Last week Libertad y Progreso hosted a debate between libertarian economists Aldo Abram, executive director of the entity, and Fausto Spotorno, director of the Center for Economic Studies of OJF Consulting. The axis of the debate was their economic expectations for the rest of the year, and the trigger was precise: Are we approaching a devaluation?
SPOTORNO: This is difficult to answer. If you tell me that the official dollar lags behind, I would say no. I see the long-term, equilibrium dollar at 120 pesos. An adjustment is overdue but the gap is not as big as in 2013 or 2015. There may be a correction, but a big devaluation is not necessary. Let’s clarify: when economists say devaluation, this goes off. Correction is a tiny devaluation. In principle, I would say that there should be an exchange rate correction without the need for an exchange rate bomb. Now, I frequently make a comparison with 2013. Why? The situation is similar in many respects. You arrive at a midterm election with stocks, and the government has stabilized the dollar. The gap grows. There are many similar characteristics in the fiscal area, including overdue fees, that must be corrected. In 2013 you knew a fiscal adjustment was coming. It was necessary to support local private creditors and postpone payments to international ones, which are now due to the IMF. There’s a similar whiff. The difference is that the gap in 2013 was much greater and you now have more reserves. This time the curve is less sharp but the problems remain.
I think we will see a currency correction, but I cannot be sure where it will end. There is no room to maneuver with reserves, but there is room for restricting everything. There was a measure by the Central Bank that restricts operations in MEP and financial dollars that will have long term consequences. It begins to create problems throughout the production chain. I think that’s what’s going to happen. They are going to correct this by putting many restrictions. Blue (black market) can buck. There is a fact: for the last 10 years, there was a devaluation after each election.
ABRAM: Clearly, we need to define the concept of devaluation. I think the future will look like 2014: we will see an increase in the wholesale exchange rate (in 2014 six months later it was up by 40%). People should know is why they are repeating the same policies. It is because it is useful to win elections. Another factor that helps Argentines to measure inflation is the price of the supermarket cart. The wholesale exchange rate is highly dependent on gondola goods. To the extent that the wholesale exchange rate rise is low, it does not reflect the true devaluing of the peso. Thus, the prices of supermarket goods rise less. When the wholesale price index was released with a 2.2% increase the decrease was phenomenal.
You keep doing this as the elections approach and people are happy when they vote. Prices will not go up as much, but you are creating an economic disaster. When Argentines produce exportable goods, costs go up as much as the peso depreciates. Obviously, production and exports will go down.
Thus, most goods are imported because the Argentine entrepreneurs produce less. The Central Bank is also entangled by increasingly buying fewer dollars and selling more. It is absolutely unsustainable. After the elections, we will see a 30% rise in 6 months and prices at the gondolas will gallop backward. But you already voted.
The same will happen to tariff delays. Costs keep going up for companies. Someone makes the difference: the State, that has a huge fiscal hole. In the first semester, we will have a string of rate hikes that will scare us.
THE IMF
SPOTORNO: From the outset, the IMF will ask us what we will do about rates. Subsidies remain the same as in 2015. They will tell us that we must cut the fiscal deficit. There are two main problems: inflation and lack of growth. Regarding inflation, we will have to stop issuing. And to do that you have to lower the fiscal deficit. The deficit is the engine behind the issuing machine. They will try to cover it by continuing to raise some taxes and then they will look at the expenses, the subsidies. Why don’t they cut them out? That is going to be the first thing they ask.
The second point is the exchange rate: why should you be able to buy dollars at 100 pesos when they are trading at 180? We need to increase exports. The price of commodities is terribly high and we are not exporting anything. This too has to be corrected. Paying exporters more increases the dollar supply.
Furthermore, when bureaucrats decide, they do not know what is relevant, what needs to be imported. This is especially true for rarer products like dental appliances. There the bureaucrat, as he does not know what to do, tends to control. That creates huge distortions across the market. The day you start currency controls, you have to block imports. It’s automatic. And when they get stuck, they make disasters. It is what is happening now.
ABRAM: We will see demands from the IMF because we are going to arrive to an agreement with the Central Bank’s own reserves almost exhausted. On the other hand, I see that there is a conceptual error that will lead us to a very bad place. Before agreeing with the private creditors (they claimed we shouldn’t worry) they increased currency controls because of the uncertainty around them. They were opened after restructuring. They closed the restructuring and in September we had the super controls. It is a path that leads to a crisis. Now I think this same fantasy is back. Controls will end when we export more. Some put figures: 90.000 million dollars. We are never going to arrive. Argentina may export 4% more, but it’s going to recover little of what was dropped last year in terms of quantity. We are getting lucky with international prices.
Next year prices will be lower. What is going to happen? Tax collection will be lower. They buy dollars at 97 pesos a dollar and if you want to buy them back, the price is 170. Thus, the government is withholding part of the money in the exchange. For a soybean producer, this means his income is less than 40% of the total that he should have received. Then you have to pay the taxes and costs before you earn something. Luckily we have a highly agricultural industry. The day the producers have enough we will all have to turn off the light and leave.
CURRENCY CONTROLS
SPOTORNO: I do not believe in any economic program that does not include ending currency controls. It is the typical emergency measure that does not go away anymore. By putting controls, you lock imports. Dollars do not enter the country except for exports. There is speculation using this gap. Thus, later you have to prevent the dollars from escaping through financial transactions. Dollars start leaking everywhere and tourism has to be taxed to prevent them from leaving the country.
Another point, which is difficult to measure, is that the impact of controls on exportable stocks can last for decades or years. Once controls are established, the stocks and livestock needed for industry take years to get back on track.
If a businessman has to buy machines, he will plan his business based on the domestic market and won’t look at the export market. Only when controls are removed, if the market sees it as solid, will they start working for the export market there. That takes a lot of time, since you have to convince customers that they will be able to provide goods in a timely manner. That takes 7 years and Argentina needs to export.
If controls are needed as an emergency measure, it cannot last more than two months. In the third month, you have to rethink of a whole economic program. That’s my limit.
ABRAM:
When I talk about this topic, it is important to understand the importance of planning exports. I usually show a graph that shows the whole planning process and the time it takes until one manages to place a product outside. If it does not happen overnight, you need certainty. I also show a graph displaying the real exchange rate since 1980 and quarterly exports in terms of GDP. Where do we see a sustained upward trend over time? The only period in which we see steadily increasing exports is the 90s. And the real exchange rate is one of the lowest. When exports go up significantly it is because the real exchange rate rose a lot, covering Argentina’s inefficiencies. But then exports fell again. In the 90s, people were able to plan how to place their products outside. That takes a very long time. Now nobody knows how to end controls.
SPOTORNO: What you say is very true. A high real exchange rate can serve to accelerate exports, but it is not what generates them. They only grow when there is an economic infrastructure capable of sustaining exports. That is why exports could grow in the 90s. The margin of stability was high and the focus was on an economy that would gain competitiveness. That approach made one willing to invest. Then everything went to hell.
The big problem is economic instability, which means we can’t provide the world with sophisticated products. If I want to export microchips, I need to insert them within a production chain, which means they have to arrive at a certain time, respect technical specifications etc. To provide that product I need to have the economic stability necessary to know the cost and be able to determine the frequency. Obviously, there is always going to be a risk. When we can’t do that, what is left is to exploit soy, corn and meat. Other countries will always buy it.
It is useless for me to start exporting microchips if the exchange rate changes and my business drops. It happens even in the wine industry. Wineries broke their souls to insert the Argentine wine market in the world. When a winery decides to supply the United States, it needs hundreds of thousands of cases. That takes effort. I have seen Argentine companies selling to the US at a loss because it costs so much to get a customer.
The policy maker who makes economic policies is focused on gaining competitiveness and productivity. They should be thinking about competing with Japan. Here they think about how to win the elections in La Matanza.
ABRAM: This result is terrible not for the exporter, but for the people. When you compete with other countries you have to think about how to be more productive. However, there is a heavy, excessive State, which takes the largest amount of tax revenue. It takes part of the credit that would allow you to be competitive. You have to deal with more than 67,000 regulations that make you more inefficient. This is also a country that rarely invests in infrastructure.
There’s another issue within the mythology: Increasing exports does not depend on the real exchange rate but on legal and economic stability.
It is not that, as some economists say, if you don’t export, you won’t develop. That’s where you start to lose sight of how to develop. One way is a poor real exchange rate, which ultimately means that we are all poor.
I will give an example: imagine an isolated island in the middle of the ocean. These people fish with their hands and live from coconuts and fruits. Eventually, they begin to network. Some people fish more, so others no longer need to fish and can focus on collecting coconuts. They are all better than before. They have more fish and more coconuts. Who were they exported to?
Is planet earth better off than 100 years ago? Than 200 years ago? We are certainly better today. What made the difference? Investment. A country which gets investment is obviously going to develop. It will be more competitive and export more. It will export more because it received investment.
COMPETITIVENESS
SPOTORNO: Productivity is the name of the game in economics. When we talk about higher production, productivity is behind it. It is the fundamental reason for economic development. When you pull the thread behind what makes exports grow, productivity is behind. You can develop through exporting or without exporting. The focus should be on productivity.
Export is a development strategy. If you are a small country, I recommend it. If you are a very big country, it may not be necessary. The United States could develop locally. Productivity is based on technological development, human capital and institutional capital.
Intangible capital, human, institutional and financial capital are what’s most important in developed countries. It represents 80% of their value. Can Argentina live within the domestic market? Yes, but the international one is more attractive due to its size.
The high exchange rate is useless if it doesn’t lead to gains in competitiveness. It could be the beginning, the lighting of the little flame. But if I don’t work on productivity, exports drop.
ABRAM: The real exchange rate actually falls in developed countries.
SPOTORNO: The currency of a country is like the value of shares from that country. If the country does well, obviously the currency will be more expensive. With development, the exchange rate becomes lower. There is a fantasy that the state can control the exchange rate.
ABRAM: As long as we remain an unstable country that can collect all the taxes it wants, in which any official can tell you how to run your company, investing is extremely risky. If you invest, the profit that you are going to ask for is high. Which means workers have to be paid less. Workers’ participation will tend to decline as long as we have governments like these. Thing works the other way around.
SPOTORNO: Orlando Ferreres always tells me that in developed countries people are expensive and things are cheap. One thing that must be eradicated from our brains is that if the employer earns less, the worker earns more. Everyone in a company has shared interests. Marxism tries to break natural unions.
