Brazil: Opportunity Missed
by Domingo Cavallo
Brazil's fundamental problem was not addressed by the sequence of devaluations that followed the Jan. 13 announcements. The only true solution for high interest rates and speculative attacks that emerging countries can rely on is to adopt disciplined fiscal and monetary regimes: regimes based on rules, not on caprice; that bind policymakers to a well-charted course of actions, not to the whims of bureaucrats and elected officials. For currencies, there are only two such regimes: a currency board, like the ones in place in Argentina or Hong Kong; or a free-floating policy, with a central bank bound to strict monetary rules, like the one in New Zealand. (New Zealand, not long ago, tied the salary of their finance minister to the economy's rate of inflation. I'm not certain, but it may still be so. - ty) In-between systems don't work, which is exactly where Brazil was coming from and went to. They left a scarcely credible exchange rate ban to adopt a dirty float with no inflation or money targets to speak of.
Experience should have banged into our heads that a country can control its monetary policy or manage its exchange rate but not both. Yet Brazil proved unwilling to live with the discipline of an exchange rate rule or a monetary one. Under the current scheme, interest rates will most likely not come down and inflation will resume. A wonderful opportunity was missed, at a great cost to all involved.
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More from Mr. Cavallo
The dollarization of Argentina would further strengthen the country's current one-for-one peso-dollar peg implemented in 1991 and reduce the risk of a devaluation. That, theoretically, would lower interest rates and save the government billions in debt servicing costs, analysts say.
The peso-dollar peg, known as ''convertibility'', wiped out years of hyperinflation and has been the bedrock of Argentina's economic stability and growth over the past years.
Domingo Cavallo, Menem's economy minister who implemented Convertibility, told Clarin that he technically agreed with dollarization, but that the real problem was that international markets did not understand Argentina's monetary system.
"In 1995 they attacked our currency and they were wrong. If they do it again, they will be wrong. Foreigners operating in Argentina still do not understand convertibility," he said.
"There are all sorts of dumb people managing those funds. They spend their time making mistakes and losing money. People overestimate the intelligence of those managers in front of intelligent governments," he said.
Cavallo, fired by Menem in 1996, said Argentina and Brazil should focus on creating their own convertible currency.
According to a poll by the Center for the Study of Public Opinion, 52.2 percent of those who felt Argentina would not be affected by Brazil's economic crisis attributed their belief to the stability provided by convertibility.
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Appears also, from what I'm reading, that Cavallo and Duharde have teamed-up ahead of the elections. |
