MENEM AND THE MILLENIUM.

President Carlos Menem fixed an ailing Argentine economy in the 1990s, but his successor has a laundry list of other ills to worry about in the new century.

WHEN CARLOS MENEM TOOK OVER THE PRESIDENCY in Argentina in 1989, the nation was completing a decade of triple-digit inflation and negative GDP growth. The large swathes of the economy that were in state hands were in crisis. It was almost impossible to buy a new phone line, electricity was expensive, and power cuts frequent. YPF, the oil and gas giant, had won a less than flattering place in the Guinness Book of World Records in 1983, when it was still state-owned, for the largest-ever loss recorded by a company in a single year--$4.6 billion.

Today, nearly all of these assets have been sold, in most cases producing marked increases in performance. The Menem years produced total growth of around 35%, while inflation in recent years has dropped below that of the United States.

But economic growth has done little to promote social justice and, following a first term dedicated to stabilizing the economy, Menem has failed to deliver improvements in employment and welfare. That's bad luck--at least in part. The second term started with the 1994 Mexican maxi-devaluation, known as the Tequila crisis, which was followed by meltdown in Russia (the "Vodka effect"), economic collapse in South East Asia (Asian flu) and devaluation in neighboring Brazil (the Samba effect).

Nevertheless, with or without growth, the gap between rich and poor has grown every year throughout the Menem years. Official statistics show that a fifth of national households, with an average of five members each, survive on just $12 a day.

Domingo Cavallo, the renowned former economy minister who is in the running for the presidency, says Menem squandered opportunities and retreated from the administration's original principles. "Economic change doubled the resources available in real terms to the provinces and the federal government. There was every opportunity to develop a tremendous social policy." Instead, says Cavallo, Menem "subordinated every-thing to his attempts to perpetuate himself in power."

More order, less Brazil. The transition to a new Argentine leader is expected to be smooth. But the winner will have to whip into shape a government that spends far too much money. He will be called upon to fix a terrible tax system, diversify an economy too dependent on its Brazilian neighbor and bring order to a nation of politicians who rank as among the world's most corrupt.

All bets are on Argentina's opposition Alliance candidate Fernando de la Rua easily defeating Peronist rival Eduardo Duhalde and Cavallo, who leads the Accion por la Republica party. A poll released in early August indicated that De la Rua had an overwhelming lead over Duhalde with 47% to 31%. Cavallo garnered only 7% of support from those polled by the Centro de Estudios Union para la Nueva Mayoria. Another poll conducted by Gallup had De la Rua with a 43%--31% edge over Duhalde. Elections are slated for October 24.

Despite threats by candidate Duhalde about a debt moratorium, economic policy isn't expected to change. Still, many foreigners fret that the new government could abandon the center-piece of Menem's economic reforms: the convertibility plan and currency board system that maintains a rigid one-to-one relationship between the peso and the dollar.

There is little cause for alarm. Argentina has the strength to defend its regime, with nearly $27 billion in reserves, enough to cover all pesos in circulation. Meanwhile, the banking system has been reinforced with an emergency reserve of around $7 billion and credit lines with international banks for another $8 billion.

More importantly, Argentines have the political will to do whatever it takes to avoid a return to the days of hyperinflation. For most, that time that characterized the last change of government is such a painful memory that risking its return by abandoning convertibility is a horrifying prospect. During the Tequila crisis, for instance, polls consistently showed wide public majorities in favor of lowering salaries rather than returning to inflation. "Convertibility is strongly defended by the people," says Cavallo, the plan's architect.

Got problems? Dollarize. Abandoning convertibility would also do little to alleviate the current recession. Unlike Brazil, Argentina is highly dollarized, meaning that, as well as sparking a major bout of inflation, devaluation would do little to help reduce exporters' costs and would hurt those, including the government and wide sectors of the public, who have dollar debts.

Menem's answer is to abandon the peso in favor of complete dollarization. Given his current political weakness, however, he is unlikely to be able to push the initiative through, particularly because of opposition by U.S. officials, including recently appointed U.S. Treasury Secretary Lawrence Summers. In any case, dollarization would do nothing to improve economic competitiveness, the major task facing the incoming government.

Clearly, Argentina's biggest problem has been Brazil, the only major market with which it operates a trade surplus. The devaluation of the real earlier this year wreaked havoc on the Argentine economy (Brazil's currency has so far devalued by around 20%). With exports remaining sluggish, says local economist Luis Secco, Argentina's current account deficit will drop only a fraction this year from 4.8% to 4.4%.

Since the quick fix of devaluation has been ruled out, a reduction in local costs will thus require tackling the structural changes that Menem has left undone during his second term. One of these would he revamping the tax system. The government currently takes in about $50 billion, representing around 24% of GDP, while even Brazil manages 30%. That burden falls particularly hard on companies that operate in the formal economy. The loss in revenues from tax evasion runs as high as $25 billion. Employers complain particularly of taxes on employment and an infiexible labor market in reducing their competitiveness. But Guillermo Rozenwurcel, an economist at the opposition-backed Argentine Foundation for Equitable Development, FADE, says prices charged by the underregulated utility companies are "at least as important" in reducing competitiveness. He cites telephone rates and highway tolls. He says telephone charges run between 15% and 30% higher than international norms; highway tolls as much as 50% higher per kilometer.

Another troubling note is the Argentine government's nasty spending habits. Despite the country's low inflation rate, public spending rose from $66 billion in 1992 to $93 billion in 1999, according to the Foundation for Latin American Economic Research. And, despite raising $40 billion from privatization, the public debt has more than doubled during the decade, from $61 billion to $139 billion, while the resulting financial costs have leapt from $4 billion to $10 billion a year. Its debt-to-GDP ratio is projected to hit 40% this year compared with 35% in 1997.

The government's spending spree has done little, however, to reverse the notorious decline of the public-education and-health systems. Institutional reform will also require a major clamp down on state graft. The public lists the issue as its second or third major concern, but also appears skeptical about the ability of the two leading presidential candidates--de la Rua and Duhalde--to tackle it.

Government spending spree. Argentina's money problems were enough of a concern to Duff & Phelps to prompt the international credit rating agency to lower its sovereign debt rating for Argentina from positive to stable in August. "The positive outlook assigned in October 1997 was contingent on the government taking decisive action in the areas of tax and labor market reform and in a gradual but firm improvement in fiscal and debt indicators," says Jaime Sanz, head of the firm's Latin sovereign ratings. "The results are not very encouraging on either front and we don't see much scope for improvement in the next six to 12 months."

Little surprise then that, in last year's ranking of perceptions of corruption organized by Transparency International, the leading non-government organization focusing on the issue, Argentina scored an average of only 3.0 out of a possible 10 for maximum honesty. It was rated 25th most corrupt out of the 85 countries surveyed.

Luis Moreno Ocampo, regional president of Transparency International, a leading anticorruption crusader, remains optimistic. "If you had said that Menem was capable of implementing a macroeconomic reform, people would have laughed:' he says. "Politicians are interested in power. They are all aware of the fact that whoever manages to control corruption will gain a lot of power.

For Menem, the task has proven impossible because a president can only effectively tackle corruption during the first two years of office, Moreno Ocampo says. "After [two years], the corruption is his, not someone else's."

With crime apparently intractable and little room for maneuver on the economy, the opposition may find that locking up members of the former government is the one thing it can do to win popular support. Already during the launch of his election platform in last May, presidential candidate Fernando de la Rua promised if elected be would see that "those guilty of corruption will form a procession through the courts."

Several ministers have already started the parade, most recently an ex-minister for his role in illegal arms shipments to Croatia and Ecuador. If allowed to run its course, that case could reach as high as the president, who is among those who signed decrees authorizing the shipments. Most political analysts believe that any purge will remain at the level of Menem's ministers, with the worst circumstance to await Menem being unemployment. Then again, there is always the presidential election in 2005, when Menem will be eligible to run again.

POPULATION: 36.1 million (1998 estimate) 1998 GDP-US$ 298 billion 1998 GDP per Capita: US$ 8,300 Capital: Buenos Aires

From Falklands to friendship

LAST YEAR, ARGENTINE PRESIDENT CARLOS MENEM WENT TO GREAT Britain, the first visit by an Argentine president in almost 40 years. More recently, a landmark deal was signed that now allows ordinary Argentineans to visit the islands for the first time since the 1982 Falklands War.

The two events are part of what many say is the new Argentina, a nation and society that no longer shuns the outside world but embraces it with open arms.

"Argentina had a xenophobic attitude, a great distrust of the foreign," says former economy minister Domingo Cavallo. "That attitude has changed completely."

Cavallo likes to take credit for the change, but many believe Menem also deserves some recognition. After all, it was under Menem that Argentina signed the 1991 agreements to create the Mercosur trade bloc and finally laid to rest Argentina's last outstanding border dispute with Chile over the continental ice fields that divide the two countries. Argentina also sent frigates to the Gulf War in 1991, ending years of friction with the United States.

Still others say Menem was being pragmatic and hardly dreamed up some grand scheme to draw Argentina closer to the rest of the world. Clearly, the fall of the Berlin wall only months before Menem took office left him little alternative but to sidle up to the one remaining world power. The collapse of the Soviet bloc also made it easier to abandon a statist economic model at home.

Menem: Alone and depressed

AS ECONOMIC GROWTH HAS STALLED, ARGENTINES HAVE SEEMINGLY tired of President Carlos Menem. On the back of his early achievements, he was able to strong-arm the opposition into allowing him to run again, winning reelection in 1995 with almost 50% of the votes. But as he finishes his second term, his popularity has not exceeded 25% for two years. And this time it has proven impossible to amend or interpret the constitution so that he might have another shot at power in October's presidential contest.

With that project definitively buried, Menem is a lame duck. The government is back-pedalling with embarrassing reverses on several recent measures, particularly on education funding. His former allies are scurrying to align themselves with Eduardo Duhalde, his bitter rival for power within the ruling Justicialista (Peronist) Party and Menem is apparently alone and depressed.

That is all in striking contrast to the bluff confidence and consummate political skill that previously allowed him to navigate the stormy waters of Argentine politics unscathed for a decade. After winning election on a platform of populist slogans in 1989, the economy collapsed into crisis, in part because of the fear that he inspired in business. With inflation rampant and looters on the streets, he took office five months early, as his predecessor, Raul Alfonsin, proved unable to maintain control.

Menem, however, has always been at his best during a crisis. Without batting an eye, he promptly put in motion a program of radical economic reforms that represented a 180-degree turn from his election platform, although for Duhalde, Menem's 1989 running mate, the change was logical and unavoidable." When the election took place, the economy had still not collapsed ... The center of our proposal was the productive revolution, and that happened," says Duhalde.