Report Nº: 109708/12/2024
The high competitiveness of sectors such as agribusiness, energy, mining and the knowledge industry generates a low exchange rate, which is a disincentive for other sectors that create most of the jobs. The solution is not to devalue but to quickly and thoroughly address the reforms announced in the May Act.
When a country has sectors with a high capacity to export, the abundance of dollars they generate lowers the exchange rate. This has an impact on the rest of the economic sectors, which find it difficult to produce and create jobs because imports become cheaper. In economic literature, this phenomenon is called “Dutch disease”. It refers to a strong appreciation of the Dutch guilder in the 1960s when a large hydrocarbon reserve was discovered in the North Sea.
Argentina is at risk of suffering the “Dutch disease”. The government implemented the fiscal pardon for hidden wealth, which produced a massive inflow of dollars into the formal circuit of the economy. Expectations are that, thanks to the benefits provided by the special regime for grand investments (RIGI), mining and energy production will expand increasing exports and decreasing imports. Added to this is the very high competitiveness of the agricultural sector. The multilateral exchange rate (that is, the one that considers the currencies of the main countries with which the country trades) already reflects that the dollar is already low in Argentina and it is likely that the phenomenon will deepen in the near future.
Considering the export dynamism in agriculture, energy, mining and the knowledge industry: What could be the impact of a low exchange rate on the labor market? According to the Ministry of Labor, it is observed that:
These data show that sectors with a high capacity to generate foreign exchange (agriculture, energy, mining and the knowledge industry) generate relatively little employment: barely 1 out of every 10 formal salaried jobs. The rest (industry, construction, commerce and services) account for 9 out of every 10 formal jobs. This is an approximate distribution since highly competitive sectors generate demand for the rest of the economy, but their impact is limited. The bulk of urban employment depends on sectors with less competitive capacity and, therefore, a low exchange rate hurts employment.
There is a way to prevent the high competitiveness of some sectors from becoming a curse via the “Dutch disease” for the rest of the sectors. The solution is not to devalue but to accelerate structural reforms. With reforms, more sectors will be able to produce and generate jobs even with a low exchange rate. Eliminating distortionary taxes, redesigning labor legislation to avoid excessive conflict and litigation, improving the transportation system and all logistics, promoting regulations that encourage competition and dismantling monopolistic practices will lower the costs of domestic production. In other words, the remedy to the “Dutch disease” is not to devalue but to promote structural reforms so that the costs of producing in Argentina fall as much or more than the exchange rate is reduced.
The opportunities to lower costs and inefficiencies are enormous and a large part of the reforms are in the May Act. The way to counteract the low exchange rate is to implement the May Act. For example, absorbing provincial and municipal taxes with the national VAT would greatly increase the competitive capacity of many sectors. Similarly, so far the labor reform eliminated the multiplication of severance pay and gives the option of creating a severance fund, but decentralizing collective bargaining at the company level could greatly improve the competitiveness of labor-intensive sectors.
The experience of the 1990s teaches that a relatively low exchange rate requires a very efficient economy. The decades after the 1990s show that devaluation is not a solution but the way through which the generalized impoverishment of the population compensates for inefficiencies. In order to avoid repeating mistakes, the agenda proposed in the May Act must be addressed urgently and in its entirety.
