Mr Menem's "savage capitalism"

Louis Proyect lnp3 at
Sun Dec 23 09:43:42 MST 2001

Financial Times, December 10, 1999

new Argentina with old problems: Menem changed the country during his
two terms as president but leaves a partly poisoned chalice, writes
Ken Warn:


It was a game of two halves. Argentina's President Carlos Menem, who
steps down today, pushed through sweeping change in his first period
of office from 1989, putting his stamp on his country to an extent
that few other democratic Latin American leaders have achieved.

Moribund state industries were sold off, the role of the
paternalistic and inefficient state was pared back, and
hyperinflation was quashed. But in his second mandate from 1995, the
pace of reform slowed as Mr Menem appeared distracted by personal
projects, such as his fruitless bid to change the constitution and
run for a third consecutive term. The slackening pace of the Menem
revolution means incoming president Fernando de la Rua, of the
centre-left Alliance, faces a backlog of reforms and a series of
intractable problems which will test his resolve to the limit.

Yet over Mr Menem's tumultuous decade in power, a new political
consensus has been forged around pro-market policies. In foreign
affairs, the rhetoric of non-alignment has been abandoned, to the
point where Guido Di Tella, outgoing foreign minister, described
relations with the US as "carnal", and Mr Menem mused about joining
Nato. The army, which mounted rebellions against Mr Menem's
predecessor, is well and truly back in barracks.

The main unresolved issues of the Menem era are "unemployment, rising
crime and corruption", says political analyst Rosendo Fraga. The new
government's ability to act quickly on these issues looks limited. A
recession expected to cut GDP by 3 to 4 per cent this year has gnawed
away at economic self-confidence and eroded tax revenues.

The most toxic ingredient in the poisoned chalice which Mr Menem will
hand to his successor is the fiscal deficit, expected to reach
Dollars 5.8bn for this year, and rising. Although less than 2 per
cent of GDP, the deficit adds to an already heavy financing burden.

The rising red ink has been the single biggest component in
international investors' disillusion with Argentina - and it was
strong flows of foreign capital that fuelled the bursts of rapid
growth under Mr Menem.

The incoming government is under pressure to rein in next year's
deficit to Dollars 4.5bn, as mandated by law. "Argentina is on
probation," MIT economics professor Rudi Dornbusch told a Buenos
Aires conference this week. "It has done very little to move out of
the problem areas. And the biggest problem is fiscal." Bickering in
Congress this week over the budget only intensified investors' focus
on the deficit.

Financial constraints also leave little room for the new
administration's broader social agenda, aimed at ushering in a more
equitable society after what the Alliance calls Mr Menem's "savage
capitalism". The modest recovery forecast for next year is unlikely
to make much of a dent in unemployment, widely seen as one of the
motors of rising crime.

Projections released this week by the Fundacion Capital think-tank
showed unemployment falling only marginally next year from the
current 14.5 per cent, with GDP growth of 2.4 per cent.

Mr Menem had several blind spots in his reform agenda. He backed away
from liberalising the country's rigid Peron-era labour laws,
apparently preferring to keep the unions onside for his attempt to
run for another presidential term. Although seriously weakened, the
unions could prove a serious irritant for the new president.

Despite a steady stream of corruption allegations against senior
officials, Mr Menem never appears to have believed that he faced a
systemic problem. However, Mr De la Rua, does not have the appetite
for a thorough investigation of corruption in the Menem era,
threatening to disappoint the left of his Alliance. Without an
overall majority in either house of Congress, Mr De la Rua will have
to cut deals with Mr Menem's Peronist party to push through
substantial legislation.

Critics also claim that the limited legal reforms so far, such as
placing judges under the control of a new oversight body, appear
merely to have rebalanced, rather than removed, political influence
over the judiciary. "There is growing apprehension over the work of
the Council," says Larry Birns, director of the Council on
Hemispheric Affairs, a Washington-based research group.

The outgoing government repeatedly argued that worries over
institutional weakness and legal security had not deterred foreign
investment. But institutional and procedural problems have
complicated and held up important deals.

In the early privatisations of the Menem era - when the government
was scrambling for buyers willing to take on bankrupt enterprises in
a bankrupt country - no-one paid too much attention to the finer
legal points of the sell-offs. Yet, years later, Argentina still has
extreme difficulty in organising tenders accepted by all the
participants as fairly run.

The award of a Dollars 183.5m radar contract to a consortium led by
Northrop of the US, for instance, has been blocked by the courts amid
angry recriminations among the bidders.

As he takes office today, Mr De la Rua finds he has not only to push
through a tough fiscal adjustment in a country weary of austerity,
but to rebuild the prestige of government itself.

Louis Proyect, lnp3 at on 12/23/2001

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