Re: Incomes and Exchange rates; part 2

[Diego Miranda <miranda@xxxxxxxxxxxxxxx>]

On Wed, 17 Sep 1997, Colin Danby wrote:

> Thanks very much for this discussion.  The question arises of
> the long-term sustainability of the fixed peg.
> I have the impression Argentina is running current account
> deficits in the neighborhood of $10 billion a year, roughly 3%
> of GDP.  If foreigners are unwilling to finance this deficit
> indefintely it will become necessary in time to raise exports
> and/or lower imports.  What are the prospects for doing this?
> Given that the evolution of relative prices in Argentina in
> recent years has favored the nontraded sector, how likely is
> this?  Will FDI close the gap?  Productivity?

The last 6 years have seen impressive growth in productivity and a
significant reduction of transaction and operation costs for firms in
Argentina (see Sguiglia, Delgado and Obschatko, "Efectos de la
desregulacion sobre la competitividad de la produccion Argentina," 1993).
Parallel to the currency appreciation you mentioned, there has
been a strong "fiscal" depreciation --via labor flexibilization,
deregulation, country risk reduction, etc-- which explains why
Argentine exports have doubled from 1989 to 1996, why investment has
continuously increased...and why wages have remained at best stagnant
during that same period of time.

Of course, it remains to be seen up to what point the current exchange
rate can be maintained --both politically and economically--, and it is
likely that such rate will be modified in the future, as you seem to
imply. Meanwhile, however, convertibility has functioned --and will
continue to function in the short and medium term-- as one of the most
important government tools in both maintaining fiscal discipline (note
that only since 1991 has Argentina had a budget that was set before
expenditures were made) and enhancing the policy credibility of
government. To abandon convertibility now
would most likely cause tremendous macroeconomic turmoil, and an
irrecoverable loss of confidence in the Argentine government. You are
probably right in that Argentina is running towards a
foreign exchange bottleneck of some sort.  But the solution is not to
abandon the
current currency board, rather upgrade it.  As put by Machinea and
Llach ("Mas alla de la estabilidad" 1994), we do not commit suicide today
because we know we are going to die tomorrow.

That said, the need for change is evident in that, despite
certain social improvements during the 1991-1994 period, since 1995 the
social situation has deteriorated substantially. This in turn casts
further shadows on the current government's capability to maintain its
reform program. Yet I think that the question we should ask ourselves
is not if the basic structure of the current program should be
maintained. To think in those terms, if possible, would have momentous
negative effects on the social problems we would supposedly be trying to
solve.
Rather, we should ask how to design economic and social programs
able to correct for the shortcomings of the current ones.

Diego