To break Argentina's disastrous inflation, President Raul Alfonsin is imposing a drastic remedy. He is running high risks and showing great courage. Whether he wins will depend on the reaction of Argentina's 29 million people over the coming months.
The inflation rate, currently running about 1500 percent a year, is the most immediately dangerous of the burdens that Mr. Alfonsin inherited from the incompetent junta that preceded him. At first he thought that conventional restraint, and appeals to the public, would be enough to control it. But the inflation has lately been accelerating, and Mr. Alfonsin has come to see that a failure to master it will end in a collapse not only of the economy but of Argentina's newly established democractic government as well. To wring out inflation by the usual method of keeping money tight -- the method that the United States has used over the past six years -- would require in Argentina a recession of intolerable length and severity. Mr. Alfonsin has chosen a more radical alternative.
The immediate cause of the Argentine inflation is a huge budget deficit. It's been running well over 10 percent of the gross national product; by comparison, the federal budget deficit in this country is around 5 percent of GNP. Mr. Alfonsin has declared that the Argentine deficit will come down to 2.5 percent of GNP in the second half of this year. That will be a greater achievement than balancing the United States budget by Christmas.
Mr. Alfonsin has abolished the peso and introduced a new currency, the austral. The name is a reference to the south, and Argentina's place in the world -- a nicely calculated appeal to national pride. He has pegged its exchange rate to the U.S. dollar and, even more daring, he has set the short-term interest rates for borrowers at 6 percent. Recently they have been running as high as 40 percent a month.
That's shock treatment on the grand scale. One precedent that comes to mind is the currency reform in western Germany after World War II. But that was imposed by the Allied military occupation, not -- as in Argentina -- by an elected government. Shock treatment seems to work only when a country is seized by a real sense of crisis. Circumstances in Argentina are not those in Germany in 1948, defeated and suffering widespread destitution.
Some people in Argentina will probably fight the new program on grounds that it is unfamiliar and they fear losing money under it. They will be supported and abetted by others with very different reasons of their own to want to see Argentine democracy destroyed. But inflation is debilitating the country, and not only its material standard of living. Shock treatment can succeed, if Mr. Alfonsin succeeds in convincing a majority of Argentina's people that there is more at stake than money.