The reason lies on the historical size of the flows which is related to the US cycle: when the US is hit by recession the flows decrease. This is clearly seen in the case of Brazil and is creating the problems we have nowadays. Brazil’s devaluation is related to perhaps with the problems of Argentina. The timing depends on what happens in Argentina. But we already knew this trend toward problems of this kind due to the American recession.

Even countries that have reported successful growth rates, such as Chile, have decreased expectations to more or less half those of 1997. So the whole region is experiencing growth problems, including Mexico. This is an overview of the situation even from a perspective before September 11.

What does September 11 mean for the region in economic terms?

It is hard to assess it. However, I believe the news is not so negative for Latin America since the United States is giving greater priority for security systems. So if the region could reach agreements with this country it could obtain greater economic support in exchange. The attitude of the US tax office is today much more permissive than before. So we see that fast track is closer to approval and there are also many important things happening that seemed hard to occur a while ago. I think countries should pay attention to these opportunities as I am sure this will happen and so I think it could cause a drop in the region’s country-risk rate and higher flows. Especially if the region and our zone decide to accelerate the ‘Four plus One’, which could give a positive impetus to foreign direct investment.

In my view, the fast track , FTAA effect does not relate to trade so much because it is not easy to generate in the short-term as it takes time to produce greater exports and customers must be found but it does relate to the ‘signaling’ effect it produces. A sign of higher credibility, a sign of greater stability, a sign that the country is seriously focused on a US-style economy…Sign that capitalism is being taken for granted. That is the most important effect.

Who will benefit from fast track the most? Those countries that are further from giving those signs. Argentina is one of those countries for it is hit by recession and has a whole political class speaking of defaulting, devaluing, change regulations of privatized companies (though it may be good from a certain perspective, defaulting on the debt breaks credibility in property rights and related issues) and all that is reflected on the huge risks we must pay for now.

I believe Argentina may take a great benefit from this. And since it is a country whose problems usually affect others too that would help drop country risk in the region and in principle improve prospects. Brazil would also benefit from the situation as it had been receiving a considerable amount of direct foreign investment. In other words, the rwo countries I consider may benefit the most from the situation are Argentina and Brazil and by rebound effect, the rest of the countries too.

Considering it from the ‘90s onwards, there is a series of correct measures taken by Argentina that fueled economic recovery at that time. But now it is reporting the same per capita income as in the ‘70s, the success story of Argentina has been returning to the ‘70s. I f we draw a chart, then we’ll see a gap, basically a ‘black hole’ we fell in after the hyperinflation from 1989-1990 but then when inflation was tamed the system recovers by itself. We did things so badly that ruined economy.

Now we are like starting from scratch, like in the ‘70s, on the verge of the cliff if we fail to do things rightly but also with the chance to walk out of the crisis for once and for all. This is the time for the truth for Argentina.

‘Argentina refused to abandon the 1 to 1 parity, refused to agree with Brazil
–I think on good grounds- and is now paying the price. In a free trade area one may invest
in Brazil or Argentina with a difference: if one invests in Brazil and then problems arise,
the exchange rate will be favorable. If there are problems in Argentina, the exchange rate
in Brazil worsens the situation even more’.

Argentina began experiencing serious problems in 1999. Personally, I believe Brazil’s devaluation was a serious case and most important the fact that Brazil has not made any exchange rate commitment. This is unprecedented in the recent history of the advanced capitalist world. In Europe, where integration efforts have always existed, the exchange rate was integrated first and then the trade structure slowly.

It is true they did not have a single currency but they always reached exchange rate agreements so that exchange rates would not be affected as is now happening in the Mercosur. The European exchange rate system has always been more stable. In Latin America we have exchange rates such as the one in Brazil that may devalue 30% in short and also extremely fixed rates such as the Argentine ones. So this is the major structural problem of the country.

Argentina refused to abandon the 1 to 1 parity, refused to agree with Brazil –I think on good grounds- and is now paying the price. In a free trade area one may invest in Brazil or Argentina with a difference: if one invests in Brazil and then problems arise, the exchange rate will be favorable. If there are problems in Argentina, the exchange rate in Brazil worsens the situation even more. Then, where do investors go? Brazil. And this is what we have seen: investments dried up in Argentina and continued in Brazil. People are surprised by the Brazilian success but how paid for Brazil’s success? Nobody ever wonders. And I am not saying Brazil has blundered as it conducted some adjustments. But the policy if implemented is of competitive devaluation. They did not want to do it, it’s true, but they did it ‘de facto’.

To what extent is the single currency aspiration ambitious?

If Argentina is dollarized then the single currency will be pegged to the dollar. Now should that single currency devalue by 50%, then Argentina would be in a serious financial trouble. Now it has no more export markets problem but financial woes. See what happened to Asian countries when they devalued in 1997 and thought that they could export more with an open market. Exports fell because they lost access to credit. This is an aspect many times forgotten when speaking of devaluation: they think after devaluating exports may increase. But in order to export credit is necessary.

Devaluation is very complex in Argentina as everywhere. It worked in Brazil because the business sector was totally protected by government against exposure to dollar debts. So by devaluing those with debts in dollars did not pay dollars more expensive but the dollar that they had hired.

The government lost in that operation: the public debt rose in Brazil in 1999 significantly. That is a financial aspect we should not forget. We do not have that sort of protection in Argentina and consequently if the country devalues the business and household sectors are mostly affected and a serious financial problem could hit the country.

For another thing, can devaluation be of 15%? That is what Mexico tried to do in December 1994, which was thought a good idea because they thought they would become more competitive and that the economy was going to recover as they were close to NAFTA. But what actually happened was that they devalued 100% and the GDP dropped 7%. Fortunately they recovered later thanks to a $ 50 billion megapackage but it was really hard even though it was not a dollarized economy like Argentina’s. If one translated this into Argentina, then the problem could be more serious. So no to devaluation.

Devaluation and dollarization as an answer to a natural question that derives from this so that the exchange rate remains intact? I think so, it seems financially more feasible. But Brazil’s exchange rate remains the same and so we still depend on 30% of the Brazilian exports and Brazil may devalue later. So this also applies to dollarization: without reaching compromise with Brazil we have that heel of Achilles.

I think we should capitalize on the opportunity before us now when the United States is considering more than ever partnership with Latin America to prevent terrorism acts in this part of the world. As far as I am concerned, our government are totally in favor of this sort of partnership which must be totally tapped. Against this background, Argentina should try to obtain another considerable ‘blindaje’, make the pending adjustments and open trade with the United States, hopefully within the fast track framework and above all accept the ‘Four plus One’ compromising with Brazil. In this line, Argentina could strengthen dollarization and reach agreement with Brazil, where it is not necessary for that country to peg to the dollar but to put some limits on the exchange rate and so based on that limit in case of devaluation it would allow Argentina to access compensatory tariffs. This is not the best case scenario but it is better than what we have now.

*Interview conducted during the VI international conference of the Latin American and Caribbean Economic Association (LACEA, in its Spanish acronym). From 18 to 20 October, 2001, Montevideo, Uruguay.