Adios, Argentina Hello, Brazil

Companies are stampeding out, posing a problem for de la Rua

`Love thy neighbor" is not an easy commandment to live by for Argentina. Brazil's abrupt devaluation a year ago rendered Argentine products comparatively more expensive both at home and abroad. Worse, the cost of doing business became far cheaper in Brazil than in Argentina, spurring some two dozen companies to jump the border. The effect was to drag Argentina into a deep recession that it still hasn't shaken. Meanwhile, the Brazilian economy is set to rebound nicely in 2000. Thank you, Brasilia.

This double whammy of a cheaper Brazilian currency and a local recession is presenting Argentina's new president, Fernando de la Rua, with one of his first big policy challenges. The 35% slide of the Brazilian real against the Argentine peso is luring one manufacturer after another north to Brazil. If de la Rua cannot stop it, the corporate exodus could cut short any nascent recovery, boost 14% unemployment to even higher levels, and spark social unrest in Argentina's poorest provinces. Also, corporate flight will deal another blow to Mercosur, the trade group anchored by Brazil and an increasingly disgruntled Argentina.

GOOD COMPANY. The latest to pull up stakes is Delphi Automotive Systems Corp. The world's largest auto-parts maker announced on Dec. 27 that it would shut down a wiring plant in Argentina's Cordoba province. Delphi is in good company: At least 15 auto-parts companies have moved north to Brazil, taking with them 7,000 jobs--or one-fifth of the industry's total workforce. Meanwhile, General Motors Corp., Ford Motor Co., and Italy's Fiat are all shifting some of their production to Brazil.

The stampede isn't limited to the auto industry. Compania Industrial de Conservas Alimenticias (CICA), a unit of Anglo-Dutch giant Unilever, will close a plant in Mendoza province at midyear and step up exports from facilities in Brazil and Chile to supply Argentina. The company had considered the possibility of shuttering the Mendoza factory before Brazil's devaluation, but the real's slide "accelerated our decision," says Miguel Angel Gonzalez Abella, CICA's head of institutional relations.

De la Rua said just before New Year's that he will do everything in his power to stop the exodus. So far, the President has offered to ease the burden on business through cuts in payroll taxes and a reduction in import tariffs on key industrial goods. That could slow the rush of companies out of Argentina, but it will compromise de la Rua's efforts to curb a gaping $6.5 billion budget deficit.

The fastest way out would be a devaluation, but there is virtually no support for such a move in Argentina. Scrapping the peso's 1-to-1 peg to the U.S. greenback would devastate scores of Argentine companies with dollar debts and end the country's nine-year streak of single-digit inflation. "This is a problem that has no quick solution," says Abel Viglione, an economist with the Latin American Economic Research Foundation (FIEL), a Buenos Aires think tank.

Argentina is learning the hard way that when times are tough, companies will focus on the big markets. Brazil's population of 165 million is nearly five times that of its neighbor. That's one reason why auto makers, even while scaling back in Argentina, are plowing more money into Brazil. Fiat plans to invest $1.5 billion over the next three years to boost sales of small trucks in the country--its largest market outside Italy. DaimlerChrysler is spending $500 million to modernize a truck plant. Although its economy barely grew in 1999, Brazil received $29 billion in foreign direct investment last year, compared with just $6 billion for Argentina.

OVERNIGHT. One long-term answer to Argentina's quandary is a Mercosur single currency. All of the bloc's members, which include Paraguay and Uruguay, have endorsed the concept. Yet it is clear that the merco, as the common coin could be called, can't emerge overnight. It took Europe more than a decade to lay the groundwork for the debut of the euro last year. "A single currency can be achieved, but it will probably take at least six years," says Michel Alaby, a Sao Paulo economist.

Until then, expect lots of disagreement within Mercosur. Two-way trade between Brazil and Argentina fell by over 25%, to an estimated $10.6 billion in 1999, the first annual decrease since the bloc was launched in 1991. Argentina has hiked tariffs and imposed quotas on Brazilian goods, from steel to household appliances. Brazil has retaliated with its own protectionist measures. Beggar thy neighbor, not love thy neighbor, are the words that Mercosur's two leading partners live by nowadays.