Re: Incomes and Exchange rates; part 2

[Colin Danby <danbyc@xxxxxxx>]

Greetings, Diego,

I want to thank you for several extremely interesting
and informative posts.  One or two further questions
or observations.

On productivity growth: In the Mexican 1990-1994 period
productivity also grew respectably but far less than
what would have been needed to close the gap caused
by currency appreciation.  (Maybe the main problem is
excessive portfolio inflows.  Has there been discussion
of limiting those?)  Is the Sguiglia, Delgado and
Obschatko paper you mentioned published?

Will the low wage growth limit the degree to which
overall output growth pulls in more consumer good
imports?  (which might ease the current acct problem)

On the question of exchange rate sustainability I'm
indeed skeptical, but I don't know enough about the
country to express strong opinions.  I am very interested
in your suggestion that the currency board system be
modified, because historically such modifications, to
currency boards or to fixed pegs in general, tend to
be rather abrupt.  Do you envision a soft landing?  It
would seem that the very strength of the language
around this policy -- that it is the very bedrock of
stability and good government -- works against even
small modification.

The line you quote:

> 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.

is clever and I do appreciate the conviction that you
and others seem to share that worthwhile changes are
being made in the current period of price stability.

But let me for the sake of discussion take issue with it,
as I heard similar sentiments in Mexico in 1993.  What
the metaphor forecloses is the life after death, that
is to say the post-devaluation recovery.  If we expect
devaluation, another question to ask is what set of policies
will produce the best post-devaluation results.  In the
Mexican case I'd argue that 1990-1994 policies prepared the
country very poorly for the post-devaluation period.

Best regards, Colin