Argentina Plans to Link Its Currency to Dollar : Economy: The move is aimed at holding down runaway inflation. The Buenos Aires stock market soared on the news.

MEXICO CITY — The government of Argentina, the birthplace of economic theories that encouraged Third World countries to pursue independent development policies, has introduced a new plan that will link its embattled currency to the dollar--and investors are ecstatic.

The Buenos Aires stock market soared 30% Thursday as investors responded to the plan, introduced late Wednesday in an attempt to inhibit the country’s chronic inflation. “We’re living in euphoria over the plan,” one stock trader said.

Economy Minister Domingo Cavallo said the Central Bank will use its gold and U.S. currency to keep the austral, the Argentine currency, at 10,000 to $1, while maintaining a freely convertible currency. Pending congressional approval, the plan will go into effect April 1.

In exchange for backing the plan, politicians in a conservative party loosely aligned with President Carlos Saul Menem said they will demand the government stop financing the fiscal deficit by printing money.

“We are in agreement with the substance of this plan, in that it will put a straitjacket on government spending,” said Federico Clerici, a parliamentary deputy.

Economists, however, were skeptical, calling the measure another shock plan, much like the 1985 introduction of the austral. Back then, the austral was worth $1--10,000 times its current worth. The plummeting value of the currency reflects the country’s dizzying inflation rate. Prices rose 27% in February alone.

“This is an aspirin, a laboratory experiment,” said Luis Diaz Muller, a professor at the National Autonomous University of Mexico who specializes in Latin American economic development issues. “Argentina needs economic reactivation. It is a much larger problem that cannot be solved by simple monetary measures.”

Some business leaders sounded similar warnings. “The plan seems to be magic and violent,” said Eduardo de la Fuente, chairman of an industrial trade group. “I cannot see any chance of reactivation. We are not going to grow.”

The most recent report by the WEFA Group, an economic consulting firm in Bala Cynwyd, Pa., predicted that Argentina would attempt some type of currency stabilization plan. The respected economic group also predicted that the country would be unable to sustain the effort.

Still, international economists brushed aside Argentine newspaper commentators’ criticisms that the plan will lead to “dollarization,” linking not only the austral, but other transactions, to the U.S. currency.

“Argentina is already a dollarized society,” said David Garlow, director of Latin American services at WEFA. “A lot of Argentine money is in Miami. The dollar means a lot (to Argentines) as a reserve of value.”

So backers of the government plan say linking the austral to the dollar is a logical way to show government commitment to stabilizing the currency--and a way to send signals that might put a halt to inflation.

The link also shows how much Latin American economic policy has changed since the days when economist Raul Prebisch led a movement from Buenos Aires that advocated developing countries close their ports to outside goods and develop their own industry.

Those theories held sway throughout Latin America until the debt crisis of the 1980s forced countries to reevaluate their policies. “In each renegotiation, banks demand increasingly more orthodox”--that is free-market--”economic measures,” Diaz Muller said.

First Chile, then Mexico, turned to free-market policies and closer ties to the United States. Now, as President Bush begins to push for his goal of a free-trade zone stretching from Alaska to Tierra del Fuego, even Argentina has aligned its future with the United States.

Politically, a more telling sign than the new currency link was Menem’s decision to send troops to the Persian Gulf. “To see Argentines lining up beside the British after they fought the war over the Falklands is a real indication of a change of attitude,” Garlow said.

The Argentine on the street was not thinking in geopolitical terms Thursday, however.

“I do not care about techniques,” said Gabriela Gonzalez, a 33-year-old Buenos Aires woman with two children who earns the equivalent of $200 a month. “I only want to know if the government will steal from us again, or if this time, actually, Menem will increase our salary.”

Correspondent Martin Granovsky in Buenos Aires contributed to this story.