Argentina's Peso, nothing but trouble
PROF. STEVE H. HANKE
PROF. STEVE H. HANKE
Many people asserted that the crux of the Argentine crisis was an overvalued peso. Supposedly, the peso’s link to the strong U.S. dollar made the peso overvalued, rendered Argentina uncompetitive, caused the economy to slump, and forced the government to default. Does the story withstand scrutiny? A classic sign of uncompetitiveness caused by an overvalued currency is declining exports. But, Argentina’s exports increased every year in the decade of the 1990s except in 1999, when Brazil, its largest trading partner, suffered a currency crisis.
Exports during the first 11 months of 2001 were about 3.2% ahead of exports during the same period in 2000. Considering that estimated real growth in world trade was only 0.9% in 2001, Argentina’s export performance was relatively strong. Indeed, the export sector was one of the few bright spots in the Argentine economy. If the rest of the economy had been growing as fast as the export sector during 2000-01, Argentina would not have been swallowed by a recession.
In an attempt to bolster claims of a peso overvaluation, some observers asserted, on the basis of taxi rides from the airport or other casual impressions, that prices were high in Buenos Aires, and that high prices were evidence the peso was significantly overvalued against the dollar. But, a Union Bank of Switzerland survey of prices in 58 of the world’s largest cities at that time found that for a basket of 111 goods and services, weighted by typical consumer habits – including three categories of house rent – Buenos Aires ranked 22nd, about midway between the most expensive city, Tokyo, and the least expensive, Mumbai (Bombay). The survey also found those taxi rides that were allegedly so expensive cost about 8% less than the rides in Rio de Janeiro did at the time.
There were other indicators that contradicted the peso overvaluation story. For example, the Economist magazine’s Big Mac Index indicated that the peso, before its devaluation, was 2% undervalued. And, although the Big Mac Index, as well as more sophisticated estimates of equilibrium exchange rates, should be treated with skepticism, a careful study of the matter using data from 1993 to 1999 indicated that the peso was always within 6% of its so-called fundamental equilibrium real exchange rate. So, a second lesson derived from the Argentine peso is that one should look carefully at the evidence before jumping to conclusions about overvaluation (or undervaluation).
When it comes to the peso, my School Boy’s Theory of History applies: it’s just one damn thing after another. Perhaps it’s time to dump the peso and replace it with the Greenback?