Market Focus : Argentine Economy Not Dying on the Vine : A top winery becomes the model for a provincial government’s efforts to modernize and diversify the marketplace.

For decades, the Giol winery was an infamous monument to Latin American statism. Now it has become a model for the economic transformation that is fermenting in the region.

The government of Mendoza province bought the struggling winery in 1954, in an era when state domination of Latin American economies was accepted theory. The province took over the operation intending to help regulate the private market by giving small-time grape growers a guaranteed buyer.

Giol, founded by two Italian immigrants in the 1890s in South America’s principal wine-producing valley, was to have been returned to the private sector in three years. It didn’t work out that way.

As a government enterprise, Giol grew to become the world’s largest winery, with 3,500 employees--although it only needed about 1,200 to produce its wines, both fine and table-quality. It added grape by-products and then a fruit-processing operation.

Bloated and inefficient, Giol began to leak. From 1983 to 1989, its losses averaged $500,000 a month. That $6 million a year was no small sum to a provincial government with an annual budget of just over $200 million.

Gov. Jose Antonio Bordon, who was elected in 1987, recalls: “We asked ourselves: ‘Does Giol serve the people of the province? No.’ So we decided to sell it.”

Bordon, 44, is one of the young “renovators” of the Peronist party, whose founder, President Juan D. Peron, inspired the state takeover of the telephone system, the railroads and other businesses in the 1940s and ‘50s. Like Argentine President Carlos Saul Menem, another Peronist, Bordon is regarded by some diehards as a traitor to the Peronist cause.

But he pressed ahead with the Giol divestment plan. To ease the impact for the grape-growers, the government helped them form cooperatives to make them more competitive and give them some muscle in the market. So far, 25 cooperatives have been formed; most paid back their initial loans within six months, even though they had five years to pay.

The vast wine-producing complex, whose huge fermentation and storage tanks look more like an oil refinery than a winery, was sold to a combination of other wineries and the growers’ cooperatives. The size of the state work force plummeted, with many accepting transfers to the police force or hospitals and others joining the newly private firm.

The privatization process was virtually completed in March. Only the regulatory branch of Giol, charged with improving the quality of Mendoza wines, remains in state hands, with 250 employees and a target of 100. The financial drain has stopped. The fruit-processing branch goes on the auction block in July.

The Giol winery is a case study in a broader initiative by Bordon’s government to modernize and diversify the provincial economy. The production of fruits has multiplied five times since 1987, and exports have soared from $86 million to $206 million, including fruit-processing machinery sold to the Soviet Union.

Budget procedures have been revamped and computerized. Rodolfo Irigoyen, a Bordon adviser, said the government “discovered that we had 200 warehouses, and we didn’t even know what was inside them. Now we know. We have identified 96% of the public work force. This is unknown in Argentina--we know what they earn and what they do.”

The province had used 35 different systems of dividing itself into districts, depending on which public agency was involved. Now, police, schools and health and energy agencies have all adopted a uniform system, Irigoyen said.

Through such reforms the government discovered that the gas company was failing to bill nearly $1 million annually, a problem now being corrected.

The World Bank has cited Mendoza as a model for the rest of Argentina’s 22 provinces to follow in reforming their moribund economies.

Mendoza, the fourth-largest province, with 1.5 million inhabitants, is arid but blessed with oil and other resources, making it traditionally one of Argentina’s more prosperous regions. The capital city of 800,000, also called Mendoza, lies at the edge of the Andes Mountains foothills bordering Chile, near the tallest peaks in the Americas. The province offers some of the finest skiiing in the Southern Hemisphere, a resource that Bordon wants to exploit more fully.

The governor said the fundamental problem in Mendoza was the over-reliance on a single crop--grapes--and the lack of market competitiveness of the smallest of the 20,000 grape producers, who simply had relied on Giol to buy up their product.

“Democratic governments had been subsidizing these producers. We had farmers producing 80 quintals (one quintal equals 220 pounds) on land that could produce 300 quintals with a bit of investment. Giol was a huge cost for so small an output,” Bordon said in an interview.

“Now the resources we earned from Giol are going to credits, to capital investment, to reconverting the fruit industry.”

But Bordon, often mentioned as a future presidential candidate, is adamant that the goal is not privatization for its own sake. “This is a pragmatic approach, so that we combine business efficiency with social justice,” he said. “We don’t want savage liberalism either.”

Neither the United States nor Japan emerged from their crises of the 1930s and 1940s without allocating a key role to the state, Bordon noted, adding that Argentina’s transformation also will require a combination of public and private initiatives.

“The Argentina problem is not going to be solved magically by shrinking and privatizing the state, but by being efficient and uniting behind a common project. We need to diversify products and markets. We have needed a change in mentality and technology. Democracy needs efficiency.”

One key to Bordon’s success is his economic team, led by 38-year-old Economy Minister Rodolfo Gabrielli. By balancing the budget and halting the Giol losses, the province has had more funds available to finance productive investment, particularly export-related businesses.

Processing of grape products such as juices and concentrates has increased, along with exports of tomato products (up 1,000% to $14 million last year), increases that begin to call to mind the economic boom across the Andes in Chile.

“This is proof that our people want to produce, when they are given the chance,” Gabrielli said.

While serving as a congressman in Buenos Aires from 1983 to 1987, Bordon sponsored legislation tightening quality controls on Argentine wines, requiring that all fine wines in containers of one liter or less be bottled in the place of origin and under closer scrutiny.

Some Argentine wines, particularly red wines, have long been recognized as world-class, but cheaper wines, from Giol and other mass producers, had been criticized as inconsistent. Mendoza’s wine people are confident that those complaints are being resolved and that Argentine wines will gain increasing prominence.

Raising exports is vital since wine consumption in Argentina fell by nearly half in the 1980s due to economic crisis and changing lifestyles.

At the Giol complex in the town of Maipu, a few miles east of Mendoza, Jose Luis Sanchez said his cooperative, Lumai, has grown from an original 33 member growers to 80. “The difference is that before, the small guys sold at low prices,” said Sanchez, a 19-year veteran of Giol. “Now the cooperatives can support them. The only solution was to group together, and not surrender to the big companies.”

Argentine provinces have long been plagued by overreliance on Buenos Aires to bail them out of financial crises, while the provinces have complained that the national government neglects and underfinances them.

Bordon said Mendoza serves as a case study for successful federalism, and he pointed proudly to the World Bank’s comments in May on his innovations: “They show that meaningful reforms in the provincial public sectors are possible in Argentina.”

On the Grapevine

Argentina ranks fourth in the world in wine consumption, per capita, and fourth in the world in wine production according to 1988 figures provided by the Wine Institute. The Giol winery, one of the oldest in the nation, has become a model for economic transformation sweeping nation.