June 18, 2001

June 18, 2001 | Commentary on Latin America

Dollar Peg is a Vital Tool for the Future of Argentina

Sir, In their article "Throw away the dollar peg" (June 7), Michael Bordo and Roberto Chang make the most typical mistake in macro-economics: to assume that there is one recipe - combining fiscal and monetary policy - to solve any country's trouble.

Such a recipe will not work in a country that constantly infringes on its citizens' property rights. Bordo and Chang are right to say that Argentina's problem is lack of competitiveness.

They are wrong, however, to think that such lacking is due to the dollar peg. The dollar peg is the only solution for a country whose government proved incapable of controlling its spending and the only institution that gave Argentina credibility for the past 10 years.

Argentina is not competitive because it is not an open economy. It prohibits free trade with a common external tariff of about 14 per cent; it has unemployment because creating jobs in Argentina is expensive and it doesn't grow because the government refuses to make the economy more flexible.

Argentina's addiction to International Monetary Fund loans does nothing more than prove that the government will do anything to maintain its size. In this framework, advising a floating exchange rate is crazy. It will only allow the government to infringe on Argentines' property rights, this time by leading to a hyperinflation that will confiscate the little wealth some Argentines have today.

Ana I. Eiras is Economic Policy Analyst for Latin America in the Center for International Trade and Economics at The Heritage Foundation

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Originally published in Financial Times (06/18/01)