Economic Success May Not Pay Off for Argentine Leader

Before their uneasy alliance broke up, President Carlos Menem and his former economy minister, Domingo Cavallo, made history.

Together they carried out the most ambitious economic transformation in Latin America.

In five years, Argentina conquered hyper-inflation, privatized most state companies and opened its markets to the world.

Argentina’s newfound stability has made it a leading regional power.

But the partnership between Menem, the master politician, and Cavallo, the Harvard-educated technocrat, was always tempestuous.

Last month, mounting political turbulence culminated in what could prove the most important decision of the president’s tenure: Menem fired Cavallo, defying fears of international uproar and economic ruin. And it worked: The financial markets here have flourished.

Nonetheless, the 66-year-old Menem has reached a critical moment. Including Cavallo, three Cabinet ministers have fallen in a month, the other two because of scandals in the defense and justice ministries. The ruling party lost recent elections in Buenos Aires. Menem’s popularity has dipped only a year after he won an unprecedented second term that required a change in the constitution.

The administration’s challenges include 16% unemployment, a stubborn recession and ubiquitous corruption.

“In the last months, the government has suffered a major erosion of public support,” said Manuel Mora y Araujo, a political consultant. “There are two major sources: One is the economy. It has entered a phase of problems that don’t seem to have solutions. . . . The other source of the erosion has to do with scandals: corruption, justice, security. It seems that there is no way of punishing anyone.”

Argentine officials say the calm aftermath of Cavallo’s departure proves that Argentina’s progress is irreversible, regardless of the former minister’s popularity in the financial and diplomatic communities.

“There is a new perception that the world has of Argentines and that Argentines have of the world,” said Raul Granillo, Argentina’s ambassador to Washington, who spent last week assuring U.S. diplomats and international finance officials that all is well.

Granillo, a close ally of Menem’s, added: “The president showed that he is in command.”

Menem’s reaffirmation of his power is significant, because he had seemed disengaged of late, say foreign diplomats and even some of his allies.

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After ascending to the presidency from the remote province of La Rioja in 1989, the dapper, colorful son of Syrian immigrants charged through his first six-year term.

He indulged his taste for sports, fast cars and night life. But he also oversaw the economic renaissance, the strengthening of diplomatic ties with the United States after years of isolation and the delicate process of granting amnesty to former military rulers and leftist guerrillas.

Menem’s flamboyance masked acute strategic instincts; he largely dismantled his Peronist party’s big-government ideology, replacing Peronism with Menemism.

After last year’s electoral triumph, however, the administration occasionally gave the impression that it was coasting, analysts say.

They cite other factors, such as the emotional blow of the death of the president’s son in a helicopter accident last year.

The president and his inner circle appear reinvigorated by Cavallo’s ouster.

After the frenetic days of politicking that preceded Cavallo’s dismissal, the president looked relaxed as he made the announcement.

He praised Cavallo and rejected suggestions that the administration was adrift.

“The person who runs the government and leads the way is the president,” Menem declared.

Quoting Kipling, he said he has learned not to listen to “the applause of success and the jeers of hatred.”

Menem has said Argentina’s economic policy will not waver despite Cavallo’s departure.

The former minister’s economic program, which in 1991 tied the dollar to the peso, ended delirious years when inflation ballooned to 5,000%.

Under Cavallo’s program, foreign trade and investment soared.

Argentina now has one of the world’s lowest inflation rates and is one of the hemisphere’s strongest emerging markets. And unlike similar free-market development in Chile and Mexico, Argentina’s reforms occurred in a full-fledged democracy.

Lately, however, Cavallo had come to symbolize harsh austerity measures and a recession that has hurt the middle and working classes. Simultaneously, he struggled with a budget deficit that bulged past $2.5 billion.

Mora, the political consultant, said Menem chose Cavallo’s replacement, former Central Bank President Roque Fernandez, because he is less political and espouses a more orthodox free-market philosophy.

Menem and his new minister have a pressing dilemma. On the one hand, they have said they want to pursue such difficult steps as toughening tax collection, privatizing banks and cutting bureaucracy in the provinces, where the employment landscape is bleak. On the other, the voters are clamoring for the government to do more for poor and middle-class Argentines.

And the recent scandals have stoked popular discontent.

During the last month alone, the defense minister resigned because of alleged illicit arms sales. The justice minister fell after his neo-Nazi past was revealed. Police commanders were locked up on charges of drug trafficking and terrorism. Authorities raided the luxury apartment of a judge accused of illegal enrichment, who in turn is investigating an assault by gunmen on the home of the president’s brother.

And thugs menaced the family of a federal prosecutor assigned to a multimillion-dollar contraband case, slashing his sister and threatening to blow up his son’s kindergarten.

“If I were the president, I would appoint a commission today of notable citizens above suspicion and give them two months to advise me on a plan against corruption,” Mora said. “This is the most serious problem that this government has.”

Cavallo, 50, retains a relatively clean image, although his ministry also endured scandals.

There is speculation that he is forming a political movement centered on an anti-corruption platform: At a recent marathon news conference that was widely interpreted as the launch of a presidential candidacy, he said he will establish a think tank to study the crises in justice and law enforcement.

“These are issues not only of Argentina, but of Latin America,” Cavallo said. “Security and justice are key issues for people who decide to invest in their nation or . . . for people who come from other nations to invest in Argentina.”

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In defense of the government, officials call economic modernization a fundamental reform. The privatization of state industries broke up bastions of graft and inefficiency, officials say. And Granillo asserted that it is only the perception of corruption that has increased.

“It’s not that it didn’t exist before, it’s that it wasn’t investigated before,” he said. “Corruption is being fought, so it is coming to light.”

If Cavallo decides to wave the ethics banner and run for president in 1999, he may end up on a collision course with Menem.

The president will be his party’s kingmaker for the elections; despite his denials, many observers believe that Menem may try to change the constitution again and seek a third term.