Bad Shocks Teach Argentina Economics

NATIONS, like individuals, can learn from hard knocks.

That, says Argentina's Finance Minister Domingo Cavallo, is the story behind his country's amazing economic bounceback. Over the past three years, the real growth in Argentina's output of goods and services has been 25.5 percent, or more than 8 percent a year. Only China and Malaysia have a better record. Last year's inflation of 7.4 percent was the first time in 25 years that Argentina's consumer price index has registered a single-digit increase.

In the past, many foreign economists and executives have cited Argentina as a leading example of a mismanaged economy.

What has happened to change the situation?

``It was a set of experiences,'' Mr. Cavallo explained in an interview while in Boston to talk to institutional investors.

From 1870 to 1930, Argentina enjoyed a rapid-growing economy, along with such nations as Canada, Australia, and Brazil. It had a constitutional, stable political environment. Its economy was linked to the world. Argentina had strong ties with Britain, then the dominant commercial power.

Argentina's government ``made a lot of room for the private sector,'' Cavallo notes. The government provided a legal and physical infrastructure for private enterprise, but did not produce many goods and services itself through state-owned companies.

That all changed after 1930. ``We did not find a way to participate in and benefit from world affairs,'' Cavallo says. Argentina adapted a closed-economy approach with high trade barriers. The government became more and more involved in regulating and managing the economy and producing goods and services. Government deficits got bigger.

Also, the first military coup took place. The nation suffered from political instability; its leaders did not respect the Constitution. (Argentina did not have normal succession of two constitutional governments until 1989, when President Raul Alfonsin resigned from a six-year term six months early to permit President-elect Carlos Saul Menem to assume office.)

Then came two ``extreme shocks'' that, Cavallo says, have changed the nation ``for good.''

r Argentina's military regime lost the ``Malvinas War'' - the war with Britain over the Falkland Islands. As a result, most of Argentina's people ``abandoned the idea that the military could be managers of a good and efficient government,'' he says.

r The nation suffered hyperinflation. Prices rose 20,000 percent from March 1989 to March 1990. That was preceded by decades of stagnation and a 25 percent drop in output in the 1980s. ``It forced Argentines to be much more realistic than they were before as to how the economy works,'' Cavallo says.

``All that has changed the attitude of the average Argentine,'' the finance minister says. ``It has shaken the prevalent ideas [and] created room for the big changes we have created.''

Cavallo credits former President Alfonsin with recreating a democratic political system in Argentina. Alfonsin stopped the nuclear race with Brazil. He signed a friendship agreement with Chile, settling numerous border disputes.

President Menem has extended the dramatic change into the area of economics, privatizing major state enterprises, reorganizing the economy, and accentuating the integration of Argentina into world affairs. He revived diplomatic relations with Britain and restored friendly relations with the United States.

``We are completely reversing the trends that prevailed for several decades,'' says Cavallo, who got his doctorate in economics from Harvard University. Indeed, he says, Argentina has in the past four years moved toward an open market economy perhaps three times faster than either Chile or Mexico.

``The learning of the Argentine people from suffering, from shocks, and from decline was very intense,'' Cavallo says.

The finance minister says he expects progress to continue, with the economy growing at a 6 to 7 percent real rate over the next few years before slowing to around 5 percent as the ``catch-up'' phase ends. Given a new political consensus between the key political parties, the vote for a constitutional assembly April 10, and a 30 percent rise in personal consumption in the past three years, Cavallo predicts continued political stability ahead.