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Don't Cry Yet for Argentina's President De la Rua

BUENOS AIRES: After ten years of democratic rule under President Carlos Menem, Argentina's transition to its new president, Fernando De la Rua, has been swift and smooth. The ease of change from Peronist rule to the center/left Alianza signals Argentina's democratic maturity. Stability prevails in financial markets; country risk fell 300 basis points between July and the day De la Rua assumed power; industrial production grew 14.9% in the second half of last year.

Policy continuity eased this change of regime. Sensibly, the new government maintained "Convertibility," the local name for a Currency Board system that sets a 1:1 exchange rate between the peso and the US dollar. Yet despite this, De la Rua's government denounces President Menem's economic legacy, claiming that its fiscal irresponsibility nearly incited a run on the banks and currency. That catastrophic assessment led the new government to enact a tax package which hiked taxes on middle income wage earners and exempted earnings from dividends or interest. Tax evaders were offered deals to repay overdue taxes.

Nothing, however, angers paying taxpayers more than having their taxes raised while shirkers get special breaks. Economists, although they praised the idea of balancing the budget, sharply criticized the means. Moreover, persistent effort to blame everything bad in Argentina on Menem's administration boomeranged: people viewed it as a smokescreen for a lack of leadership.

Such finger-pointing has a price. During the new government's first three months, trends in industrial production, services, construction, consumption and, worst of all, tax collection reversed. Although nominal GDP was expected to be 2% higher (in annual terms) in the first quarter of 2000, nominal tax collection fell by 1.5 %, exposing the inadequacies of De la Rua's tax package.