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
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
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. …