Bold Policy Is Made, and Investors Yawn : Argentina: President Carlos Saul Menem hatched an ambitious economic program when he won office. Lack of private investment may ruin it.

After barely five months as president, Carlos Saul Menem has run into Argentina’s traditional unmovable obstacle: the sheer intractability of the nation’s problems. Menem’s ambitious economic program, highly touted abroad but deeply controversial in Argentina, is in trouble. Worse still, political signals from the Argentine electorate are far from comforting.

As soon as he moved into the presidential palace, Menem broke with many canons of his Peronist legacy. He drew up an economic plan known here as the Plan BB, for Bunge y Born, the giant grain conglomerate from which his new economic team was drawn. The plan included opening the economy to imports and foreign investments, privatization of large chunks of the state-owned sector, cuts in consumer and industrial subsidies and stabilization of the exchange rate after an initial devaluation, together with moderate wage increases and substantial price hikes. The immediate aim was to control inflation, then running at a triple-digit rate. The long-term objective was to make the Argentine economy grow again, essentially by handing it over to the private sector, in consonance with similar strategies under way in Mexico and Chile.

On paper, the Menem-Bunge y Born match seemed to be a winning combination. The new president had the electoral mandate and the political legitimacy stemming from his Peronist heritage. The grain firm has close ties with the rest of the Argentine business community and, equally important, with international financial circles. But like many other economic blueprints in Latin America today, this one rapidly encountered two underlying, virtually unmanageable problems. One comes from below, the other from abroad.

The attempt to dismantle a significant part of the Argentine welfare state--which has survived several military dictatorships and a flurry of conservative policies in the late 1970’s--has produced tremors in the working class. Wildcat strikes by railroad workers and a split in the national labor union along pro- and anti-Menem lines are among the first warning signs of grass-roots discontent. The election of extreme right-wing Gen. Antonio Domingo Bussi as senator from Tucuman, a mid-sized city in the interior, rocked the Establishment that had hoped the Radical and Peronist parties could maintain their tidy two-party arrangement. More important, the election of a socialist mayor in Rosario, the nation’s second-largest city, where food riots erupted in June, dealt a serious blow to Menem, who had carried that erstwhile Peronist bastion with a wide margin in the presidential vote.

But beyond the limits that Argentina’s electorate and unions can set on Menem’s modernization drive, the main obstacle resembles the one confronting other, similar attempts in Latin America: The domestic private sector and the foreign business community simply do not seem interested. Last week the Argentine government was forced to decree new price increases (of more than 50%, for instance, for gasoline) and a 34% devaluation of the austral because of a new spurt of inflation in November and another run on the central bank’s reserves. By early December, despite an adequate trade surplus and a virtual suspension of payment on its debt service, the government was losing $50 million a day. Instead of bringing money into the country--the intent of the deal with Bunge y Born--the Argentine private sector was still sending it out. One can privatize state-owned industries and sharply cut back the state’s role in the economy only if there is somebody willing and able to buy what is being sold.

Latin American private investors, with the possible exception of those in Brazil and Chile, are requiring political and economic conditions to bring back their flown capital that no government can realistically meet. So presidents and finance ministers plunge into economic feats of daring that must have massive private-sector funding, to succeed, only to find that the money stays in Miami, Los Angeles or New York. They then look to foreign creditors or investors, and discover that in the age of perestroika, Europe-’92 and the Pacific Rim, Latin America (including Mexico) is not the most exciting investment in sight.

Menem’s program of economic renewal has not yet foundered. Discontent from below and indifference abroad are both still manageable, and the jury is still out on the free-market economic policies that he and others are experimenting with. But the dangers posed by diminishing most Argentines’ standard of living, at least in the short run, or, if the program fails outright, continued stagnation due to under-funding, are real.