One country's crisis, neighbor's rocky road

Lesson: Argentina is hastening presidential elections, hoping to speed economic reform. But Brazil is discovering that impending elections do not always bring stability.

July 07, 2002|By THE ECONOMIST

SOMETHING had to give. For months, Argentina's president, Eduardo Duhalde, has struggled to restore something approaching order to the country's shattered economy. His efforts have largely been in vain. Six months after the disastrous collapse of the peso and the financial system, virtually no progress has been made. The economy is in its fourth year of recession, unemployment is about 24 percent, and riots have returned to the streets of Buenos Aires. Duhalde, an interim president whose poll ratings have fallen to 8 percent, had nowhere to turn.

On Tuesday, the president announced on national television that the elections due in September of next year will take place six months early, with the new president taking office in May. That shortens the period during which Duhalde has to cope with the political infighting that has made economic reform almost impossible.

But as the recent experience of Argentina's much bigger and richer neighbor, Brazil, has shown, impending elections do not by themselves bring economic stability. Brazil has none of the fundamental economic problems that trouble Argentina. Yet, jumpy financial markets have been giving Brazil an increasingly rough ride.

Duhalde chose his moment carefully. Negotiations between his government and the International Monetary Fund have dragged on for months with no sign of the rescue package that Argentina is so desperate for.

The IMF, and its principal paymasters, have frequently expressed exasperation at the country's failure to confront its economic problems and deliver the reforms seen as a precondition for outside help. Within the last week, though, there has been a change of tone from Washington. The IMF said Tuesday that the talks were enjoying "new momentum." Duhalde took this as the signal to act.

Sorting out the economic mess after the upheaval the country went through at the beginning of the year would have been a tall order for anyone. Within a few weeks, Argentina saw the abandonment of the link between the dollar and the peso, the virtual collapse of the banking system, the overthrow of the previously elected president, Fernando de la Rua, and three other presidents come and go in a matter of weeks.

Duhalde, who had no electoral mandate and who has shown no relish for political confrontation, has never managed to cope with the difficulties.

One clear obstacle to reform has been the reluctance of politicians, in the legislature and the provinces, to support politically unpopular measures.

And Duhalde has lacked both the stature and the popular support to force them to accept the changes needed. But his new strategy is potentially risky.

So far, all he has to go on is a softening of tone, both from the IMF, and from Paul H. O'Neill, the U.S. treasury secretary, who has in the past taken a hard line on emerging-market bailouts. No deal is yet on the table. As electioneering gets under way, the inevitable jockeying for position could make reform even more elusive.

North of the border

Duhalde only has to look north of the border to see how destabilizing elections can be. In recent weeks, Brazil's economy has come under pressure as the financial markets have become nervous about the outcome of the presidential elections due in October.

It is hard to find anything in common these days between Argentina and Brazil: Brazil has pushed through reforms in its banking and corporate sectors; it has brought inflation down sharply; and it has a budget surplus.

But Brazil also has a candidate in the presidential elections who makes investors nervous. Luiz Inacio Lula da Silva, the leftist candidate and member of the Workers' Party, has a comfortable lead in opinion polls.

This, coupled with doubts about Da Silva's commitment to low inflation, fiscal conservatism and market-friendly policies, has seen the Brazilian real come under enormous pressure.

Intensified pressure

That pressure intensified again on Tuesday when the real fell to a new intra-day low against the dollar, before recovering slightly. The risk premium above U.S. treasury bonds which Brazil is forced to pay also has risen sharply.

The IMF recently provided a public endorsement of Brazil's economic policies.

But there is domestic and international concern about the country's large public debt. That has now reached about 55 percent of gross domestic product; interest payments are around 9 percent of GDP. Persistent weakness in the real could also push inflation up. And since a large slice of Brazilian debt is indexed to the dollar, it could also raise the percentage of debt as a share of GDP.

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