Can Argentina Restore Era of Rapid Growth?

Carlos Menem's free-market policies have helped make Argentina one of the Western Hemisphere's most promising emerging markets.

By ending chronic hyperinflation, President Menem has brought economic stability and lured billions of dollars in foreign investment since he became president in 1989. Electricity and phone services have improved dramatically since he privatized these industries. And from 1991 to 1994, Argentina was one of the world's fastest-growing economies, at nearly 8 percent a year.

But now, scores of family-run corner convenience stores are boarded up in Buenos Aires. A flood of cheap imports has bankrupted many small- and medium-size firms. And unemployment has been aggravated by privatizations, in which thousands of state workers have been laid off. The jobless rate recently rose to 17.1 percent, despite government predictions that it would fall.

"The little guy is getting slammed," says one diplomat who closely follows the economy.

With Argentina slumped in a recession and the next round of economic reforms stalled, has Menem's "economic miracle" reached its end?

A "second reform of the state" is necessary, most economists argue, to fuel continued growth and foreign investment in Argentina. But this could cause more short-term dislocation.

Among the Phase 2 reforms: consolidating troubled banks, deregulating a union-managed health-care system, and reforming labor laws to enable employers to improve productivity. Most important, hardly any of the nation's 23 provinces have their financial house in order. Public spending typically surpasses revenues, and provincial governments can't pay state workers or retirees, who riot over missed paydays.

Some political observers say Menem postponed these belt-tightening reforms to stem further provincial rebellions during his 1995 campaign for reelection. For the time-being, he may stick to this policy, since it is widely expected that he will attempt to change the Constitution to allow him to seek a third term in 1999.

The reform program has also been stymied by lingering political friction between Menem and economy minister Domingo Cavallo, considered the architect of Argentina's economic reforms.

Mr. Cavallo, a Harvard-trained economist, almost lost his job last year after making public accusations that a corrupt "mafia" within the president's Peronist party had been working to undermine his reforms. Cavallo, who has a reputation for honesty, named businessman Alfredo Yabran, a close friend of Menem's, as heading the alleged "mafia." Pressure from edgy foreign investors kept Menem from firing the minister, press accounts said.

"Corruption is keeping Argentina from entering the miracle club of nations that grow by 8 percent a year and can resolve their unemployment problems," says Luis Secco, an economist at the Buenos Aires consulting firm Broda & Associates.

In recent months, IBM Corp. has been accused of paying bribes to obtain a $250 million computer contract from the state-run Banco de la Nacion. And in July, Juan Carlos Villamayor, the mayor of the northern city of Salta, was arrested after a hidden camera caught him asking a businessman for a $300,000 payoff.

Few believe the president will sack Cavallo any time soon. "With a recession, Menem can't afford the political uncertainty that would follow," says Horacio Verbitsky, a prominent journalist. "Both of them know that their political futures are linked to the success of the economy."

The nation's current trouble began with Mexico's financial crisis of late 1994. Concerned that other Latin American nations would follow the peso plunge, foreign investors pulled $8 billion out of Argentina, and domestic demand sagged.

Still, the economy shows signs of recovery. Economic output, after falling 4.4 percent last year, is expected to grow 2 percent this year. Foreign investment is flowing in, exports hit a record in May, savings deposits are up, and inflation is near zero.

"The worst is over," Mr. Secco says. "The recession is ending."