Report Nº: 81724/07/2019
New controversy about the dollar has risen. A high value is associated with social costs, a low value with an imminent economic crisis. The debate is as persistent as it is inconducive. The rightful discussion is how to design public policy to induce productivity increases based on better institutions. A verbal exchange between the current […]
A verbal exchange between the current Minister of Finance and his predecessor about the value of the dollar reignited an old controversy. The former Minister of Finance and other economists warn about the inconvenience of letting the exchange rate be appreciated. The argument is that a cheap dollar would make imports and tourism abroad spike again, which will bring a new crisis such as the one suffered in 2018. The Minister of Finance, on the other hand, maintains that a more expensive dollar would feed higher inflation and thus it would increase poverty.
What is implicit in this discussion is the purchasing power of salaries. A high value for the dollar implies low real wages. Reduced real salaries diminish imports of consumer, intermediate, and capital goods, travels abroad, and encourage exports. On the contrary, a cheap dollar increases the real salary. Along with it, there are increases in imports, tourism abroad and reduce exports.
One way to illustrate these interactions is to compare variations observed between the wage measured in dollars and imports. The latter is the variable that reacts the faster to changes in the exchange rate. According to data from the Ministries of Finance and Labor, it is observed that:
These data show that when there is a big devaluation, such as that of 2018 extended into 2019, the wage measured in dollars decreases. Along with it, the consumption of imports and tourism abroad are reduced. Curiously, this dynamic would support the arguments of both Ministers. With a high dollar, wages fall, and this prevents an external crisis because imports are reduced. In contrast, the reduced purchasing power of the population that helps to avoid the external crisis is what produces more poverty and generates risks of an internal crisis.
Only a broader perspective can solve this daunting dilemma. If companies in Argentina were more productive, they could export more, even paying higher wages in dollars. With higher exports, there would be more dollars available to import goods and services and to pay for tourism abroad. The antinomy in which both ministers get trapped takes as given the Argentine institutional framework which discourages productivity. Both seem to overlook that the low salaries are the result of rules of the game that make most of the productive sectors uncompetitive internationally.
That is why the key issue is not the value of the dollar but how to build a financially balanced state that provides high-quality public services financed with less distortionary taxes. By eliminating the fiscal deficit, inflation and interest rates would be lower, a fundamental ingredient to project long term investment and innovate. By improving the tax system and the management of the public revenue, the public sector would cease to be a burden for businesses and families. More important yet is the need to generate better institutions. An example of a lousy institution that corrodes productivity is the centralized model of collective bargaining. Centralized bargaining induces bureaucratization, corruption, and prebendary behavior, instead of promoting the dialogue inside firms to improve productivity and a fair distribution of its benefits.
With rules that reward the lobby, bureaucratic unionism, and rent-seeking, the high dollar is the mechanism to finance all these privileges by depressing the real salary. Therefore, manipulating the exchange rate will not disentangle this perverse logic of the dollar. Addressing a profound rethinking of institutions and public policies with political courage and innovative spirit will do it.