- The Washington Times - Thursday, April 5, 2001

BUENOS AIRES, Argentina Argentina's new economy czar, Domingo Cavallo, faces a stiff challenge in his attempts to end a crippling recession that has shattered investor confidence throughout the region.
Mr. Cavallo, the 54-year-old Harvard-trained economist credited with taming Argentina's hyperinflation a decade ago, won sweeping powers from the nation's Congress after his appointment last month to battle a three-year recession.
"Cavallo, quite simply, is the last resort," said Felipe Noguera, a political consultant. "There is no one else."
Mr. Cavallo ended hyperinflation a decade ago by tying the peso to the U.S. dollar at a rate of 1-to-1.
But Argentina faces a very different set of challenges in 2001.
Now, a strong dollar means that Argentine companies cannot compete in world markets.
Banks and investors fear devaluation, so they demand high interest rates to compensate for the risk that borrowed funds will be worth less when they are paid back.
High interest rates, in turn, dampen business expansion.
Mr. Cavallo confronts a crippling 33-month recession that has seen unemployment grow to 14.7 percent and the national debt rise precipitously to $124 billion, nearly half the size of the economy.
Within days of his appointment, though, Mr. Cavallo came forward with a rescue plan to invigorate the economy by trimming taxes, trimming federal agencies, cutting red tape and adjusting tariffs to make it cheaper for businesses to import machinery and raw materials.
The package, analysts say, is designed to create a "confidence shock" to get business going again.
"Cavallo is trying to restore trust in the system," said Diana Mondino, managing director of Standard & Poor's Argentina, a debt rating agency. "Recovery is a matter of Argentines' willingness to believe."
The powers, granted to Mr. Cavallo by Congress last week after a marathon six-day debate, will let him sidestep political opposition to his plan, particularly from powerful provincial governments who oppose cuts in spending.
They will allow Mr. Cavallo to adjust tax rates, modify external tariffs and cut waste in government bureaucracy by authority of a presidential decree, rather than in consultation with Congress.
Facing congressional midterm elections in October at the helm of a shaky center-left coalition, President Fernando de la Rua turned in desperation to Mr. Cavallo, an old political adversary.
The rescue package has its critics.
In the short term, it has actually led to a net increase in taxation as Mr. Cavallo moved to boost government coffers immediately with a new tax on financial transactions.
He also slapped a 35 percent tariff on imported consumer goods, a move that alarmed Argentina's main trading partners.
Moreover, union leaders have rejected the measures, saying they will lead to widespread layoffs of government workers.
Several members of the president's own coalition have resigned in protest.
But even Mr. Cavallo's critics have been impressed by his energy. Within a week, he had slashed through months of political gridlock, powered a bill through Congress to modify taxes, flown to Spain to reassure nervous investors, won key political support from major trading partner Brazil and forced politicians to work over a weekend.
Argentine economists are cautiously optimistic that the special powers will allow the economy chief to steer Argentina out of its economic malaise.
"Cavallo's a strong minister with a good team and clear ideas," said Martin Redrado, chief economist at Fundacion Capital, an economic think tank.
"He adds credibility to the government. He should be able to halt the deterioration," Mr. Redrado said.

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