Argentina lives in a permanent debate about the exchange rate, a key variable that directly impacts the competitiveness of productive sectors, inflation, foreign trade and, ultimately, economic growth. However, It is rarely recognized that the heterogeneity in the productivity levels of the economy complicates the task of defining an appropriate exchange rate for all sectors.
This problem is particularly relevant in a context of exchange rate delay sustained by a “crawling peg” of 2% monthly, while inflation in 2024 comfortably exceeded that rate, exacerbating existing distortions.
Productivity and exchange rate: an unavoidable relationship
The real exchange rate is, in essence, a measure of external competitiveness. However, its effectiveness in promoting economic growth and development depends largely on the productivity of the sectors involved. Argentina, with its economy characterized by marked heterogeneity, faces a great challenge: sectors with drastically different productivity levels coexist under the same nominal exchange rate.
The countryside, traditionally considered the most competitive and productive sector of the Argentine economy, is a clear example. But even within agriculture, productivity varies significantly. Producing soybeans in Pergamino, in the heart of the Pampa Húmeda, is not the same as doing so in Formosa, where the climatic and soil conditions are much more adverse. These intra-sector differences highlight the difficulty of using the exchange rate as a uniform tool to encourage competitiveness in such a diverse economy.
On the other hand, the Argentine manufacturing industry faces serious structural limitations, such as high labor costs, deficiencies in infrastructure and a low scale of production. These characteristics mean that, on average, it needs a higher real exchange rate to be competitive internationally. If the agro-export sector, which operates with a relatively low real exchange rate, is already facing serious problems, evidenced by the increasingly stronger claims they make, the prospects for the industry are even more worrying.
The impact of taxes and withholdings
Fiscal policy also plays a crucial role in this equation. In Argentina, withholdings on exports act as a direct tax on the agricultural sector, reducing its profitability and, therefore, its competitiveness.
In the case of industry, taxes also create a significant burden. High labor tax rates, costs associated with bureaucracy and widespread tax pressure erode the competitiveness of the sector. This context, combined with a real exchange rate that does not reflect their specific needs, deepens structural inequalities within the economy.
The crawling peg and the exchange rate delay
Throughout 2024, the Argentine government’s exchange rate policy has been marked by a “crawling peg” of 2% per month, a rate clearly insufficient to accompany inflation that has remained consistently above 100% annually. This strategy made the cushion generated with the devaluation of December 2023 disappear and has resulted in an evident exchange rate delay by returning to the same real exchange rate left by the previous administration, which means that the nominal exchange rate is lagging behind in relation to internal prices.
The exchange rate delay has serious consequences for the economy. Firstly, it negatively affects exporters, who receive fewer pesos for each dollar of exports. This is particularly detrimental to the agricultural sector, which not only faces this disincentive, but also the withholdings mentioned previously. Secondly, the exchange rate delay encourages over-importation, since foreign goods become artificially cheap in relative terms. This generates additional pressure on the Central Bank’s reserves, exacerbating the country’s macroeconomic vulnerability.
The trap of productive duality
Productive heterogeneity is not a problem exclusive to Argentina, but in few countries is this duality so evident and so impactful for economic policy. While sectors such as agriculture operate close to global productivity standards, others, such as industry and services, are lagging behind in both technology and operational efficiency.
This duality poses a dilemma for those responsible for exchange rate policy. A low real exchange rate can sustain macroeconomic stability in the short term, but it discourages exports and limits the inflow of foreign currency. On the other hand, a high real exchange rate could benefit less competitive sectors, but at the cost of generating inflationary tensions.
The need for structural reforms
Solving the exchange rate problem in Argentina requires more than nominal adjustments or a one-time devaluation. Structural reforms are needed that address the root causes of productive heterogeneity. This includes:
- Investments in infrastructure: Improve connectivity and logistical conditions to reduce productivity gaps between regions.
- Tax reform: Redesign the tax system to make it more equitable and less distortionary, eliminating perverse incentives that penalize production and exports.
- Sectoral development policies: Implement differentiated strategies that recognize the particularities of each sector and promote its competitiveness.
- Macroeconomic stability: Control inflation and maintain fiscal balance to avoid excessive use of the exchange rate as a nominal anchor.
Conclusion
The exchange rate in Argentina is much more than an economic variable: it is a reflection of the structural tensions and inequalities of a deeply heterogeneous economy. The current exchange rate policy, marked by restrictions and a “crawling peg” that does not keep pace with inflation, is generating an exchange rate delay that harms exporters and exacerbates macroeconomic problems.
While the most productive sector of the economy, agriculture, struggles to remain competitive, the outlook for industry and other less efficient sectors is discouraging. Resolving this situation requires a comprehensive approach that combines structural reforms, macroeconomic stability and a deep understanding of the productive differences that characterize the Argentine economy. Without these measures, the country will continue to be trapped in a vicious circle of exchange rate backwardness, low competitiveness and economic stagnation.
Source: Ambito
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