Will Argentina Follow Bolivia's Lead?

IN becoming Bolivia's next president, Jaime Paz Zamora sealed that country's ambitious economic reforms that have made it a model for curing the ravages of hyperinflation. Argentina, in the midst of its worst economic crisis, is in a position to follow its northern neighbor. In 1985, Bolivia's government-dominated economy appeared beyond repair. Afflicted with 48,000 percent inflation, successive years of economic contraction, unpayable debt, and crippling strikes, the real economy ceased to function. That year, newly elected president V'ictor Paz Estenssoro launched a free-market austerity program that would transform the world's basket-case economy into a paragon of reform.

In a matter of months, the budget deficit fell to under 4 percent, and hyperinflation dropped to nearly zero percent. Today, Bolivia has witnessed two successive years of solid economic growth, inflation has steadied to under 10 percent, employment has picked up, and the stage has been set for renewed economic development. Its success has so shattered conventional wisdom of the state's role in the economy that Mr. Paz Zamora, a leftist, reiterated his allegiance to the program.

Argentina is confronting a situation similar to Bolivia's. Inflation has rocketed to over 400,000 percent, gross national product is a third lower than it was six months ago, fiscal deficits are swallowing 16 percent of national output, and unemployment is rising sharply.

After assuming office, Carlos S'aul Menem set off on a path of harsh economic reform. He purportedly told his surprised Cabinet that it is ``better that the people insult me for a year and applaud me for a century, rather than the other way around.''

Mr. Menem has even brought in influential members of the business community, including the presidential candidate of the opposition free-market party, to serve on his economic advisory team. He has also invited noted Harvard economics professor Jeffrey Sachs, who was instrumental in forging Bolivia's economic program, to join his staff.

The key question remains whether Menem will stick to his plan. His predecessor, Ra'ul Alfons'in, saw his much-vaunted Austral Plan unravel when he supinely caved in to union demands for wage increases.

Squashing hyperinflation was the linchpin to reversing Bolivia's economic decline. And so it must be for Argentina. Paz Estenssoro cut the fiscal deficit, which consumed 36 percent of national output; hence, the elimination of price subsidies, the sacking of surplus public-sector employees, the gutting and privatization of money-draining, state-controlled companies, and trade liberalization.

Cutting the fiscal deficit will also be Menem's primary task. The top 13 state-owned industries lost $2.5 billion last year. The state railway alone, for instance, loses $1 million a day. The state-owned telephone company - notorious for not working - has more employees per line than any other telephone company in the world. The national airline employs twice the number of workers of other national airlines.

Decades of featherbedding, officially sanctioning corruption, and using the state's control over the economy to divide the spoils of political victory, however, have created a political culture that is anathema to any reform. It was, in fact, Menem's Peronist Party, under the direction of its charismatic founder Juan Per'on in the late 1940s, that institutionalized this ``corporatist'' tradition of state and big-business collusion.

Such draconian measures will demand inordinately strong leadership. Paz Estenssoro, instrumental in Bolivia's 1952 revolution that brought sweeping land reform, universal suffrage, and the nationalization of US mining companies, had unimpeachable nationalist credentials. In the same way, only a Peronist can convince Argentines of the necessity of opening up Argentina to the free-market and the global economy.

Unlike Bolivia - which is poor, relatively uneducated and, until lately, highly dependent on tin exports and coca production - Argentina benefits from one of Latin America's most educated work forces, a diversified and industrialized economy, and enjoys a potentially large investment pool of up to $50 billion in flight capital.

Paz Estenssoro may go down in Bolivian history as the man who rescued the country. Should Menem prove serious about turning the tide against hyperinflation and its source - the state leviathan - his people will indeed applaud him for a century.