Provinces key to Argentine fix

Corruption, too, plays a part. The local media frequently uncovers instances of provincial officials awarding contracts at inflated rates to business associates, or giving jobs to family members or political allies.

In the impoverished province of Formosa on the country's northern border, about half of all formally employed workers are on the government payroll, and media investigations have demonstrated that many show up only once a month – to collect their paychecks. The 30 provincial legislators themselves each collect a whopping $12,000 a month in salary.

To add to the mess, federal tax collection is woefully inefficient: the government estimates value-added tax (sales tax) evasion at 40 percent and income tax evasion at 50 percent.

Until recently, this waste was hidden by a stream of foreign capital and loans, particularly as Argentina opened up to investment during the 1990s under President Carlos Menem. Since the default, Argentina's credit rating is in the tank and foreign investment has all but dried up. With the economy in free fall - it's expected to contract by 15 percent this year - provinces literally printed money to pay state workers. They issued some $1.75 billion in public bonds, equivalent to almost one in every two pesos in circulation, that quickly became de facto currencies.

The IMF has pressed Duhalde to either impose federal control over provincial spending, or press provinces to collect taxes and pay their own way. They are also pushing for the retirement of the 20 unofficial currencies now circulating in the provinces.

"Argentina should put together an economic plan that's coherent and consistent," says Francisco Baker, the IMF's spokesman on Argentine issues. "They need to bring down the deficit in the provinces and stop using the so-called funny money they've been using."

IMF insiders say its stance on Argentina's provincial elite is part of a get-tough policy ushered in by a new management team. The Bush Administration has also said it is in favor of more crisis prevention and fewer bailouts. IMF officials say that a 10 percent cut in spending by each province would translate into a 60 percent reduction of the federal deficit.

Duhalde, who was himself accused of using poverty-relief to buy votes as governor of Buenos Aires province, has floundered for solutions. The president is urging his former gubernatorial colleagues to voluntarily cut payrolls. But with unemployment at 20 percent and rising fast, the governors are stalling.

"The IMF is asking the government to use its federal power to exert some control on the provinces," says Burdman. "The federal government is, in effect, replying 'We can't do it. You do it for us.' "

Despite rising social chaos in Argentina's towns and cities, the IMF team appears determined to see real reform. "The IMF view is that if Argentina's political class can't get it together, then so be it," says a senior Western diplomat. "They'll come in afterward and pick up the pieces."

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