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Last Updated: Monday, 28 April, 2003, 16:16 GMT 17:16 UK
Elections rock Argentina's fragile recovery

Analysis
By Briony Hale
BBC News Online business reporter

Flamboyant former President Carlos Menem will face provincial governor Nestor Kirchner in the second round of presidential elections in Argentina next month. The eventual winner must establish a lasting economic recovery and break the cycle of boom and bust.

The Argentine economy - notorious in recent years for disaster and deep recession - has been quietly staging an impressive recovery.

The people have borne the brunt of the suffering inflicted by desperate economic measures, including the devaluation of the peso and despised controls on withdrawing their savings from the banks.

But those brutal measures, it seems, are beginning to reap the promised gains.

Carlos Menem
Carlos Menem has presided over a boom and bust cycle once before
The economy is set to expand by 5-7% this year, with industrial production growing by about 20% each month during the first few months of the year.

A gaping trade deficit, meanwhile, has turned into a surplus.

"The devaluation had a seismic impact on Argentina, taking its exports from highly uncompetitive to very competitive," said Rupert Brand, director of Latin equities at F&C.

But, while things finally seem to be getting better, the Argentine economy is entering its most critical period yet, according to Carlos Perez, director of Fundacion Capital in Buenos Aires.

The first round of presidential elections on Sunday started the ball rolling for caretaker president Eduardo Duhalde to hand over power - and oversight of the fragile economic recovery - to a successor.

Defining moment

"Argentina, without doubt, is about to define where it is going," Mr Perez told BBC News Online.

"It has the opportunity to give its people a better quality of life, but not if it compromises on the way ahead," he warned.

Nestor Kirchner
Nestor Kirchner promises to keep the existing economy minister
Poverty is still rife and it will take a long time for those who lost so much to get back on their feet.

But there are already pockets of hope, such as agriculture and the burgeoning tourism industry, which are helping to reduce unemployment and provide relief in some of the poorest areas of the country.

The main fear of many economists is that populist measures - such as widespread job creation and pay rises - will substitute the harsh but necessary policies that have prevailed during the crisis.

Professor Martin Uribe, an Argentine expert at the university of Pennsylvania, talks about the risk of "murdering the boom" by slapping heavy taxes on areas of industry that are now prospering.

To do list

However, the one candidate economists feared most - Adolfo Rodriguez Saa - did not get through to the second round.

Adolfo Rodriguez Saa
Out of the race: the man economists feared the most
But then neither did liberal economist Ricardo Lopez Murphy, who was billed as a genuine reformer.

Argentina's leading shares index, MerVal, slumped 6.5% on Monday after Mr Lopez Murphy, a market favorite, was knocked out of the race.

But both the candidates who are through to the next round - former president Carlos Menem and the existing government's candidate Nestor Kirchner - are described as "pro-market and pro-business" by Professor Uribe.

While economists express cautious optimism about the lead candidates, they still have a long list of important things that need sorting out.

These include:

  • reaching an agreement with multilateral money lenders to reschedule debt

  • opening Argentina up to international trade

  • deregulating the labour market to make it easier to both hire and fire people

  • overhauling tax collection and tackling the fiscal deficit

  • recapitalising the banks and dealing with insolvency issues.

    The interim government reneged on promises to change economic policy, said Mr Perez, adding this can only be truly tackled by a permanent government.

    Rhetoric or radicalism?

    But at the end of the day, Mr Perez argued, there is no guarantee that any candidate will do what they are promising.

    Mr Perez cites the case of Brazil's President Luiz Inacio Lula da Silva, whose anti-capitalist rhetoric had markets trembling ahead of his election but who has subsequently won their favour.

    And that means, while the recovery may seem to be going well, there is still great uncertainty.

    It is easy to see the current boom as impressive in comparison with the misery suffered 18 months ago.

    And the boom of the early 1990s, presided over by Mr Menem during his first term, quickly went horribly wrong during his second term.

    The real challenge for the new president is to break the cycle of boom and bust and carry through with reforms that will produce lasting prosperity.




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