BUENOS AIRES, ARGENTINA — It was early April when the four men gathered around a table here and started to talk about shock therapy for Argentina`s economy.
Economy Minister Juan Vital Sorrouille was sure that ``gradualism,`` a plan to ease inflation down from a terrifying 1,000 percent by slow adjustments, was never going to work.
He called together three of Argentina`s top economic officials, graduates of Harvard, Stanford and the University of Minnesota, and together they started fashioning a plan that was so bold, so severe, that they shuddered at the thought of the political consequences.
``To say the least, it was anguishing,`` said a high Argentine official who was close to the process. ``We had no idea who would react, or how they would react.``
Chief among the reactions they pondered that April day was that of President Raul Alfonsin. Would he accept the radical surgery they contemplated as technicians, or, as a politician, would he dismiss it?
The situation was critical, and the economy of the world`s third-largest debtor, with foreign loans totaling $48 billion, was headed quickly toward collapse.
So Sorrouille; his deputy, Jose Luis Machinea; Adolfo Canitrot, undersecretary for economic planning; and Mario Brodersohn, then president of the National Development Bank and Argentina`s chief negotiator with the International Monetary Fund (IMF), started work on a plan to ``shock`` the economy and Argentines. Last week, Brodersohn was named treasury secretary.
``We understood that we had to impose a plan that was a shock,`` said the Argentine official, who asked anonymity. ``It was even a shock to the IMF.``
The official said that the four studied other countries, Indonesia and Bolivia among them, where inflation rates had reached 1,000 percent or more.
``The only way of getting it down in such cases is a severe shock,`` he said.
Two things made the situation worse in Argentina:
-- One was its long history--more than 40 years--of inflation, the official said. ``This had created an inflation mentality that is hard to break,`` he explained. ``It becomes a way of living.``
-- The other factor--the policy of indexing pay--was a related one. Raising salaries in line with inflation had to be abandoned, something the experts feared would lead to a political explosion from the powerful Peronist trade unions.
The plan they finally drew up called for the abandonment of the peso as a unit of currency, an immediate freeze on wages and prices, a new interest-rate structure and a forced savings plan.
It also outlined steps toward the elimination of the government budget deficit and for state-owned industries to end all borrowing. By some estimates, the government has been covering about 60 percent of its deficit by printing money. The deficit is running at about 10 percent of the nation`s $70 billion output of goods and services.
When they took the plan to Alfonsin, his reaction was swift and positive. ``All he wanted to know was how quickly we could do it,`` the official explained. He said they had to temper his enthusiasm and outlined the steps that had to be taken first to make sure the plan worked.
Moving quickly, the government ordered a round of huge price increases for everything from gasoline and electricity to telephone service and meat.
The increases ran well above inflation rates and well above what the state industries needed to make a profit. The idea, the official explained, was to build up a cushion of fat around the firms that would allow them to finance their operations once the draconian measures were put into force.
``We bit our lips a lot,`` the official said, describing how the few in government who knew about the plan reacted to outcries from politicians over the increases.
The delay also appeared to have a psychological purpose. By seeming to be doing nothing about inflation as prices raged higher, the government contributed to a sense of desperation among Argentines that prepared them for the dramatic steps that were to come.
``People were so fed up with what was going on,`` the official said.
``This was just the right time.``
So far, the shock treatment appears to have worked. Public reaction has been generally favorable. There was no immediate run on the banks when they reopened Wednesday after a three-day bank holiday declared by Alfonsin.
The new currency held its value in trading against the U.S. dollar on the official and black markets. While critical of the plan, trade unions have failed to offer any counterproposals and have yet to take any kind of strike action despite threatening to do so.
People have adapted quickly to the new currency, the austral, which is worth 1,000 pesos. Knock three zeros off a peso note and call it an austral.