Argentina's Peso-Dollar Peg Is a Drag On Efforts to Make Exports Competitive
BUENOS AIRES -- Four months after Brazil's devaluation, Argentina's recession drags on as companies struggle with high costs and a U.S. dollar-pegged exchange-rate system that many believe is still essential to economic stability.</br></br>Despite weakened currencies in just about every major Latin American economy in the past five years, Argentina has hung on doggedly to its link to the dollar. The so-called Convertibility Plan, in which the dollar peg plays a key part, extinguished Argentine inflation and provided a base of stability that allowed the economy to grow at an average annual rate of 5.8% between 1991 and 1998. But because the dollar peg means Argentina can't weaken its currency to make its exports more competitive, it has to find ways to lower the cost of production.</br></br>Economists say the government hasn't complemented the currency system with policies that lower costs for businesses, and that may be delaying economic recovery. "If the government is going to say that convertibility is a sacred cow, they have to build competitiveness," says Pedro Lacoste, whose Buenos Aires economic-research firm bears his name. "It's a tough agenda with powerful interests against it. But whoever the next finance minister is, he better be very convinced about these issues."</br></br>In the early 1990s, Argentina increased competitiveness, Mr. Lacoste says, by slashing export taxes and liberalizing port regulations. But the government's attention now seems to be diverted by political shadow plays in a presidential election year. Some new tax policies appear to be working against competitiveness. In an announcement of default yesterday, power generator Central Termica Guemes SA said it wouldn't make a $3.6 million interest payment in part because of "new taxes levied by the Argentine government on assets and on cash interest payments."</br></br>Mr. Lacoste estimates that gross domestic product will fall 3% this year, while exports decline around 12%. Yesterday, the government said auto production fell 51% in April from the same month a year earlier; electricity consumption fell 9% in the same period. "The government and some economists were betting on a recovery in the second quarter; it is just not happening yet," says Martin Lousteau, an economist who works with Mr. Lacoste.