Informe Nº: 12/05/2014
The "model" implemented from 2003 relied on twin surpluses (fiscal and foreign). Since both were generated by the reduction of real wage, as a consequence of the strong currency devaluation, once real wages were restored to the pre-crisis level the economy stagnated. To reestablish the "model", it is necessary not only to devaluate but also to ensure that the wage increases are less than the devaluation of the dollar and inflation. Promoting public policies seeking a rise in productivity and competitiveness appears to be a more promising alternative in order to achieve growth without deteriorating real salaries.
The significant depreciation of the official exchange rate, the rise in interest rates provoked by the Central Bank plus the forced sell of dollars imposed to banks brought about calmness in the foreign exchange market. This temporary peace will gradually become permanent as long as activate measures are sought in order to regain a structural balance. Thus, in the strategy of authorities it is the idea of reestablishing the "model" that prevailed from 2003.
The pillars of the "model" were the twin surpluses (external and fiscal). This was accomplished through the sharp decline in real wages brought about by the mega-devaluation of 2002. The "model" had momentum, with output and employment growth, while real wages were below the pre-crisis levels. But when real wages recovered, surpluses disappeared and started the current stage of stagnation, inflation and exchange rate volatility.
The analysis of wages in recent years allows identifying the conditions that would permit to revive the "model" of 2003. According to official data from the Ministry of Economy:
· At the end of 2000, the formal private wage was U$S 960, which measured in pesos at the current price level represents $ 7,600.
· In late 2002, the mega-devaluation had reduced salaries to U$S 300 which, measured in pesos at current prices, were equivalent to about $ 6,000.
· By the end of 2013, it is estimated that the formal private wage reached $ 10,300 which, at the official rate, are equivalent to U$S 1,600.
The data shows that the "model" that began in 2003 was based on an extremely depressed level of real wages. This was the pillar that underpinned the growth of exports and reduction of imports that led to external surplus, as well as reducing real public spending mainly composed by wages and pensions. The decision to postpone the recovery of real wages to pre-crisis level, together with the favorable international context, explained the period of high economic growth with job creation that lasted until 2008. But with the recovery of real salaries, public accounts and the external sector deteriorated. The "model" lost steam and brought about the current situation of stagnation, inflation and exchange rate volatility.
The authorities’ intention now seems to be to restore the "model". Between December and January the official dollar exchange rate rose 30% and it was emphatically announced the need of "moderation" in salary rises. This implies that the Ministry of Labor has to, in contradiction with the official discourse, make wages grow less than prices and the dollar. It is a politically complex operation. While in 2003 the reduction of real wages was "inherited" and, therefore, the political costs of applying adjustment were assumed by the previous government, in the present circumstances the current administration faces the challenge of imposing wage increases which will be significantly lower than inflation and rise in the dollar exchange rate.
There are alternatives which do not require high social costs. This alternative consists in imitating other countries in the region and building better economic, political and social institutions. This also requires a significant investment as well as policies for tackling privileges, vested interests and reversing obsolete ideas strongly held in society and throughout much of the political system. The main difference is that, whereas restoring the "model" requires political capital in order to impose and adjustment, the proposed alternative means an investment in political capital to eliminate obstacles that prevent the entry to a path of sustained social progress.
