IT IS THE REFORMS THAT MUST BE ACCELERATED, INSTEAD OF DEVALUATION

Criticism of the government’s strategy of devaluing below inflation is growing. It is argued that this generates an exchange rate appreciation, which makes domestic production costlier than imports bringing with it the risk of devaluations that will rekindle inflation. President Milei questioned these arguments, stating that the exchange rate is not appreciating. For the president, what is happening is that there is an accumulation of regulatory and tax distortions that artificially increase domestic costs. 

Simplifying the analysis, there are two ways to make domestic production competitive. In the President’s approach, competitiveness is achieved by eliminating the factors that make local production costs more expensive. Critics, taking a more pessimistic position as to how quickly these distortions can be eliminated, consider that in order to prevent domestic production from losing competitiveness it is essential to increase the rate of devaluation of the official dollar.

Increasing the rate of devaluation has many impacts. A very important one can be illustrated by looking at what happened with the last major devaluation. According to data from INDEC and the National Labor Secretariat it is observed that:

• In November 2023 the official dollar at today’s prices was $685 and the real salary of formal workers was $770 thousand also at today’s prices.
• In December 2023 the official dollar jumped to $1,200 at today’s prices and the real wage fell to $660 thousand.
• In March 2023 the dollar dropped to $857 and the real wage rose to $680 thousand.  

These data show that there is an inverse relationship between the exchange rate and real wages. Devaluation improves competitiveness but at the cost of lowering real wages. Conversely, when the effects of devaluation begin to fade –that is when the exchange rate begins to appreciate– real wages begin to recover. Therefore, the recommendation to increase the rate of devaluation not only collides with the objective of lowering inflation but also with the recovery of real wages. A high exchange rate means low real wages.

The arguments in favor of accelerating the pace of devaluation point out that in order to generate welfare for the population, a competitive exchange rate defending domestic production is needed. In this view, exchange rate appreciation implies financial speculation, capital flight and increased imports that destroy national industry and employment. Devaluation is the way to preserve domestic production and employment, even at the cost of moderating the decline in inflation and the recovery of wages. In the official view, on the contrary, the way to preserve domestic production and employment, without compromising the objective of lowering inflation and recovering real wages, is to eliminate the innumerable regulatory and tax distortions affecting the Argentine economy. 

Accelerating the pace of economic transformation has clear advantages over the proposal to accelerate the pace of devaluation. On the other hand, it requires addressing much more complex challenges. To devalue is enough with a Central Bank norm. To transform the economy requires a great deal of political expertise and management capacity. The sanction of the Law of Bases and the tax reform approved in the Lower House are good signs. But, in view of the pending challenges, it is only a modest step in the right direction. 

The countries with the highest quality of life have high wages measured in terms of dollars. The emphasis is not on exchange rate competitiveness but on competitiveness based on productivity gains. Replicating this in Argentina means to give less importance to the exchange rate and more emphasis to the strategic importance of signing and implementing the reforms that make up the agenda of the May Pact.