QUERéTARO, Mexico, Dec. 21 (UPI) -- It has all ended suddenly. Argentine President Fernando de la Rúa resigned Thursday, a day after his economy minister, Domingo Cavallo. Soon the currency will devalue, Argentina will default on debt, and a country that has had to make too many fresh starts will have to make a fresh start yet again.
De la Rúa might be judged unfortunate. In March he turned to the man seen by many as having rescued Argentina from hyperinflation a decade before. Who better than Cavallo to lead the fight to rescue Argentina from financial collapse? But Cavallo returned with more of his old medicine. He sought to reinforce the one-to-one exchange rate with the dollar, drum up support from the multilateral and banks, cut fiscal spending and to achieve a balanced budget. But the world had begun to decide that Argentina could not grow with its currency worth one dollar, and Argentines had no stomach for more cuts.
What Cavallo ought to have done was recognize that the fixed exchange rate and the currency board monetary system he had instituted 10 years before were a liability; that the country needed to devalue in order to be able to grow sustainably. Cavallo's reluctance to abandon the fixed exchange rate, his unwillingness to elaborate an exit strategy, meant that in the end he went through the exit, and so did the man and the country who had turned to him at the moment of crisis.
Should de la Rúa be blamed? Perhaps a wiser president would have realized that what Argentina had was failing and that something new was required. But Argentina's failure cannot be blamed on De la Rúa alone. We will return to that below.
Now events are going to take their course. Though former President Carlos Menem has advocated the replacing of the peso and dollarization of the economy, it seems unlikely this will happen. Support for it is not strong enough; and Argentina lacks anyway the necessary quantities of dollars. It is more likely that devaluation will take place, whether the government chooses or not. That will leave Argentina in a dangerous position. Looting this week helped precipitate the fall of de la Rúa, and the initial impact of devaluation will be to impoverish. There is a danger that things will get still more out of hand. Firm leadership is needed. At present Argentina has no leadership.
Ramon Puerta, the head of the Senate, has taken over as president but his tenure will last only until Saturday when the Congress is to elect an interim president. A group loyal to former President Menem is keen that the interim president should remain in charge until 2003. But provincial governors, powerful figures in the country, are said to be in favor of general elections much sooner, within 90 days.
The new leader, whether interim or the longer-term one chosen in some months' time, seems certain to be a Peronist. They are the political beneficiaries of the fall of the Radical president, de la Rúa. And, not coincidentally, they helped to precipitate his fall by turning down his request for cooperation in his final week and blocking his economic initiatives in his almost two years in power. The man that emerges from the Peronist camp matters considerably for it is a camp divided. The division goes back to the early reforming days of Menem a decade ago.
Menem's public sector job cuts and privatizations of that time split the Peronist party. Many Peronists remained and remain faithful to the party's jobs-for-the-boys traditions. In Menem's second term this division became obvious in a long drawn out dogfight between the powerful governor of the Province of Buenos Aires, Eduardo Duhalde, and Menem. Reforms advocated by Menem and Cavallo were blocked by Duhalde's faction. Duhalde, whose wife is involved, Evita-style, in highly visible social projects, could easily be a beneficiary of the political transition now taking place.
The dangers are great. For unless the Argentine government is firm, the peso could fall a long way fast. The old economic enemy that Cavallo successfully fought, high inflation, could easily return. The country could slide back to its unfortunate position at the end of the 1980s. The social unrest seen in the past week could worsen.
To prevent spiraling down Argentina must recognize why it has failed. The fixed exchange rate was not the only obstacle to growth. There are other problems which Argentines have long shied away from -- not just for three years or 10 but for 50. Labor laws must be made more flexible. Government finances must be improved. Bureaucracy and red tape must be simplified. Corruption must be reduced.
These are all weaknesses on which Cavallo focused in his first term under Menem in the 1990s and in his brief second one under de la Rúa this year. The Congress and provincial governors have always been uncooperative. They have defended the privileges created by Perón, privileges enjoyed by a minority and that the country can ill afford.
Let us put it another way. Argentina has sunk again because its politicians have once again let down their own country. They have been too selfish, too blinded by self-interest, too inflexible, too corrupt. Cavallo, the fall-guy of this week, fought against all this bravely; his only mistake was to adhere to his currency board and fixed exchange rate, both of which he saw partly as tools that would work against the country's habitual indiscipline. Argentina's future now depends on whether its politicians are going to show greater maturity and wisdom. We hope so. But you would have to be brave to bet on it.
Global View is a weekly column in which our economics correspondent reflects on issues of importance for the Global Economy. Comments to [email protected].
