The official exchange rate is closer to 2001 than to 2002

Adopting Compulsory Preventive Social Isolation (ASPO) strategy very early and strictly was a decision without a scientific basis. Now it is causing enormous social costs. The early lockdown and the consequent paralysis of the economy led to the destruction of businesses and jobs, impoverishment, and social exhaustion. The situation is so critical that it was necessary to end up relaxing the lockdown at the very moment of the highest infection.

The change in strategy was to abandon the original federal centralized decision-making scheme and delegating the pandemic’s management to local authorities. In parallel, post-pandemic economic recovery is now at the center of the federal agenda. The diagnosis is that the current crisis, which began in 2018 and would peak in 2020, is similar to the convertibility crisis.  The latter started in 1998 and erupted in 2002. The hope is that the basis for a vigorous economic recovery, as the one of 2003 onward, is set. Thus, once the pandemic is over, the recuperation will be automatic.

In order to assess the foundations of this parallelism, it is relevant to compare the evolution of the real exchange rate. Taking the value of the official dollar, updated by domestic and US inflation, it can be seen that

• In 2001 the value of the dollar was equivalent to $56 at current prices.
• In 2002 the value of the dollar rose to $126 at current prices.
• Currently, the value of the official dollar is $72, and the parallel dollar is about $140.

These data show that the situation of the current exchange rate is ambivalent. The official exchange rate today is closer to 2001 than to 2002. On the contrary, the parallel exchange rate is more like in 2002. The conclusion is that the official exchange rate still needs to be freed to get closer to the current parallel dollar, if 2002’s conditions are to be recreated. In other words, there is no basis for optimism. To repeat the experience that began in 2003, a traumatic and costly mega-devaluation as that of 2002 is still needed.

This dichotomy about the exchange rate explains the periodic oscillations of the Argentine economy. A higher dollar –like the one of 2002 or the current parallel dollar– reduces the real value of public expenditure (generating fiscal surplus) and compensates the businesses for the lack of general competitiveness (generating external surplus). But the high dollar –needed for macroeconomic equilibrium– produces falls in real wages, pensions, and impoverishment. In other words, macroeconomic stability demands a dollar so high that it destroys the social fabric.

Resolving this contradiction needs a change of strategy. The challenge is to overcome the structural shortage of dollars by inducing genuine improvements in competitiveness. Companies must be able to export and compete with imports thanks to more rational regulations and better-quality public services and infrastructure. Therefore, the starting point is the modernization of the public sector. This implies achieving a genuine fiscal balance with a non-distorting tax system, a sustainable pension system, and a federal State without national programs that overlap with provincial and municipal functions. Another requirement is that each province must finance itself with its own tax revenues, eliminating the co-participation, replacing it for a Develop Convergence Fund for the backward provinces.

Avoiding the State’s ordering is to prolong the decadence. It is to continue oscillating between a high dollar –which relieves businesses of the State’s inefficiencies– and a low dollar –which reduces social tensions and impoverishment–. The pandemic is an opportunity to tackle this trade-off. The requisite is to avoid falling into the misconception that the recovery of 2003 is possible without going through the traumatic experience of 2002.