Poverty's Prey

Joshua Goodman

Ordinary Argentines hunger for a return to prosperity.

YOU CAN DEBATE WHEN AND HOW IT WILL end, but there's no doubting that most Argentines remain in a recession-inspired funk. Signs are everywhere--from violent roadblocks by unemployed workers to embarrassing pep talks by politicians looking to lift morale--but it's enough just to note that, thanks to sluggish demand, the country that a decade ago was the textbook example of hyperinflation now suffers from its opposite: deflation.

Officially, Argentina began to crawl out of its nearly two-year downturn during the first quarter, when the economy expanded by 0.9% after a 3.1% contraction last year. But the majority of the public has so far benefited little from such lukewarm growth, most of which comes from strong export performance of modern industries--agriculture, automotive and energy--that require increasingly fewer workers.

Indeed, for most people, the light at the end of the tunnel is growing dimmer, not brighter. Unemployment, which has stayed above 10% for the last six years, increased to 15.4% in May, from 13.8% in October 1999, according to the government. Consumer confidence, which peaked after President Fernando de la Rua's November 1999 election, has fallen back to last year's lackluster levels. Meanwhile, sales at supermarkets and shopping centers, the official barometer of consumer activity, have posted year-on-year declines for 11 consecutive months.

Wage cuts and tax hikes don't exactly help either. But that's the formula De la Rua adopted to reel in a fiscal deficit that was spiraling out of control when he took office. Although De la Rua rightly insists that he inherited the recession, his decision to increase income taxes, plus cut the salaries of nearly 300,000 government employees by 15% to 18%, is blamed for prolonging it. Adios honeymoon!

But enough diagnosis. To understand how the country hopes to shrug off its downcast mood, LATIN TRADE spoke with ordinary people affected by the recession in Buenos Aires. Some of their worries, such as whether to splurge on a new TV, are as cyclical as the economy itself. Still others, like deciding to resettle in another country, will continue to tug at the country's social fabric even after the economy has recovered. In both cases, however, the same lesson applies: Growth without job creation is no recipe for economic security.

BACK TO THE OLD COUNTRY

It's 7:30 a.m. in front of the Italian consulate in Buenos Aires. Federico Carreras, 25, waits in line to undo his Italian-born grandparents' courageous transatlantic journey at the turn of the 20th century. He has never lived outside his parents' home, never set foot on European soil, but in November--after saving for two years--he'll board a plane with a one-way ticket to Rome. "My grandparents came from Sicily in 1908 looking for the same thing I'm after now: a future," says Carreras with despair. "If I'm lucky, I'll fall in love and meet someone to raise a family with so that my kids don't have to put up with what I did."

Carreras isn't the only one who dreams of a better life abroad. On this cold winter morning, he's been waiting since before dawn with some 400 other young adults outside the consulate. All are hoping to be among the lucky few to have their passports and citizenship applications processed during the short 8 a.m. to 10 a.m. period that the consulate is open to the public. For many it's not their first attempt. Diego, one of the handful of pamphleteers peddling legal advice to the future emigres in front of the embassy, says, "The lines keep growing, so people need to arrive earlier and earlier each day." He shakes his head in disbelief at the block-length lines and the long faces on those who are supposed to be the inheritors of the Argentine dream.

The ease with which most Argentines trace their ancestry to Europe makes obtaining a European Union passport a sort of insurance policy against the future. But mass emigration--standard fare during dictatorships--is difficult to explain in today's more stable political environment.

Nonetheless, demand for a free pass to the First World has been skyrocketing. A recent Gallup poll reveals that 33% of Argentines between the ages of 18 and 24--or a fifth of the population--are seriously considering resettling in another country. It is the highest percentage since the annual survey was first taken in 1988, when Argentina was reeling from the economic chaos brought on by hyperinflation.

The demand is overwhelming foreign consulate staffs. Italy for example, has already issued the same number of passports in the first half of this year, some 7,000, as it did during all of 1999, itself a record year Spain, another top destination, reported a 35% increase in visa applications. Lines of between 50 and 100 people can also be seen daily outside the U.S., Canadian and German consulates.

Despite its immigrant roots, Argentina is rapidly becoming an exporter of valuable brainpower Like Carreras, an architect by training but a salesman by default, the majority of those looking to leave are frustrated by the wide gap between what their university education prepared them for and the lot dealt them by current economic reality. "Even washing dishes in Spain I could earn more than what I studied so much to achieve here," says Carolina Baez, an English translator who makes US$350 a month. She's leaving in September, even if her passport doesn't arrive in time. "I'd like to emigrate legally but I'm prepared to go any way I can."

A MALL OF MAL

When the upscale, $111 million Abasto Shopping Center was inaugurated in 1998, it was supposed to be Latin America's largest shopping center, not its biggest picnic plaza. But that hasn't stopped 36-year-old single mother Claudia Martinez from hunkering down with her three children and a homemade chicken salad on a wooden bench inside the mall's huge atrium. "We used to go to McDonald's and then a movie, but now we just come here to see friends," says Martinez, who just had her $1,000-a-month salary as a government secretary cut as part of the federal government's effort to reduce its deficit. "It's a lot safer than the parks and not as cold as our apartment."

Martinez and her family aren't the only ones out to lunch these days. So too are the majority of Argentina's retailers.

Sales at the country's commercial centers, where a large chunk of shopping takes place, fell by 1.1% in the first six months of the year versus the same period in 1999. Compared with 1997, however the last full year of economic expansion, sales at some malls are off by a numbing 35%, says Mario Brandy, commercial director at Alto Palermo, owner of the country's top malls, including the Abasto. "We've gone from managing wealth to managing poverty," he says.

Nowhere is that dismal appraisal more apparent than in the case of the Abasto. The historical arcade that served as the city's main fresh food market for almost a century was saved from the wrecking ball so it could be converted into an anchor of stability in a working class neighborhood. But most people coming to the 40,750-square-meter structure do so only to window shop, grab a cheap meal or marvel at the indoor Ferris wheel and skating rink.

The sharp contrast between the large crowds and the empty stores has sparked some unprecedented sales, Below-cost discounts of up to 60% are adopted by most stores to lure customers over the threshold. And in May, Alto Palermo began an aggressive media campaign for its new "Alto Checks." The checks, sold at half their face value, are issued in $30 denominations and can be used like gift certificates at any store in the company's eight Buenos Aires malls.

While hour-long lines to purchase the checks are common, the extra push hasn't been enough to keep some leading chains solvent. Upscale clothing brand Vitamina and John L. Cook are arguably Argentina's most coveted among teenagers and young professionals, but the check promotions have not filled the two retailers' 92 outlets. The companies--whith controlling shareholders that include Bank of America and U.S. insurer AIG--flied for bankruptcy protection in June. Their large market position has sparked concerns that bankruptcy could now spread beyond their currently insolvent garment suppliers to other vendors.

Shopping mall operator Brandy's most pressing concern, for example, is collecting rent. Of the 10 or so daily meetings he holds with vendors, about eight include a plea for rent relief. With the supply of alternative tenants scarce, Alto Palermo works with the businesses to restructure their contracts or payment schedules. Some schemes are ingenious, such as allowing cash-strapped tenants to payoff their back rent with the reimbursements due them from the Alto Checks program. "We cede as much as we can but it's still not enough," he says.

As bad as things seem inside the malls, the situation is even more desperate outside. A decade-long exodus of shoppers toward the comfortable palaces of consumption means that the recession comes as a double whammy for small, family-owned stores located on the street. Empty storefronts and forgotten "for rent" signs have replaced once-prosperous businesses on many strategic downtown corners.

THE GOURMET GHETTO

For wealthier Argentines, Las Canitas is an urban oasis from the recession. On any given night of the week a caravan of foreign-made luxury cars can be seen parading into what was once a quiet residential neighborhood. Creative restaurateurs and celebrity chefs--followed closely by the rich and beautiful crowd--began flocking to the area that borders the city's polo grounds in 1997. Since then, the scene has exploded. In a 15-block radius there are now 44 pricey bistros offering everything from exotic (at least by Argentine standards) Asian cuisine to the finest in Argentine meat and potatoes.

Sixty-minute waits outside neon-lit restaurants with trendy names like Soul Cafe, Voodoo Lounge and Club Zen are common throughout the year. And, despite the protest of neighbors, new spots keep opening, at the rate of about one per month. "What recession?" says, Hector Olivera, only half-joking. Olivera, a marketing executive at a local telecommunications firm, is entertaining visiting U.S. business clients. His gym-sculpted physique clad in a black suit, cell phone attached at the waist, Olivera epitomizes the hip ideal sought by the area's young, upwardly mobile patrons. "This is like South Beach and SoHo rolled into one," he says.

Within such a thriving district, it's easier to detect traces of plastic surgery than hints of a recession. But the blemishes do exist. Alberto L6pez is one of about 15 scraggly cuida-coches keeping an eye on cars. L6pez began making the one-hour commute by bus to Las Canitas when he was laid off as a baggage handler for Aerolineas Argentinas 18 months ago.

At Aerolineas, Lopez used to take home $1,200 a month. Now, on a good night, waving cars into tight spaces can earn him $30--the same price as one of those mouthwatering steaks he sees served day in and day out. That's assuming, of course, that he's not jumped in the process. Competition among rival caretakers is intense and has more than a few times led to violent confrontations requiring police intervention, he says. Taking a day off can result in losing one's turf for good.

Lopez knows that he's mistrusted and that the rich clientele sometimes resent his presence. But the injury to his pride takes a back seat to his financial obligations to his wife and four children. "There's no future for me in doing this, but it's all that I've got," he says before darting off to attend to a departing BMW. A minute later, he returns empty-banded once again. "The worst part is that these people care more for their cars than they do for their fellow human being."

The Express Speak

LATIN AMERICA'SLEADING ECONOMIES WILL GROW IN 2001-WITH LOW INFLATION, ACCORDING TO THE LATIN TRADE Consensus Forecast. Our annual survey of 15 leading financial institutions concludes that growth will range from a blistering 6% in Chile to 2.9% in Ecuador Regional powerhouses Brazil. Mexico and Argentina are expected to post healthy 4.2% growth next year. To better identify key issues ahead. LATIN TRADE interviewed last year's most on-the-mark forecaster of CDP, inflation, exchange rate and current account in 1999. Highlights:

MOST ACCURATE LATIN AMERICA FORECAST

MICHAEL HOOD

Coordinator, J.P. Morgan

KEY ISSUES

* New economic expansion has yet to feed through to domestic sentiment.

* Latin America will grow at the same rate as the world economy--4% for region versus 3-4% for world.

* Inflation will continue to trend downward

How would you qualify the results of the recent elections in Latin America?

The outcomes were very encouraging. At a time when the economies were emerging from recessions, centrist candidates won. Twenty years ago,you wouldn't have had elections in many cases and many countries would have sought radical solutions.

Going forward, you have had a transition in Mexico in the electoral sense, but now you will have it in the administrative sense (when President Vicente Fox takes power on Dec. 1]. It should be eased by the favorable economic conditions. In the Andean countries (Venezuela, Colombia, Ecuador], stability is the main concern.

How will U.S. government policies affect business in Latin America?

U.S. interest rate policy in the short and medium-term is going to be more important than what the State Department is up to. The U.S. narcotics certification process is perhaps the most visible policy and it has not had a big impact on the Latin American economies. A lot of people are angered by it, but there is not much impact.

What about free trade agreements?

The big prize continues to be better access to the U.S. market. In the last 10 years, there has been a sharp rollback in trade barriers that survived the recession. Now you are gearing up for another round. The more important issue is direct foreign investment from companies in the developed world. It is the main and only source of foreign financing [for Latin America) right now.

Will foreign financing continue?

Stock markets have been doing very well and that seems to facilitate capital flows. An equity market disappointment in developed countries might have a rather serious affect on foreign direct investment flows to Latin America.

What about the reforms in health, education and welfare?

I'm much less interested in the second wave of reforms than the broad-brush changes in monetary and fiscal policy. Mexico, for example, has effectively de-petrolized its exports. Oil no longer accounts for the bulk of its exports, but the government is still highly dependent on revenues from [state-run oil company] Pemex. The president-elect is trying to set the government on more solid footing through increasing non-oil tax revenues. That could have some important impact on manufacturing companies there.

What do you see coming in privatization and deregulation?

There are a fair number of reasonably big companies to be privatized in small countries, such as Colombia and Ecuador. Mexico is the last of the large countries without private sector power.

What about the state-run oil companies?

I don't think so.

What exchange rates are you watching?

Mexico's and Venezuela's. In Venezuela, oil has been doing very well so the bolivar has strengthened. In Mexico, the United States has been doing very well so the peso is also strong. In Mexico and Venezuela, you are probably going to see some adjustment over the next couple of years.

MOST ACCURATE BRAZIL FORECAST

MARCELO CARVALHO

Chief Economist for Brazil, J.P. Morgan

KEY ISSUES

* The 2002 presidential elections may have already begun, delaying or softening hard policy decisions.

* Low interest rates will stimulate economic growth, especially for machinery and construction industries.

* Currency will remain stable, but watch current account deficit growth for signs of trouble.

How important are the October municipal elections?

They are not important, per se, by themselves for business, but many politicians will be using them as a platform for the 2002 presidential election. That race is already beginning. Brazilian President Fernando Henrique Cardoso's agenda has always stood on a foundation of brittle political alliances. The coalition may prove less adhesive now.

What are the prospects for continued reforms in the last two years of President Cardoso's term?

The prospects are not that good. It's not that the reforms are needed for the short term, but they are needed for the country's long-term fiscal health. Brazilian government spending reform has been insufficient, The government cut where it could cut its deficit, not where it needed to cut, like social security.

What has been the effect of tax reforms?

For the government, at the macro level, the financial transaction tax has been a good thing. But at the micro level, for the people and businesses, this is a horrible distortion.

Will there be more privatizations?

The appetite for privatization is starting to fade, not just in the government, but also in the legal system and beyond. All of this involves changes. It involves will. Government and business leaders, however, are starting to look for a lower profile.

Will the Brazilian economy grow next year and in what areas?

Brazil should grow about 4% this year and in the same neighborhood the next year. Inflation is in line with our targets. Interest rates are the lowest they've been in over a decade. Manufactured and capital goods will benefit from cheap credit with machinery and construction outperforming the other sectors. The automobile sector has started to recover. Non-durable consumer goods are a different story. Supermarket sales are hurting and will continue to do so.

Where is the exchange rate headed?

The currency has been resilient over the past months and remained fairly stable. But, looking ahead, it will likely weaken to about 1.9 [to the dollar) by the end of the year. If the political situation turns sour and the external figures disappoint, the Central Bank could hike rates, stop cutting them or sell off the reserves.

MOST ACCURATE MEXICO FORECAST

ALFREDO THORNE

Chief Economist for Mexico, J.R Morgan

KEY ISSUES

* Energy sector reform should open the way for private investment

* Budget for 2001 must be approved by Dec. 31, 2000.

* Tax system reform aimed at converging with U.S. tax system.

What are the issues on the political front?

We have been concerned about cooperation between the outgoing Zedillo administration and the incoming Fox administration, but there seems to a good deal of coordination. President Zedillo's government presented its energy sector reforms to Congress with the support of the Fox administration. That's a good sign of continuity.

What are the major initiatives during the transition?

The energy sector reform will create a new regimen for [state-owned oil monopoly) Petroleos Mexicanos, open the petrochemical sector further and allow private investment in electricity. The government's 2001 budget must be approved by the end of the year. The tax system reform will begin at the start of next year. There has been discussion of applying the value added sales tax to medicines and basic foods and lowering the top individual tax rate from 35% to 30%, but its components are not yet entirely clear. The basic idea will be for Mexican tax policy to converge with that of the United States.

Will the Mexican economy continue to expand in 2001?

Without a doubt. But the economy will slow down from 7% in 2000 to 4% in 2001. The consumer sector is leading growth right now but this is where the government's restrictive monetary and fiscal policies will have the most effect. The foreign trade sector will slow as growth in the United States slows

In 2000, will Mexico beat the peso curse of election-year devaluations?

Almost certainly yes.

Where does Mexico go from here with free trade?

The Fox administration has proposed that the North American Free Trade Agreement become a customs union, which would have an important impact on migration and labor.

MOST ACCURATE ARGENTINA FORECAST

JUAN ARRANZ

Head of Research, Santander Investment

KEY ISSUES

* Government must improve finances and reduce debt.

* Labor reform aimed at reducing unemployment.

* Construction growth will signal economic expansion.

What will the political situation hold for Argentina this year?

We have clearly seen from public opinion figures that support for President De la Rua has deteriorated from the time he took office [in December 1999]. Yet the key political leaders in the country from both parties and most of the governors in the provinces are all fully committed to free market policies.

How does the government plan to get the economy going again?

Economic growth will begin with the government paying its debt. Since the Asian/Russian/Brazilian financial crises, the country has suffered with high interest rates and a lack of credit. Now we have a government with a renewed commitment to improving fiscal accounts and with more benign international circumstances, Argentina's credit worthiness should increase, having an impact on credit demand--mortgages, housing, etc., which stimulates the economy.

Could Argentina suffer another external shock?

Not very likely. The [international] financial markets present a very benign scenario, which means that the country should be able to attain more financing at lower costs. That's good news for a country that is highly dependent on foreign financing.

How is the government dealing with unemployment?

A new labor law was approved at the end of April, which is intended to make labor contracts as flexible as possible. Basically, it allows shorter labor contracts, the temporary elimination of the tax wages for people entering the labor market and negotiation of more flexible contracts. And if Argentina returns to its normal growth rates of about 4% to 5% for the next three years, unemployment will be back in the single digits.

Will the government feel pressure to devalue the currency?

The common view of the government and the population is that it's too difficult to get rid of convertibility. To leave or abandon convertibility would produce an extraordinary impact on bankruptcies because the country is in debt in U.S. dollars.

What signals over the next 12 months will indicate the speed of Argentina's recovery?

The main way to stimulate the economy is via credit expansion, and construction is the first sector in which the positive effects of decreasing a country's risk should become evident. An eventual recovery in construction is an early sign that GDP growth is taking off.

What will be the impact of telecom deregulation this year?

It will increase investment by about $5.6 billion.

THE 2001 OUTLOOK

FOR 15 YEARS, CARLOS MAGALLANES WAS A manager for Peugeot Argentina. Laid off, he works now as a 'remisero' or chauffeur. "It's almost a pastime," says the 49-year-old father of three. "I can't even pay my bills with what I earn."

Magallanes' plight--and the conditions in Argentina that created it--are emblematic of the challenge facing Latin America. Competition and open markets have brought increasing productivity and economic growth, but they have also turned middle-class families into poverty's prey. Rising unemployment, not rising prices, stalks the main consumers of everything from candy and cigarettes to computers and cars.

On the streets of Buenos Aires, the scene stands in sharp contrast to the analysts' 2001 regional forecasts, fluttering down unheeded from the macroeconomic Mount Olympus. All the major economies are expected to grow, but the bigger question is whether or not that growth will mean anything to ordinary people.

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