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By Albert Fishlow

Albert Fishlow is a senior economist and visiting professor at Columbia University. His published research has addressed Brazilian and Latin American development strategy as well as economic relations between the industrialized and developing countries.

On Jan. 6, Argentina's senate finished the task of approving the new economic program of President Eduardo Duhalde. The lower house had already concurred the day before. Banks remained closed on Jan. 7 and 8 as the government sought to publicize its components and to fill in many details. This is, of course, the inevitable domestic side of the failure to remain current on the $135 billion Argentine external debt.

Three features of the plan stand out.

Convertibility, as defined by the free exchange of dollars for pesos at a fixed rate, is definitively finished after more than 10 years. So, too, is the exchange rate of one peso for one dollar: a dual rate is anticipated, one for trade at a rate of about 1 dollar to 1.4 pesos, another a free rate for tourism and finance.

"Pesofication'' of private debts of small and medium-sized businesses, as well as personal mortgages for housing and unpaid balances of credit cards, up to $100,000, will occur. Similarly, the tariffs of telephone companies, utilities and other public services will be changed from their current level in dollars to the same rate in pesos. Banks will be partially compensated for the losses they incur by a new tax on exports of energy. This provision is a clear intent to assure middle-class support for the program.

A range of freedom has been granted to the government for the purpose of implementation. It will have authority to restructure bank debts, fix key prices, determine the exchange rate and so on. What will get done will depend on what is seen to be necessary to avert an inflationary burst already begun in the last two weeks of political succession.

Is this, as some have argued, the end of neo-liberalism and dependence on the International Monetary Fund (IMF) and the beginning of old-fashioned Peronism once more? Certainly the past performance of Duhalde as governor of Buenos Aires province, and that of his then economic advisor and now minister of economy, Jorge Remes Lenicov, is not encouraging. Then they, and all of the governors, contributed to the present outcome by regular and increasing provincial deficits. And Duhalde and his new minister of production have spoken of the need to convert from reliance on international investment and the financial sector to an emphasis upon domestic production and employment.

Or is this a 2002 Argentine version of Brazil in 1999, with a little bit of Mexico in 1995? Both of those recent Latin American experiences reflected significant devaluation and some internal financial restructuring. Both saw large programs of external financial assistance from the IMF and foreign governments and fairly rapid economic recovery and, in particular, limited domestic inflation, as government accounts changed from primary deficits to fiscal surpluses.

This is the heart of the matter. Can the Duhalde government manage fiscal policy in such a way as to restore creditability at an early moment? To be sure, the tie to a strong dollar after 1997 limited exports and encouraged imports, but it has been more the failure of productivity to increase on a regular basis and the expanding federal and state deficits that are the real culprits in the matter. They have led to the rapid increase in public debt. Yet despite this additional demand, continuing high rates of unemployment of the magnitude of 20 percent have occurred as investment has flagged. Devaluation as well as the current reduction in public salaries reduce the cost of labor and provide an opportunity to begin to do better. But any meaningful fiscal program will have to deal seriously with this problem. Increases in exports will initially be limited, given the expectation that global trade will increase only 2 percent this year. So immediate insistence upon a zero deficit, such as the IMF had earlier done in former Finance Minister Domingo Cavallo's waning moments, seems to be the wrong place to start.

Argentina additionally starts from the important advantage of generalized acceptance of the state's inability to pay its external debt as contracted. That reality is already much in the news. Even the IMF recognizes it. Already, the government has been able to secure a recent reduction in its obligations to internal creditors.
This new element -- fundamentally different from the prior recoveries of Mexico and Brazil -- affords a much greater relief on governmental outlays and becomes a way to reduce expenditure. More than that, while such an outcome will inevitably mean an initial greater reluctance of private lenders to return, that period need not last forever. It used to be the case that defaults meant exclusion from financial markets for two decades and possibly longer. Yet we have already seen the recovery of international finance in the case of Russia, and that official default occurred only a little more than three years ago.

Cordoba Province Gov. Jose Manuel de la Sota has expressed the hope that Duhalde, in his remaining two years, will be the Adolfo Suarez of Argentina. That Spanish prime minister represented the real bridge between Francoism and subsequent extension of democracy and rapid economic growth. Duhalde has made a start by incorporating representatives of the Radicales and Frepaso in his cabinet. He has received an overwhelming vote of approval from the congress on his economic program. If he wishes to succeed, let him now move forward on the second issue of national concern: the question of official corruption.

Former President Carlos Menem was a Peronist who moved to a convertibility board and privatized virtually all public assets. Duhalde can be the Peronist who goes one step beyond to establish a fiscally responsible state, and one that remains internationally open. In those circumstances, the obligations of a fixed exchange rate, so necessary initially to achieve the end of hyperinflation, will become irrelevant.

We will now see, and sooner rather than later, whether Argentina takes a giant step forward or returns to the tragic past of a continuing decline in relative income and international relevance.

(c) 2001, Global Economic Viewpoint. Distributed by the Los Angeles Times Syndicate International, a division of Tribune Media services.
For immediate release (Distributed 1/7/02)

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