67 (both at constant 1993 prices; MECON, 2003b). A return to the 1998 level would thus show up as cumulative “growth” of 22.5 percent. Although the January 2003 transitional agreement with the IMF assumes growth of “between two and three percent” in 2003 (MECON, 2003c), recent output trends suggest an outcome closer to 4.5 percent.<sup>67</sup> A plausible time path thereafter to reattain the 1998 output level by 2006 would involve growth of 6 percent in 2004 and 5 percent annually in 2005-06. Because the productive capacity of 1998 is still largely in place, and even considering that there will be some change in composition toward tradables and away from nontradables (given the real exchange rate change), such a path does not seem unrealistic. A key factor in whether it can be realized will be whether there is a major degree of normalization through increased political stability, and whether the new government follows investment- and market-friendly policies or instead adopts unsustainable populist policies.

On May 25, Nestor Kirchner took office as the sixth president of Argentina within 18 months. Carlos Menem, who had enjoyed a slight lead in the initial round of presidential voting in April, resigned from the run-off elections in the face of Kirchner’s large lead in the polls. Kirchner’s inaugural address warned foreign creditors that Argentina needed debt relief and declared that “a way of doing politics in Argentina is over” ( _New York Times_ , 26 May 2003; _La Nacion,_ 26 May 2003). Kirchner reappointed Roberto Lavagna as Minister of Economy, and can be expected to continue the relatively cautious fiscal policy combined with relatively populist government interventions that characterized the Duhalde transition. It seems more likely that the new government will seek primary fiscal surpluses of say 3 percent of GDP than that it will aim for targets as high as 4 or 5 percent of GDP, and some reports have indicated it intends a major public works program.

Output growth could potentially average some 5 percent annually in 2003-2006, as this would simply restore real GDP to the 1998 level by the end of this period. However, even to achieve this recovery, it will be crucial to restore market confidence. Maintaining the more positive relationship with the IMF achieved in early 2003 will be important for this purpose, as will the pursuit of policies in a wide range of areas -- including on utility rates, debt restructuring negotiations, and bankruptcy laws -- that continue to repair the damage done to confidence in the rule of law and adherence to principles of property rights.

Inflation, in the baseline, seems likely to be moderate this year, and in all likelihood well below the 35 percent December to December rate assumed in the January IMF program. Once again the impact of the election outcome on confidence will be important. Considering that inflation was running at an annual rate of only 6 percent in the six months ending April 2003, prices might rise 15-20 percent December to December, an outlook that makes significant allowance for some inflationary impact of the release of the rest of the frozen bank accounts, some adjustment in utility rates, and modest wage pressures. By 2004 and after it is not difficult to envision a process of

> 67 Some press accounts as of early May indicated the IMF and the new government would revise the growth and inflation targets, likely toward 4 percent growth and 15-20 percent consumer price inflation, but that the primary surplus target of 2.5 percent of GDP would be maintained.