Two facts stand out concerning Argentina’s performance after the crisis. The country has been growing fast and the real exchange rate has depreciated. From the very beginning, the government argued that a depreciated real exchange rate was a pillar of its growth policy. In the period that followed the 2002 devaluation, the policy seemed to work perfectly well: the growth rate was high and inflation was low. As the process unfolded, however, inflation accelerated substantially and the central bank authorities had to intervene in the foreign exchange market. In light of this, many observers are arguing that it is not possible to maintain the current real exchange rate and that the government will face an iron dilemma in the near future: it will have to let the nominal exchange rate fall or let inflation rise. The authorities are trying to solve the dilemma by intervening in the exchange rate market. But critics state that this policy is unsustainable because it will generate an increasing quasi-fiscal deficit.
Why, then, was the government able to meet its goal at the start of the recovery while it cannot now? One central factor is that the fiscal surplus was much higher and public expenditures were much lower during the first stage. Under such circumstances, the demand for non-tradable goods was substantially lower while the fiscal surplus absorbed the newly created monetary base stemming from the monetization of the trade surplus. The real exchange rate vs. the inflation dilemma appeared afterwards precisely because the government had made substantial changes in the fiscal policies: expenditures skyrocketed in the context of a falling primary surplus and increasing real wages. As a consequence, the demand for non-tradables rose and, as the economy was in the neighborhood of its potential output, the relative price of non-tradables tended to increase. In this way, the acceleration in inflation is simply the counterpart of the inconsistent goal of trying to maintain a high demand for non-tradables and a depreciated currency. Of course, if the government changed the monetary policy and let the nominal exchange rate float, the appreciation of the real exchange rate could occur via a fall in the nominal exchange rate.
Why has the government modified its policies? From my point of view, this cannot be accounted for without taking into account the political economy side of the story. When growth was ignited, the rate of unemployment was over 20 per cent. Right now, it is below 10 per cent. When growth was ignited, the country was trying to supersede the second-largest fall in GDP in its history (the first was associated with World War I) and in such a context the workers’ priority was to preserve work rather than to demand wage increases. The economy is now showing five consecutive years of growth. In the context of the crisis, devaluation was a panacea to the extent that it was perceived as the only way to stop deflation and employment destruction. In the current context of high growth and much lower unemployment, unions are much tougher in their demands, and a range of economic and social groups are pressuring the government. The government has adopted a passive stance as the October presidential elections are fast approaching. Yes, we suggest that the changes in government policies are largely an endogenous outcome of the changes in the relative power of distinct economic and social groups that have developed as the economic recovery proceeded.
In a recent article, Eichengreen reaches the conclusion that a depreciated currency can be a facilitating condition to ignite growth. The Argentine experience does not contradict this conclusion. But he also asks why, if a depreciated exchange rate is beneficial for growth, low-RER policies are not implemented everywhere in order to foster growth. Adopting an Olsonian view, Eichengreen’s hypothesis is that policies favoring a low exchange rate are probably not implemented because of collective action problems. I believe that Argentina’s current situation may be illuminating in this regard and can, indeed, add a dynamic side to the story. In 2002 the political economy equilibrium was conducive to maintaining a low real exchange rate, but as the growth process unfolded, the situation changed as the political strengths of different groups changed.
To conclude: I do not think that the government is facing a monetary, but rather a political economy dilemma. If the government’s choice is to maintain a growth-friendly real exchange rate, it must restrain public expenditures, raise the primary surplus and set a limit on the wage demands of unionized workers. This will simultaneously exert downward pressure on nominal prices and on the relative price of non-tradables; the primary surplus will absorb the excess supply of money. The government could use the surplus to institute a countercyclical fund. But of course, it will not be possible to satisfy the demands of some influential groups. To face these demands, the new government must find a way to articulate a strong pro-growth coalition, that is, a coalition to maintain the competitiveness of the economy and fiscal and monetary consistency. This is no easy task. For example, the temptation to let the nominal exchange rate adjust downward – which means fewer inflationary pressures and an appreciating exchange rate – could be irresistible: it would help accommodate domestic demands at the costs of weakening the tradable sector. Argentina can do this until the current account surplus disappears. Indeed, the most probable result is that the twin surpluses, which have been the pillars of the Argentine recovery, will disappear. At least for a while, it will be possible to entertain the fantasy that it is possible to eat one’s cake and have it, too. • José María Fanelli