Expert View: Don't say 'free trade', at least not in a US accent

The sign in the Latin America 'backyard' reads: 'Yankees keep out'

An ex-colleague was recently kidnapped in Buenos Aires. During his 24-hour ordeal being driven at 130 kph round the city while his various bank accounts were emptied, he had two terrible fears. One was that his captors, high on crack, would crash the car. The other was that they would not believe his desperate attempts to assure them he was not American, and slit his throat.

Last week in Buenos Aires, I spoke in an exaggerated British accent to my driver. We sat in the rain at the lights watching the varied and ingenious efforts of the beggars to get cash. Everything was here - flower sellers, jugglers, even people dressed as Charlie Chaplin. Varied, ingenious... and desperate.

Argentina is a test case for just how bad things can get when policy makers screw up. The massive sovereign default and humiliating devaluation five years ago sent the economy to the lowest level of support provided by purchasing parity. Even now, a luxury apartment in the centre of the city costs little more than a vegetable allotment in Cleethorpes, while lunch is the price of a coffee in London. If you get your money from an ATM, it is a constant struggle to find notes small enough to pay for anything.

All this after years of economic recovery, but there are optimistic signs. GDP growth last year exceeded 9 per cent, and the retail sales numbers for the Christmas period show an extraordinary 46 per cent rise. With VAT levels at 21 per cent, the government is now recording a primary fiscal surplus.

President Kirchner capped these successes a few weeks ago, and shocked economists, by announcing that Argentina has repaid its entire $9.8bn (£5,6bn) debt to the IMF. The president and his close associates from Argentina's deep south (the "regime of the penguins") are riding high - others advise caution.

Dining in the trendy beachside area of Palermo last Monday, we were plunged into darkness by a power cut. The restaurant manager rushed to lock the door and assure us the armed security guard would protect us. Crime is a daily risk here, but why the power cut in an oil-rich country? The answer is the return of Argentina's old enemy - inflation (now at 12 per cent and rising) and the dubious methods used to control it. The interest rate weapon lies discarded, tighter social spending unthink- able. But bizarre price-control deals have been struck with individual economic interest groups. Energy prices have been capped in just such a way - but you can't buck the market.

Free trade is on the defensive in Argentina, indeed across Latin America. The problem is, free trade is seen as anything but that and the IMF is viewed as an instrument of American imperialism. The free market policies of the 1980s and 1990s are blamed for the economic crisis of 2000. Now, nearly 40 per cent of the continent lives below the UN poverty line, almost 20 per cent subsisting on less than a $1 a day. Meanwhile, the dramatic rise in commodity prices thanks to explosive growth in Asia has spawned economic recovery and a surge in confidence among the continent's leaders.

It was against this background that, in November, President Bush blundered into the Americas in Argentina summit, brandishing his "Free Trade Plan". Ex-football hero Maradona led thousands in an anti-American march - a likeness of Cuban leader Fidel Castro tattooed on his leg. Chaos.

US diplomat Thomas Shannon was sent to Buenos Aires last week to "clean up". He has his work cut out. That Maradona tattoo was significant; once isolated among Latin American presidents, Castro is increasingly being joined by others in an anti-Bush "crusade". The latest is Bolivia's new leader, Evo Morales. They are forming what President Chavez of Venezuela calls "an axis of good".

James Monroe, the US president in the 1820s, once told Europeans to keep out of Latin America - "the United States' backyard". Well, that backyard now has a giant sign hanging over it. It reads, "Yankees keep out".

christopher.walker@tiscali.co.uk