Menem’s Bold Economic Plan Raising Hopes of Prosperity in Argentina : Latin America: By pegging its currency to the U.S. dollar, the nation hopes to tame inflation, which hit 1,344% in 1990.

The “sweet money,” la plata dulce, is making it irresistible for thousands of Argentines to fly off on spending sprees in the United States. Daily flights by Pan Am, American, Aerolineas Argentinas and Varig are not enough. Argentine tour operators are also chartering jets from Buenos Aires to Miami as South America’s summer vacation months approach.

“We have all of our flights for December, January and February already full,” said Ignacio Torres, an Argentine sales executive with American Airlines.

While Argentine travelers enjoy the benefits of cheap dollars, President Carlos Menem is also flying high, thanks to a bold economic plan that has halted hyperinflation, curtailed deficit spending and raised hopes of prosperous times.

Menem is imposing many of the free-market reforms that have shown remarkable results in Mexico and Chile. And Argentina, a nation of 32 million people whose living standards already are among the highest in Latin America, is reviving its old ambition of rising from underdevelopment to First World prosperity.

For sure, major problems are unsolved. Menem has yet to break an old Argentine habit--tax evasion, which threatens his crucial need for a balanced government budget. And the sweet money that is filling planes to Miami bespeaks an overvalued currency that has begun to erode the country’s vital trade surplus by discouraging exports and encouraging imports.

Nevertheless, many economists, bankers and business executives are as convinced as the politicians that Menem’s plan can work.

“We’re on the right track,” an Argentine bank executive said. “The plan has consistency, and there is important political support for the first time.”

U.S. dollars play a pivotal role in the plan, as they have in Argentine economics for years. In the past, when local inflation soared, people stabilized liquid assets by converting cash into dollars. Others speculated on fluctuations in the dollar exchange rate.

Meanwhile, merchants used the exchange rate as a price index. When the rate went up, prices rose accordingly, making the dollar a key factor of inflation. When the government managed to hold the dollar rate down, as it did at the beginning of the 1980s, Argentine currency became increasingly overvalued. Sweet money swept the country with a bonanza of cheap imports and foreign travel.

But in 1982 that short, sweet-money era ended in forced devaluation and financial disaster, and the Argentine economy stumbled and slipped through the decade.

When Menem took office in July, 1989, inflation was running at a monthly rate of 200%. His efforts to impose stability yielded spotty results until he appointed Domingo Cavallo, 44, as his economy minister late last January.

The previous minister failed to control a dangerous surge in the dollar exchange rate, which jumped from less than 5,000 Argentine australes in early December to more than 9,000 in late January, fanning inflation. The new minister had his work cut out.

Cavallo had been foreign minister, but with his doctorate in economics from Harvard, he made the switch with agility. He announced a new stabilization plan based on a daring concept: a dollar standard for the austral.

The central bank set a maximum exchange rate of 10,000 australes to the dollar. It is legally obliged to sell all dollars requested at that rate. A new convertibility law also requires the central bank to maintain reserves of dollars and other hard currencies, gold and certain public securities for a total equal to the austral money supply. This amounts to a guarantee that every 10,000 australes in circulation could be traded for a dollar from the reserves.

With that assurance, business leaders peg their prices to the dollar, said Roberto Alemann, a former economy minister. “If the dollar is stable, prices are stable--period, that’s it,” he said. “It’s amazing what’s happening, and I think it’s a major achievement of this policy.”

In effect, Argentina has locked its economy into the U.S. monetary system, said Jorge C. Avila, an Argentine consultant with an economics Ph.D. from the University of Chicago. “So the rate of inflation in Argentina is going to be the same as in, say, Kentucky.”

The Cavallo Plan outlaws the traditional, inflationary practice of cranking up the printing presses whenever the government needs more cash. Government spending must be financed by revenue.

The plan has worked well so far. Monthly inflation has been less than 2% for the past three months, a record unmatched since the early 1970s. Inflation for all 1991 is expected to be under 100%, down from 1,344% in 1990 and 4,924% in 1989. The goal for next year is 7%.

Taming inflation often requires recession, but not under the Cavallo Plan. Industrial production increased by one-third between March and October, and the Argentine economy as a whole is expected to grow 4% to 5% this year after shrinking more than 20% over the previous decade.

Analysts give the Cavallo Plan ample credit for a strong showing by Menem’s Peronist Party and its allies in recent elections for the lower house of the national Congress and provincial governorships. “If we add the votes of our allies, we’ve got over 60% of the ballots cast,” Menem boasted after the latest elections in late October.

Counting on provincial parties that support his policies, “Menemism” is expected to have a comfortable working majority in the 254-member Chamber of Deputies. But it will not be the pro-labor, welfare-state bloc traditionally associated with the late President Juan D. Peron’s party, which Menem has radically transformed.

“Menemism has been taking on the face of a popular conservative movement,” observed the newspaper Clarin.

Menem, 61, was a populist provincial governor who rose to national power on the strength of his glib tongue, flamboyant style and strong support from Peronist labor unions. Conservative business leaders distrusted him.

Now, while businesses and taxpayers applaud, labor leaders bitterly oppose his programs for slashing government payrolls and privatizing state-run enterprises.

In two years under Menem, the government has trimmed about 150,000 jobs from a federal government payroll of about 1 million. The ambitious goal is to bring the payroll down to 300,000.

Although critics call the cutbacks “savage,” Menem contends that his policies have created 600,000 new jobs this year by encouraging private enterprise. Economists say an estimated $45 billion to $60 billion in Argentine flight capital is beginning to trickle back into the country, and net investment is increasing for the first time in years.

The government has auctioned off numerous state enterprises, including the telephone system and Aerolineas Argentinas. “In 1992, all state enterprises are going to go to the private sector,” Menem said recently.

Privatizations will bring in a total of $20 billion to help pay government obligations and finance official spending, Planning Secretary Vitorio Orsi estimates. Without that income, it might be impossible to balance the budget.

The government is resisting public and private salary increases that unions are demanding as compensation for the ravages of past inflation. Authorities insist that if raises are not based on higher productivity, they are inflationary.

In efforts to balance its budget, the Menem administration claims to have increased tax collections by 100%, but economists say that is far from sufficient in the face of rampant tax evasion.

“That’s one of the main problems that have not been solved,” said Alemann, the former economy minister. He estimated that up to 50% of value-added taxes, the main source of government revenue, goes uncollected.

Fiscal efficiency is a key condition for a proposed $3-billion “extended facility” loan from the International Monetary Fund that would help bring Argentina back into the good graces of the international financial community. The government also hopes to regain favor by cleaning up arrears on its $62-billion foreign debt.

Menem announced Monday that Argentine officials can begin renegotiating debt payments to private banks in late January.

Argentina is behind by about $8 billion in interest payments to private foreign banks, a fact that severely limits its ability to draw capital and credit for expansion.

Another problem is the high cost of doing business in Argentina because of bureaucratic red tape, cumbersome regulations, restrictions and fees. On Oct. 31, Menem announced a broad deregulation decree aimed at lowering costs and fostering competition.

Included were measures that reduce red tape for registering foreign trade businesses and documenting exports, eliminate a 3% “statistical” surcharge on exports, lower transport duties and cut loading costs by allowing ports to operate 24 hours a day.

In presenting the measures, Menem called them “truly revolutionary.” They are partly aimed at adjusting the Argentine economy to the disadvantages of its overvalued currency by helping to reduce cost of exports.