Argentina: Here Comes One Unhappy Anniversary

No candles will be lit. But Argentina will soon mark its recession's third birthday.

Real gross domestic product has been contracting since the third quarter of 1998. In the first quarter of 2001, it was down 2.1% from its year-ago level, and the data suggest real GDP shrank further last quarter. Sales at supermarkets and shopping centers are down from a year ago, as is construction activity. Factory output has been weak all year, and the jobless rate is stuck in the mid-teens. No wonder consumer confidence, after staging a small rebound at the turn of the year, is sinking again (chart).

The long recession has heightened the risk of a debt default, resulting in double-digit interest rates as investors demand a high-risk premium. And Argentina's problems are hurting other Latin American countries. In particular, Brazil has seen its real weaken sharply partly because of its neighbor's woes.

About the only bright spot for Argentina is low inflation. May consumer prices were up just 0.2% from a year ago.

A turnaround will not be easy. In early June, Economics Minister Domingo Cavallo introduced a radical plan that includes tax incentives for consumers and businesses to lift growth. It also attempts to boost exports. In mid-1998, before the slump, exports were rising from 10% and 15% per year. Now they're barely growing.

That's because, for the past decade, the Argentine peso has been directly pegged to the U.S. dollar, causing an overvaluation of the peso and an attendant high price for Argentine goods on the global market. Cavallo's plan calls for calculating export subsidies based on an exchange rate tied to both the dollar and the euro. Initiatives against tax evasion will be launched to help pay for these new government programs.

Cavallo has a deadline on his hands. In October, national elections will cover all of the Senate and half of the lower house. With the recession likely to be in its fourth year, the ruling coalition will be vulnerable when voters go to the polls.

By James C. Cooper & Kathleen Madigan

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