Argentina - Domestic policy

In March 2000, the World Bank reported that ten million Argentines, or 29%, lived in poverty. Another 7% lived in extreme poverty. More dramatically, 43% of Argentine children lived in poverty. Argentina's economy had been growing at a double-digit pace during the early 1990s, but had entered a recession in 1999. By the time Fernando de la Rúa took office in 1999, unemployment was at 14% and the federal government faced an US $11.5 billion fiscal deficit. In 2002 when Duhalde took office, Argentina was literally running out of money. Thousands of workers and retirees were receiving only partial salary or pension payments, bank accounts were partially frozen, and unemployment nationwide had reached nearly 20%, and was closer to 30% in the cities.

In February 2002, Duhalde introduced a three-month program aimed at reversing the economic downward trend and shoring up the country's banks. One dramatic measure the Duhalde government had taken immediately upon assuming office was to eliminate the one-to-one conversion of the peso with the U.S. dollar, noting that artificially keeping the peso strong had launched the four-year-old recession. Duhalde converted more than US $40 billion in bank deposits, recorded in dollars, into devalued pesos; the citizenry responded with street protests, vandalism, and attacks on government officials. Since the government allowed the peso's value to float against the dollar, the peso's value plummeted by 70% and consumer prices were increasing by 10% per quarter.

Despite increasing pressure to resign and call elections much earlier than the scheduled September 2003, in May 2002 Duhalde reiterated that he did not think his resignation would help. By January 2003 however, Duhalde had moved up the date of the elections to April 2003, and vowed he would leave office by 25 May 2003. Duhalde and his advisors seemed to be running out of ideas, as pressure to keep up with debt repayment and domestic economic woes mounted.

One key may be in an area where Duhalde was especially frustrated over his government's lack of progress—winning commitment from the 23 provincial governments to join in the effort to right the unstable economy. The support of the powerful—and free-spending—provincial governments was necessary before the IMF (or another international source) would consider extending more favorable financing terms to Argentina. Without provincial support, it seemed unlikely that the federal government could come up with a fiscal and monetary plan acceptable to the IMF. IMF auditors contended that a 10% cut in provincial spending would translate into a significant reversal of the mushrooming federal deficit, since the federal government provides an estimated 65% of the provincial governments' budgets, with little say in how the money is spent. Provincial officials, with no accountability to the federal treasury, routinely inflated the values of contracts, and awarded them in sweetheart deals to relatives or as political favors. Ironically, Duhalde had been criticized in the past for using federal poverty relief funds to buy votes in his election as governor of the Buenos Aires province and he was pleading with the provincial leaders to cut payrolls with unemployment at 20% and rising.

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