Argentina is on the brink, facing possible default on US $128 billion in foreign loans. Yet there are signs of incremental maneuvering that may pave the way to a better future.

Political Outlook

President Fernando De La Rua forged a strong center-left coalition with Frepaso, and led the Alliance Party to victory in the October 1999 elections. He defeated the Peronist candidate, ex-Vice President Eduardo Duhalde, who, after the disastrous second term of Carlos Menem, suffered the most resounding defeat since the creation of the Peronist Party in 1945. De La Rua mounted an effective campaign centered on pumping up the economy and ending the corruption of the Menem era. De La Rua faced pulling Argentina out of 17 months of recession; the task became all the more difficult when the stated internal deficit (1999), calculated at 4 billion pesos (equivalent to US $4 billion) turned out to be closer to US $11 billion. Menem's final year spending spree, a last ditch attempt by Menem to use populism to try and force a third term (though constitutionally prohibited), basically derailed De La Rua's plans for quick revival of the economy. However, 22 months later, the country still awaits a turnaround. And government efforts to blame the Menem administration for the current state of the economy have fallen on deaf ears as the honeymoon period has long been over.

De La Rua's other major campaign promise, ending corruption, is also generally perceived as a failure. While there have been some advances in cleaning up the justice system and creating anti-corruption investigative bodies, various government officials have been caught in compromising situations; and the level of nepotism and/or "amigismo" in this government at times seems equal to the seemingly unbeatable record of its predecessor.

The question is: Who will take advantage of his failure to fulfill campaign pledges? Peronist candidates in certain districts will likely rebound from the trouncing they suffered in 1999. Leftists like anti-corruption crusader Elisa Carrio and rightists like former police chief Luis Patti could take advantage of huge voter discontent. All polls point to the fact that there will be a surge in voters who don't show up (voting is mandated by law in Argentina), or who cast a blank vote in October.

Meanwhile, President De La Rua has failed to support members of his own political coalition, and has actively supported his opponents. This destruction of the very coalition that brought him to power constitutes political suicide. The result will likely be a resounding defeat for his party in the October 2001 elections.

Economic Indicators

It is poetic justice that Domingo Cavallo, the man who a decade ago implemented the highly successful Convertibility Plan, is today De La Rua's choice to attempt to extricate the country from the rigidity of the very program which saved Argentina from runaway inflation just 10 short years ago. Cavallo is De La Rua's third Economy Minister since he took office in 1999, following the failed terms of orthodox economic predecessors, Jose Luis Machinea and Ricardo Lopez Murphy. The latter lasted just two weeks after announcing an unpopular set of belt-tightening measures, the fourth of seven plans unsuccessfully launched on a tired and disbelieving populace. According to the Government's own statistics, unemployment is at 16.4%, underemployment is close to 20%, and 15 million Argentines out of a population of 36 million are under the poverty line. Argentina's thriving middle class has been decimated over the last two decades. This downward mobility has bred bitterness especially among the young and middle-aged professionals who have fled the country in droves over the last few years.

The Convertibility Plan, implemented in 1991, pegged the peso one-to-one to the US dollar in a strict monetary program. However, the rigidity of the Plan is exactly what is being questioned as Argentina finds itself stuck with an overvalued currency and a cumbersome trade deficit. But there appears to be no way out of this predicament, as a devaluation of the peso would almost certainly mean a run on dollars and a collapse of the peso. Cavallo tried alternative measures, such as import taxes and export breaks when he took over as minister in February 2001; but it didn't provide the stimulus for the sagging economy. Cavallo then announced cuts in public spending and in state worker salaries, which backfired as it brought more political and social resistance.

Nobody outside of Argentina could have guessed at such a deep and extended recession a few years ago. Many inside the country noted the differences between the first and second terms of Carlos Menem and watched dumbfounded as Menem began his populist spending spree seeking to stay in power. While this was going on, the international lending institutions appeared to be cheering him on, perhaps only remembering the accomplishments in the early years of the Menem Administration.

Corruption

Doing business in Argentina means confronting systematic corruption that reached epic proportions under Menem. Today Menem is under house arrest for his alleged participation in arms scandals, as well as being investigated in countless other cases of corruption and fraud; numerous members of his administration have been detained or interrogated on similar charges. This, along with removal of some senior judges, has contributed to a reevaluation of the justice system. At one point the justice system suffered its lowest level of confidence, a 94% disapproval rate. That lack of confidence has diminished, although it's now directed more toward the politicians. Although De La Rua has done nothing to particularly distinguish himself in terms of fighting corruption, he has at least taken a hands-off approach, which allowed room for the justice system to maneuver. In polls of executives engaged in international business, Argentina has shown a slightly better country rating during the De La Rua administration after years of failing grades under Menem.

Controversial congresswoman Elisa Carrio of the Argentines for a Republic of Equals Party is pointing toward a run for president in 2003 based on her tireless efforts in a money laundering investigative committee. Using a no-holds-barred, shotgun approach to investigating the local and foreign business communities, she has the support of 93.8% of Argentines according to a recent poll. In a country where tax evasion is "rampant" and where the value-added tax is 21%, this kind of crusade was predictable. If properly channeled, it could lead to important changes in the tax and banking systems.

Conclusion

The last economic upturn in Argentina occurred in the early 1990s. Timing the next one should be a question not of whether, but "when." Argentina is a country with tremendous natural resources, a very capable and professional workforce, almost no illiteracy, no major ethnic strife, and a population with tremendous consumer instincts. The political and socio-economic woes are not going to go away tomorrow, but they will not be interminable.

A key to successful business operations in Argentina during a difficult period is to seek assistance in risk avoidance and advice on Argentine operations from trustworthy and knowledgeable resources. Business intelligence and planning can enable a company to ultimately prosper in Argentina. Done properly, there could be the corporate equivalent of a juicy Argentine steak at the end of the rainbow.

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