Provinces Key to Argentine Fix ; IMF Officials Are Now in Argentina Demanding That Governors Trim Spending and Stop Printing Money

Article excerpt

Argentina has a big obstacle in its path to economic recovery. Actually, 23 big obstacles.

The struggling South American giant's loose federal structure puts most of the nation's spending power in the hands of the 23 provincial governors. Historically, the governors have acted like lords over their fiefdoms, spending with abandon, printing their own currencies, and doling out the cozy jobs to cronies. This has often created massive debt and crippling inflation.

Whether or not Argentina's federal government can reverse 200 years of history and bring reform to this free-wheeling culture may determine whether the country sinks or swims. Four representatives from the International Monetary Fund are here this week demanding that governors trim spending and stop printing money as conditions of restoring bail-out funds.

Last December, the IMF suspended funding after Argentina failed to meet previously agreed upon spending reduction targets. That decision forced the country to default on $141 billion in foreign debt, and led to deadly riots and five presidents in two weeks. Since taking office in January, President Eduardo Duhalde has repeatedly sought to persuade the IMF to help his country's crumbling economy.

But pivotal to any deal is whether Argentina's federal government has the strength to influence the governors.

History of free-wheeling

At independence in 1810, rural landowning strongmen, or caudillos, resisted control from Buenos Aires. As a result, Argentina's Constitution vests great powers in provincial leaders. In the 19th century, presidents got what they wanted by ruling with the sword, in some cases literally. These days, however, the executive is obliged to rule by consensus, and can only cajole governors into falling in line.

"Since the beginning of the Argentine republic, each province has functioned as an independent political unit," says Julio Burdman, director of research at the New Majority Studies Center, a political research group. "The federal government has little power to impose its will on the provinces."

Argentina's provincial governments collect, on average, only 35 percent of the money they spend - the poorest provinces rarely collect more than 10 percent - and get the rest from federal taxes that are apportioned out and sent to the provinces. The system works if the provinces limit spending to the money coming in. Should the provinces overspend, however, the government is left footing the bill.

Between 1995 and 2000, spending in the provinces rose by 25 percent, even though inflation was nonexistent. The spending binge forced the government to build up an unsustainable volume of external debt. "There is no federal oversight, none at all," says Mr. Burdman. "The provinces do not collect taxes, but they spend without control. They have total autonomy and no responsibility."

The results are predictably ridiculous. "Inconsistency and poor planning, at all levels, have become ingrained over many years," says Diana Mondino, managing director of Standard & Poor's in Argentina. "In education, which is decentralized, there are more teachers per class than average in some schools and no teachers at all in others. …