Austerity Plan Applauded : Economists Intrigued by ‘Argentine Miracle’

Nobel laureate Franco Modigliani headed the procession of intrigued American economic theorists. He had come, the Massachusetts Institute of Technology professor was reported as saying, to see “the Argentine miracle.”

To which one of those Argentine economic theorists depicted in newspaper comic strips holding forth from park benches replied: “It really would be a miracle if he finds the miracle.”

Argentina’s vaunted Austral Plan, which stopped runaway inflation in its tracks, is inching toward a critical second stage--accompanied by international applause and domestic uncertainty.

The Austral Plan is shorthand for a Draconian blitz on inflation that includes wage and price freezes, a reduction of government deficits, a prohibition against the printing of unsupported money and creation of a new unit of currency--the austral.

Inflation Reduced

Inflation, running at over 1,000% a year when President Raul Alfonsin decreed the plan in June, has been reduced to about 2% a month. The austral has been rock steady at a fixed 0.8 to the dollar.

Such early success has awakened academic and governmental interest in the United States. And it has made Argentina a prime candidate for Treasury Secretary James A. Baker’s plan to stimulate growth in 15 debtor countries by means of up to $20 billion in new loans from U.S. banks and $9 billion in development loans from international lending agencies over the next three years. The idea is to make money for growth available to countries like Argentina where the prospect of growth is undermined by the need to focus scarce resources on debt repayment. Argentina owes foreign creditors about $50 billion.

Assistant Treasury Secretary David C. Mulford followed Modigliani into Buenos Aires earlier this month to outline the Baker scheme. Harvard’s John Kenneth Galbraith arrived on Friday, and Paul Volcker, chairman of the Federal Reserve Board, is due in next.

American Support

The Argentine economists who drew up the Austral Plan have a warm spot for both Volcker and Mulford, according to Treasury Minister Mario Brodersohn, one of the plan’s four principal architects.

As Brodersohn tells the story, Volcker and Mulford went to bat for Argentina at a tense, six-hour meeting with the International Monetary Fund in Washington last April when the plan was first outlined as a means of allowing Argentina to comply with strictures imposed by the fund.

“Ideologically, of course, they oppose the wage and price controls, but they received our ideas with an open mind,” Brodersohn said in an interview.

In a speech to business leaders, Mulford hailed the Austral Plan as “bold, comprehensive and rigorous.” But he cautioned, echoing the reservations of other free market economists, that “wage and price controls, while important psychologically, have only a very short useful life and cannot substitute for fundamental economic adjustment. The Austral Plan recognizes that inflation will stay down only if its underlying causes are corrected.”

The principal historic cause of the inflation that has dogged Argentina for four decades is the state’s inability to balance its books. A succession of spendthrift, populist-minded governments made the state the key factor in the economy. The railroads, the monopoly oil and telephone companies, utilities, airlines and arms factories all are state enterprises. They all lose money.

Long-Term Program

Alfonsin’s economic planners agree with the U.S. Treasury, with the IMF and with creditor banks that a long-term economic program to generate growth with price stability must hinge on a structural reshuffling to reduce the government’s pre-eminence.

“With or without the Baker Plan, we must make structural changes; with or without the banks and the IMF, we must control inflation,” said Brodersohn, who is now at work on a 1986 budget that, he promises, will maintain reduced government deficits.

As the second stage of the Austral Plan, Brodersohn and other economic technicians seek the privatization of state enterprises, new foreign investment and a reduction in Argentina’s large and inefficient financial community--cutting the number of banks and their branches, for example.

Some observers think they will also allow prices to rise gradually while attempting to keep the lid on wages.

In Argentina’s political melee, where a mob of parties thrive on unrest aggravated by 35 years of economic stagnation, reform is easier planned than achieved.

Austerity hurts. So far, this well-fed, middle-class country has avoided massive social distress. But there is more belt tightening to come before “the Argentine miracle” can be translated into improved living standards. Right now, Argentines are more pinched than they were before the “miracle” began.

In fact, the prospect of structural reform convinces neither the skeptics, like creditor banks, nor the nay-sayers, like Alfonsin’s big, government-loving political foes of the left and the labor-based right.

The local representative of a major American bank said: “I’m telling the head office, ‘No more good money after bad. Not another penny until we see changes, until the government cuts its deficit by getting rid of some of the white elephants. There are no signs of structural reform yet.”

Alfonsin’s political enemies, by contrast, think the Austral Plan has already gone too far and at too high a social cost.

Complaints From Left, Right

Oscar Alende, leader of a non-Marxist leftist party, thundered: “It is outrageous that major American banks improve their dividends through the interest payments on our debt while the economy shrinks 3.5% in the second quarter, a recession drops production 15% and real wages fall 30%.”

Restive, labor-based Peronists on Alfonsin’s right are wont to complain that he has sold out Argentine workers to Argentina’s creditors.

Foreign debt, Alfonsin’s critics say, echoing a position once taken by the government itself, is not merely a national economic dilemma but a regional political problem, one that requires political solutions. For Argentina to become a “test case” for the Baker plan, as Mulford suggested, would be another step in the wrong direction, they argue.

Alfonsin has thus far won praise for the skill and courage with which he has husbanded the Austral Plan to its early success. It represents a complete about-face from his early promises that real wages would not be allowed to fall, but, after five months in which they have fallen dramatically, Alfonsin is markedly more popular than he was before the gamble began.

Despite the austerity that it has meant, a plan that has reduced inflation to levels not achieved here for a decade enjoys popular support so broad that it has surprised even the government. There is no shortage of critics, to be sure, but Alfonsin’s economic planners, typically more wedded to technical competence than party loyalty, take shelter from them in what Brodersohn calls “the president’s spectacular image.”

Midterm congressional elections on Nov. 3 gave Alfonsin a resounding national vote of confidence. He has a mandate and he has made it clear that he intends to use it in an uphill struggle to solidify the miracle that hurts.