“The problem is not the dollar, it’s the peso”
By Manuel Solanet, courtesy of El Tribuno, Libertad y Progreso
The Argentine rejection of the national currency has profound causes, but also possible solutions.
A currency must meet at least three properties: being a medium of exchange, a unit of measurement, and a store of value.
The peso is used as a medium of exchange on a day-to-day basis. But, due to its rapid devaluation, it is not useful in longer-term contracts and transactions.
For this, the indexed peso is used, with enormous doubts due to the manipulation of official indices in the past. It is more common to use the dollar directly.
Unfortunately, the peso is not a unit of measurement, the second property of money. Our grandparents remembered how much a coffee cost during their youth.
Today we cannot remember how much it was worth at the beginning of the year. The peso is like a meter that gets smaller daily.
Finally, you would have to be very naive to use it as a store of value.
In Argentina you don’t save in pesos, nobody wants to see your effort evaporate, not the ministers or the vice-presidential family.
In conclusion, the peso is not a currency, but only a means of payment that remains in force because it is legal tender. If there were freedom of choice of currency, it would have long since disappeared. In any case, it follows Greham’s Law which, referring to current use, says that bad money displaces good, because people get rid of it as soon as possible.
These are the reasons why the dollar is the reference currency in Argentina. If issuing pesos were the solution, Argentina would have solved its economic problems decades ago. If the rulers really believe it, we had better not have an economy minister and put an excellent production manager in the Mint.
For this year, a drop of more than 7% of GDP is expected, a value comparable with the collection of VAT, although this inflation tax does not require legislation.
In order to correct this problem, the solution must be sought in another way. From the tax revenue side, one could try to take out debt, an option that does not exist for our country.
The other option is to increase tax pressure, a path that Argentina has traveled at the cost of suffocating private activity, and driving away investment, producing the stagnation of the GDP of the last decade.
Other countries have similar tax burdens and even higher than ours, but economies that work. The difference, in these cases, is that state spending is well done. Education that works, safety, health, adequate infrastructure, etc., and carried out without corruption and taking care of public money as if it were their own and not as loot to be distributed.
Therefore, the only alternative available to eliminate the deficit and have a currency that works as such is to lower State spending. Where? First where it is spent badly. Examples abound: in Congress each legislator has an organization the size of an SME, Telam performs a function that should not be carried out by an authority, the millionaire subsidies from Aerolineas Argentinas despite its quasi-monopoly position, the multiple positions for each effective teacher in public education, just to list a few. The huge bureaucracy that has grown 76% since 2003 without any reason or justification will have to be cut. Then we should become aware that we are not a rich country, in addition to having to change the course towards impoverishment, and be aware that for some expenses, even if they are good, we do not have the money to face them.
A very important one is that of retirements under the current scheme.
When the retirement funds were created, the retirement age was roughly equal to the retirement age. Since that time, life expectancy has grown by about 14 years without the retirement ages, nor the required contributions being corrected to take this evolution into account.
In conclusion, if we want to have our own currency that meets the necessary requirements to be so, something desirable to cushion external shocks, the only alternative is to reduce spending.
But a reduction by devaluation and liquefaction is not sustainable. The task that governments must face is arduous, but the objective to be aimed is very clear. It’s time to start or else the dollar race will continue to run wild.
Manuel Solanet is Director of Public Policies at Libertad y Progreso and was Director and President of Infupa until 2010.