Argentines Raise Doubts About New Reform Plan

ARGENTINA struggled through two difficult periods of hyperinflation in two years, and seemed about to face another, when Domingo Cavallo became economy minister four months ago. His "Autumn Plan," begun in February, aims to set straight imbalanced government accounts, a prime cause of inflation. Already it has improved tax collection, cut federal expenditures, and put strict limits on money printing.

Yet skeptics abound. Mr. Cavallo's economic plan faces the same powerful political and economic pressures that have caused nine such plans to fail since 1989.

Although many economists doubt the plan can succeed in turning the economy around, a spectrum of observers that includes businessmen, government officials, and social scientists say it is nonetheless a step in the right direction. Even if Cavallo's plan ultimately flops, they contend it will have helped lay the foundation for a successful return to political and economic stability.

So far, the plan has met with some success. Inflation is falling, down from 27 percent in February to about 3 percent last month. Tax revenues have increased to levels higher than expected. And consumers, with a real jump in purchasing power, have been buying cars, appliances, and food at such an increased level that factories cannot keep up with demand.

Cavallo's plan, which also includes pressuring business to lower prices, complements moves by predecessors to shift the entire economy toward deregulation of industry, trade liberalization, and the selling off of government-run businesses to the private sector.

Confidence and capital

Two weeks ago, Cavallo announced a tax reform bill to increase revenues and encourage Argentines to bring savings back home from overseas banks.

Restoring confidence is crucial. Argentina's bountiful countryside was once thought to be an everlasting source of wealth that would bring the country to the top ranks of the world's economies. But for reasons many Argentines are still trying to discover, the country's economy began to stagnate in the 1970s.

After decades of blaming the government for their bad experiences, Argentines are beginning to look to themselves to enact change that will take their country toward prosperity.

"More people are seeing that in reality we are all guilty," says Beatriz Tountoundjian a sociologist. They see "that the state merely reflects society."

Even the biggest critics of the Cavallo plan admit that the public supports the government policy, showing that many Argentines have rejected the old notion that the economy should revolve around a federal bureaucracy that gives privileges and protection to unions and business in return for political support.

Recent protest marches that brought federal action against the provincial government of Catamarca are indicative of the switch to a more activist citizenry less loyal to political parties, says Rosendo Fraga, director of the Union for a New Majority Study Center, a think tank.

"The power of political parties, the military, unions, and businessmen, is being transferred to the individual," Mr. Fraga says. The individual is "recovering his share of autonomy, of power, that was previously given over to institutions."

That new attitude, many say, has arrived as Argentines have gained greater access to information about the world around them, and opened their eyes to conditions in their own country.

"It's not a question of deciding to privatize or something like this, but it's a general state of spirit of a people who realize that their institutions are useless," says Jorge Telerman, the Foreign Ministry spokesman. Many, he says, now realize that the economy was stagnant for years, that many Argentines left the country, and that hospitals, phones, mail services, and schools simply do not work.

"People begin to put all the data together" and realize how bad it was, Mr. Telerman says.

Plain speaking

Such stark realism can be seen in official pronouncements that for years promised quick and easy solutions to economic and social problems. Cavallo, for example, spoke bluntly at a recent press conference about the plight of Argentina's 4 million retirees whose pensions have dwindled.

"It anguishes us to see our elderly suffer," Cavallo said. "But we can't lie to them. We have to tell them that the solution of the pension problem can only come with an increase in tax revenues."

Behind Cavallo's plain-spoken statement of such problems, however, is the worry many hold that his plan, like those before it, will fail. The boom in spending, and upward pressure on prices, is one of many reasons economists fear the plan will falter.

Rising food prices "can lead to a situation of 30 percent to 40 percent inflation a year - and then people want their salaries [raised] to make up for this," says Pablo Gerchunoff, an economist at the independent Torcuato di Tella Institute. The price of beef rose 22 percent Monday.

As internal prices have risen, the austral, the national currency, appears in danger of becoming seriously overvalued. The effect, economists say, would increase imports, cut exports, and put Argentine workers out of work. Meanwhile, loss of confidence in the currency's value would send Argentines running to buy dollars, leaving the poor, who have little access to such protection, with devalued wages.

"The recession would be gigantic," adds Mr. Gerchunoff. To avoid this "the fiscal situation has to be resolved very quickly."

Temptation to spend

Into this mix of economic difficulties flows the political challenge of congressional and gubernatorial elections set for October. Because the outcome will determine how much support President Carlos Saul Menem will have to continue economic reform, the government may seek support from special interest groups.

"The politicians' temptation to spend is the central risk to the plan," Fraga says.

Meanwhile, economists complain that the government does not have a program to help Argentine industry modernize to become more competitive. And so far, the government does not have an overall plan that includes the critical areas of health, education, defense, and internal security. There is also $60 billion in foreign debt to renegotiate and a needed loan from the International Monetary Fund.

Businessmen wary

In Buenos Aires wholesalers' district, it is clear that the risks of investing in an emerging economic framework are still too large for many businessmen.

"People are waiting to see," says Javier Saal, manager of a jacket factory store, speaking about economic policy. "A trade opening is always good, but you have to see if the competition doesn't destroy local industry."

Yet government officials are not put off by such hesitation.

"We are going all the way," says an Economy Ministry official. "We are not saying we'll privatize this little bit, we'll make this one change and see what happens. This is a very deep transformation of the country. This is not for six months or a year. This will be forever."

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