Argentina Has To Follow Through

Argentina is stuck. After boldly privatizing state industries, ending hyperinflation with a currency board, and opening its capital markets to foreign investment, the country appears unable to follow through on its commitment to a market economy. Growth has slowed, income is falling, government debt is soaring, and candidates running for the presidency in the Oct. 24 election are making overseas creditors uneasy. After Eduardo Duhalde of President Carlos Menem's Peronist Party suggested in July that he might seek a moratorium on interest payments on $145 billion in government debt, the stock market plunged 9% in one day.

Menem deserves credit for opening a closed, protected, and statist economy to global competitive forces. But much remains to be done by whoever replaces him. Taxes are extraordinarily high on businesses and goods and services because individuals evade their income taxes. The value-added tax alone is 21%. Restrictions on hiring and firing discourage companies from taking on new employees or using part-time or temporary workers. And the police, judiciary, and government bureaucracies are notoriously corrupt, adding to the cost of doing business.

Argentina's currency board is also a mixed blessing. By fixing the peso to the dollar in 1991, it was able to dramatically lower its chronic inflation rate. But Argentina belongs to the Mercosur trading bloc, and Brazil is its largest trading partner. Brazil's recent devaluation is hurting Argentine exports and there isn't much it can do about it. It can't devalue. Long-term, Mercosur must come up with a common currency, whether it's the U.S. dollar or some other unit.

Short-term, Argentina must finish what it started. The country has lived too long below its potential.