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This Supply Sider Is Riding High (Int'l Edition)


International -- Latin American Business: Argentina

This Supply Sider Is Riding High (int'l edition)

De la Sota has Cordoba province besting the rest of Argentina

Argentina may have come up with its own version of Ronald Reagan. He's Jose Manuel de la Sota, the governor of the heartland province of Cordoba, population 3.1 million. While the rest of the country is on an austerity drive, de la Sota is going supply sider, cutting taxes and offering generous incentives to lure foreign investors. "We're breaking with the old model of demanding sacrifices up front and deferring any benefits until later," says the 50-year-old renegade.

So far, he's getting impressive results. Since de la Sota took office in July, 1999, Cordoba has been outperforming the rest of the country. Gross domestic product grew by 1.8% during the first half of 2000, while at the national level it was an anemic 1%. Unemployment fell to 13.4% in May, yet nationwide it rose to 15.4%. But de la Sota has his critics. President Fernando de la Rua and his backers at the International Monetary Fund warn that Cordoba's experiment with supply-side economics is bound to collapse under the weight of a spiraling deficit.

Maybe so. But meantime, de la Sota has slashed provincial taxes by 30% and tightened spending, so Cordoba is still on course to achieve a balanced budget in 2001. By contrast, the de la Rua administration recently acknowledged that it would not meet the fiscal deficit targets agreed upon with the IMF as a condition for a $7.4 billion standby loan. This after the government followed the fund's advice and raised taxes on middle-class families and businesses in January. It's no wonder, then, that while de la Rua's approval rating has sunk to 38%, de la Sota's is holding firm at 54%. Indeed, if the current trend holds, these two sons of Cordoba may be facing off against each other in the 2003 presidential election.

Of course, de la Sota can't claim all the credit for the Cordoba phenomenon. Some 57% of the province's revenue comes from the federal government's coffers. And if it wasn't for the approximately $600 million that a tax amnesty is set to bring in, Cordoba's tax collection would actually be down 12% this year, instead of up 4.1%. Plus there's the $1 billion that privatization of the provincial bank, lottery, and electric utility is expected to generate.

Even so, it's hard to discount the fact that under de la Sota, foreign investment in Cordoba has more than tripled, to $500 million a year. That's no mean feat considering Argentina's dollar-pegged peso has become a drain on competitiveness, particularly since neighboring Brazil floated its own currency in January, 1999. Cordoba was especially hard hit by the devaluation of the Brazilian real, since nearly 40% of its exports go to that country--almost twice the national average. "For peso-dollar parity to survive, Argentina needs to come up with new remedies to lower costs and attract investment," says the governor.

De la Sota appears to have come up with a successful cure. Earlier this year, he persuaded Motorola Inc. to build a $40 million software development center in the province, one of only 14 in the entire world, by donating a plot of land and footing the bill for training the facility's 500 employees. "He understands better than most how to build expectations," says Horacio Werner, general manager of Motorola Argentina.GOOD TRIP. De la Sota will stop at nothing to sell investors on Cordoba. Shortly after he was elected, he flew to Hanover, Germany, to appeal to Volkswagen's management to expand its plant in the province. He didn't come back empty-handed. VW is pouring $200 million into a new transmission operation. In exchange, de la Sota vowed to build a new road to the plant. He also persuaded the local unions to allow VW to take on several hundred interns enrolled in the province's "First Step" program.

De la Sota's advocacy of supply-side policies could open a much needed debate in Argentina about what is more important: economic growth or deficit reduction. "Fiscal austerity is important, but leadership requires vision that goes beyond short-term obligations and focuses on restoring the public's confidence," notes de la Sota, who recently embarked on a three-day tour of Buenos Aires to preach his tax-cutting gospel. Is Ronald Reagan listening?By Joshua Goodman in CordobaReturn to top


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