Argentina's Menem Helps Economy Grow Vigorously
STAYING THE COURSE
ARGENTINA'S economy appears headed for another year of growth and stability, despite recent political squabbling over reforming the Constitution.Skip to next paragraph
Subscribe Today to the Monitor
Without reform, President Carlos Saul Menem, who started revamping the economy in 1989, cannot run for reelection in 1995.
Analysts say some international investors, who are fueling Argentina's 6 percent annual growth rate, may find other markets for their dollars if President Menem cannot seek a second term.
``If there's reform of the Constitution, there's more certainty that Menem can continue with his plan,'' says Daniel Artana, chief economist at the Fundacion de Investigaciones Economicas Latinoamericanas in Buenos Aires. ``If not, there might be less capital inflow and less consumption of goods or investment, less activity.''
After last-minute political maneuvering, Menem and former president Raul Alfonsin on Nov. 14 signed an accord on reform that will, if approved by Congress, let Menem seek reelection.
But whether or not Menem can enter the race, analysts agree that Argentina's economy will remain an economic model in Latin America.
After assuming power in 1989, Menem launched an economic program that pushed Argentina into the international arena after decades of a closed economy. He lowered or cut many import barriers, moved toward balancing the budget, and began privatizing state-owned industries, including oil.
The economic program hit its stride in 1991 with the launching of the convertibility plan - which ties the Argentine peso to the United States dollar. Economics Minister Domingo Cavallo, the architect of the plan, was brought in by Menem in early 1991. Mr. Cavallo garnered the confidence of the international financial community by accelerating the economic changes and hiring a team of reform-minded technocrats.
Argentina now has one of the highest levels of growth in Latin America - more than 8 percent in 1991 and 1992 and between 5 and 6 percent this year. Analysts expect a smaller increase of 3 to 5 percent next year as the peso remains tied to the dollar and the rate of inflation slows.
It is the dramatic drop in inflation - down from four digits in the late 1980s - that has most bolstered the reputation of the Menem-Cavallo team. ``The major success of the government has been to lower the inflation rate,'' says Adalbert Kreiger Vasena, an economist and former Argentine economics minister. ``All the fundamentals are in order now for continued growth.... The inflation rate, the budget is under control, and the attitude toward private investment is more open.''
Most analysts expect inflation to drop to 8 percent this year, down from 17 percent in 1992, before reaching 5 to 6 percent in 1994. Business investment is expected to reach 18 percent of gross domestic product.
But the Argentine economy is also facing problems. Unemployment is near 10 percent as the government lays off tens of thousands of workers in its privatization efforts.
Another problem is the negligible savings rate of consumers who use new credit to buy imported goods - everything from cars to compact disc players. Credit is still tight for small- and medium-size businesses, while home mortgages carry interest rates of 20 percent.
And the trade deficit, fueled by consumer demand for foreign products and industry purchases of capital goods, is expected to reach $2.6 billion this year.
The absence of a settlement to the Uruguay Round - the international trade talks being held under the auspices of the General Agreement on Tariffs and Trade in Geneva - also could be bad for Argentina.
``If GATT goes down and there's protectionist policies, that's going to dramatically affect exports,'' says Ricardo Tappata, a Buenos Aires-based economist. ``Argentina cannot sell its goods abroad if there's going to be a subsidy war.''