Tuesday, January 28, 2014

Argentine peso devaluation

Jonathan Gilbert has a report that is not that bad on Argentina's measures taken in response to the devaluation of its peso in the markets, As Argentina's currency plunges, echoes of past financial crises Christian Science Monitor 01/27/2014. (The title and opening sentence on the post have been edited to more accurately describes the peso's devaluation, which came as a result of speculation last week, not specifically as a decision of the government. What the government did was to adjust the official exchange rate from 6.8 pesos/$1 to 8.0 pesos/$1.)

Cristina Fernández' government has from the start been pursuing a challenging course of action to promote manufacturing industries at home while not keeping the Argentine peso's value so high that it makes exports insufficiently competitive. This is a matter of exercising capital controls, which is heresy to the neoliberal gospel. As I wrote last year:

As Cristina makes clear here, what's really at stake is Argentina's program of reindustrialization. The dominant neoliberal consensus in Europe and America favors the financialization of economies and the free movement of capital, which makes countries highly vulnerable to speculative attacks, as Argentina experienced dramatically in 2001. But industry provides not only good-paying jobs, it provides far greater diversification than Argentina experienced under its long and drastic experiment with neoliberalism, which the military dictatorship of 1976-83 initiated there. Heavily dependent on agricultural exports and highly vulnerable to international movement of capital, they were highly vulnerable to speculation and instability. ...

The policy of reindustrialization requires striking a balance between keeping the currency low enough to maintain export competition but high enough not to bring "imported inflation," which would too severely restrict industries' access to raw materials and machinery they have to import. In the neoliberal international free market, neither the prosperity of workers nor the national economic strength of an individual country is a priority.
Her Economics Minister Axel Kicillof made a similar point this week (“No les interesan los trabajadores” Página/12 27.01.2014):

"Las conquistas son de los trabajadores, del pueblo. No va a ser fácil que se las puedan arrebatar", destacó Kicillof, quien participó del programa 6, 7, 8, apuntando a las corridas cambiarias generadas por sectores empresariales que apuntaban a "ponerle el precio" al dólar. La operación que elevó la cotización de la moneda estadounidense el jueves pasado generó la reacción del Gobierno, que anunció la flexibilización en los requisitos para la compra de dólares para atesoramiento. Por su parte, y en referencia a los empresarios, Capitanich señaló que "muchos argentinos consideran que les va bien solamente por un esfuerzo propio e individual, desde una perspectiva extremadamente egoísta, y no valoran las políticas públicas que generan incremento en la demanda agregada, potencian el consumo y desarrollan incentivos a la industria".

["The victories are those of the workers, the people. It's not going to be easy for anyone to take away from them," emphasized Kicillof, who participated in the {Canal 7} program 6,7,8 pointing out the runs on the exchange generated by business sectors that aim to "put it to the price" of the dollar. The operation that raised the price of the American currency last Friday generated the reaction of the government, which announced greater flexibility in the requirements for the purchase of dollars for hoarding. For his part, and in reference to the business people, {Chief of the Cabinet Jorge} Capitanich signaled that "many Argentines consider that things are going well for them solely because of their own or individual power, from an extremely egoistic perspective, and don't value the public policies that generate increases in aggregate demand, boost consumption and develop incentives for industry.]
This is the segment of the 6,7,8 program of 27.01.2014 from TV Pública argentina on which Axel Kicillof appeared:

As Jonathan Gilbert explains:

The government today announced how it will implement new rules on dollar purchases, a measure that follows its decision to allow the peso to plunge. It claims the moves are astute reactions to "speculative attacks" on Argentina's economy by destabilizing forces. ...

The peso tumbled by 15 percent against the dollar in just three days last week, according to Bloomberg, including a drop of 9.5 percent on Thursday, the biggest since 2002, when Argentina's previous dollar peg collapsed.

Last week's devaluation followed a policy shift by Argentina's central bank, which was trying to execute a quick depreciation of the peso but ran into difficulties over its shrinking dollar reserves, which recently touched a seven-year low of around $29 billion. Locked out of global financial markets, the government needs the reserves to pay for energy imports and foreign debt servicing. So the central bank kept hold of its dollars and let the peso dive.

In a move that surprised many observers, on Friday the government chose to ease currency controls aimed at curbing capital flight that date back to President Cristina Fernández de Kirchner's reelection in October 2011.
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