999, he has said, if there is no other free-market champion in the race. In his downtown Buenos Aires office, Cavallo discussed the prospects for Argentina and the region in a Sept. 20 interview with Louisa Shepard, BUSINESS WEEK's correspondent in Buenos Aires.

Q: What did you accomplish as Economy Minister?

A: Argentina is now a stable country in several senses. We have price stability after decades of very high inflation. And our integration into the world economy, particularly with our neighbors, helps stabilize the economic rules of the game, especially in trade, investment, and taxes. Our monetary system has demonstrated that it can cope with severe shocks from abroad such as the [Mexican peso] crisis. The economy is recovering from a yearlong recession, and we think it will grow again next year at a fairly rapid pace.

Q: Unions have called a general strike for Sept. 26, and President Menem's performance rates below 20% in the polls. Is there a backlash against reforms?

A: I do not think people are demanding inflation or industrial protection or subsidies for the rich like those in the past. When we were a closed economy, rather than subsidies for the poor, there were hidden subsidies in the form of benefits for speculators, or protected industrialists, or bureaucrats, or trade unions. That's why I do not think there will be a backlash against the reforms.

Q: How about the 17% unemployment?

A: This is a result of the creation of jobs in the 1980s in an artificial way in public enterprises, the bureaucracy, and very inefficient private activities. In those years, while the economy was declining 10%, employment was increasing 18%. In the 1990s, the economy had to transform these jobs to more productive ones, but it could not create enough for newcomers to the labor force.

In the future, with increasing savings from the [privatized] pension fund system, plus the effect of stability itself on savings, there will be financing for mortgages for the first time in many decades. That will help expand construction of houses, apartments, and urban infrastructure. We know from Chile's experience that that will create many jobs.

Q: What were the toughest issues you faced as Economy Minister?

A: We did not do all that we should have done to get more flexibility in the labor markets and more efficiency in health care. There is where we found the biggest difficulties. That relates to the strength of the trade unions and the fact that health care is a source of power and financing for them.

Q: With Argentina's system of peso-dollar convertibility, how can you avoid damage to the economy from surges of hot money?

A: Some people argue that because of convertibility, we have no way to prevent the instability associated with short-term capital flows. We have demonstrated exactly the opposite. Thanks to convertibility, we did not make the mistake the Mexicans made in 1994. When they suffered a capital outflow, [convertibility would have forced them] to contract domestic credit rather than expand it. That would have prevented their sharp devaluation in December, 1994.

Q: Will you run for President?

A: I do not rule it out. I do not think a person like me gets the presidency because of his personal plans but mainly as a result of circumstances. You know, it is different for a professional politician that makes politics his main target in life. That is not my case.

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