Argentina

Dropping the pilot

BUENOS AIRES

IN THE end, it just happened. There was no stockmarket crisis, no run on the banks, no dramatic devaluation. Indeed, there was very little indication that the Argentine public even noticed. One day Domingo Cavallo was the minister in charge of the nation's economy; the next President Carlos Menem had said thank-you and goodbye and he wasn't.
     Rumours that Mr Cavallo, hero of the past five years' economic turnaround, was about to jump--or be pushed--have been around for many months. And with reason: the blunt-spoken economics minister has clashed with the president, other ministers and leading members of the ruling Justicialist (supposedly Peronist) party. Yet Mr Menem needed--and had repeatedly backed--his awkward subordinate.
     Still, the end had to come one day. Mr Menem is a politician, and his political background lies, however distantly, in Peronism: a tradition of populism, protectionism, open state purse-strings and state nannying, especially in creating industry and providing jobs. Mr Cavallo is an economist, and his practice was almost the opposite: economic and fiscal rigour, opening of markets, privatisation. This was the formula that defeated hyperinflation at the start of the 1990s, and then brought three years of spectacular growth (in output only, though, not employment). Argentines recognised his achievements. Yet, with memories of inflation fading, many were comfortable enough within the old tradition; not least those in the trade unions, historically linked to Juan Peron. And last year's sharp recession showed just how harsh the new reality could be.
     Economic indicators suggest that the recession has been and gone: money supply is rising, interest rates are back almost to where they were in late 1994, growth has resumed (see chart). But unemployment remains obstinately high, and voters were showing their discomfort. The demand for more growth was becoming a shout.
     The end came on July 26th. After one argument too many, Mr Menem demanded Mr Cavallo's resignation. But there was no rancour. A relaxed Mr Cavallo said he had known for some time that the president had wanted a change, and had first discussed it with him several months ago. He admitted that feelings in Congress and the ruling party had lessened his effectiveness: "I was a spent force. Every time I said 'A', Congress said 'B'." Mr Menem, in turn, was swift to honour Mr Cavallo as "the best economy minister that Argentina has had in almost its entire history."
     Financial markets blipped, but soon recovered, after Mr Menem named the central bank's president, Roque Fernandez, to take the reins. He is a respected economic technocrat, trained in economics at the University of Chicago, who won praise for his management of Argentina's banking troubles last year during the shocks set off by the Mexican crisis. He has promised to be tough: no devaluation, no meddling with market forces, no retreat from Mr Cavallo's latest unpopular measure--cuts in family benefits--and some tax-breaks for employees. Though Mr Menem unhelpfully admitted that Mr Fernandez was not his first choice, business leaders, bankers and the media were quick to endorse it.
     The head of the International Monetary Fund (IMF), Michel Camdessus, chimed in, saying he believed economic policy would continue, "not just because I trust in the men who manage it, but because the process is irreversible." He could have added a third reason: an early task for Mr Fernandez will be to win IMF approval for a wider fiscal deficit than the $2.5 billion--a bit under 1% of GDP--that was agreed earlier this year. An IMF delegation is due in Buenos Aires next week.
     There is one snag: a fair part of Argentina. Some Peronist legislators have shown readiness to offer Mr Fernandez help that they would not give to Mr Cavallo, but not all. The trade unions, already planning a general strike for August 8th, in answer to Mr Cavallo's attack on social spending, said it would go ahead. The 70% support for the change of minister found by one opinion poll was not just an expression of preference for one man over the other."If this is just a formal change, it is not enough," said Carlos Alvarez, a leader of the centre-left Frepaso coalition. "We must change the dog, not its collar."

The Economist Home Page - Search - Contents - Next article