No solitude: Latin America's exchange rate policy

Latin American Politics and Society, Summer 2002 by Jameson, Kenneth P

Critical Debates

Wise, Carol, and Riordan Roett, eds. Exchange Rate Politics in Latin America. Washington, DC: Brookings Institution Press, 2000. Tables, figures, bibliography, index, 185 pp.; paperback $16.95.

Frieden, Jeffry, and Ernesto Stein, eds. The Currency Game: Exchange Rate Politics in Latin America. Washington, DC: Inter-American Development Bank, 2001. Tables, figures, bibliography, 288 pp.; paperback $26.95.

This is a story whose basic plot was foretold long before the real collapsed," wrote Eliana Cardoso of the January 1999 Brazilian real crisis. The apparent reference to Gabriel Garcia Marquez's Cronica de una muerte anunciada captures the seeming inevitability of exchange rate crises in Latin America, such as we have been witnessing in Argentina, as well as the difficulty of understanding their causes or avoiding them. These two edited volumes provide overviews of exchange rate regimes in Latin America and also examine seven specific countries.

The Frieden-Stein book covers 1960 to 1998 while the Wise-Roett essays focus on the post-1990 period. Recurrent exchange rate crises and concurrent domestic instability are the constants, and they continue today. Wise summarizes the 1990s: "The pressure toward currency appreciation (and likely crisis) has remained steady regardless of the various exchange rate regimes that have been adopted" (p. 3). In a theoretical overview in the Wise-Roett volume, W. Max Corden claims that several different regimes were functioning relatively well in 2000, though the fixed but adjustable rate (FBAR) was the most vulnerable, and "the future is uncertain" (p. 40). His conclusion captures the overall tenor of both volumes.

The contemporary, pre-Argentine debacle orthodoxy on exchange rate regimes holds that a country's choice is increasingly between floating rates or "hard pegs"; that is, a fixed rate with guarantees, such as Argentina's convertibility or Ecuador's dollarization (Fischer 2001). Latin America provides examples of all possible variants. Alberto Pasco-Font and Piero Ghezzi (Currency Game) use a continuum with five degrees of flexibility to capture Peru's policies-though the most common Latin American regime has been the crawling peg, a "soft peg" or FBAR regime. As usual, Latin America defies reductionism, a point reinforced by Argentina's June 2001 movement from a pure hard peg toward a dual exchange rate, then to devaluation and a dual exchange rate after the 2002 default.

The immense variation in experience across countries and over time provides powerful support for the importance of domestic political conditions and choices. Both volumes start with the presumption that Latin American domestic political considerations affect the choice of exchange rate regime, as well as exchange rate strategy and policy. Any attempt to impose one deterministic economic model on this experience would fall far short. That provides a point of departure. Such a welter of theoretical arguments, political hypotheses, empirical tests, graphic depictions, and unexpected results follows, however, that it is challenging to sort out the lessons and the implications. The overview essays are helpful in this regard, as is the general empirical study by Frieden, Ghezzi, and Stein (Currency Game, chapter 2), which uses a rich data set on exchange rates and their determinants. The difficulty of drawing firm conclusions reinforces the complexity and the challenge of understanding exchange rate choices and provides support for further research in the area.

WHICH REGIME? WHICH POLICY?

The books formulate the issues differently. Wise (p. 3) asks which "exchange rate regime ... would best complement the new liberal economic model" and "how exchange rate policy... [can] better cope with new pressures"; that is, the current account deficits, financed by international saving, and the overvalued exchange rates that characterized the 1990s. The country studies in that volume, particularly Venezuela, allow Wise to answer her second question: "success or failure seems to depend as much on policymakers' tenacity and the ability of political leaders to garner broad support for the chosen strategy as it does on the technicalities of macroeconomic policymaking" (p. 11). Behind this academic statement are intriguing stories of political transformation: Menem and Peronism, the demise of the PRI, Chavez and the traditional parties, Cardoso the liberal economist.

The first question, however, has no convincing answer. Fixed, floating, or in between, each exchange rate regime had its successes and failures in the 1990s. Perhaps the issue should be reformulated, as it has been in Argentina. Can Latin America attain stability, growth, and acceptable equity under the "new liberal economic model"?

The authors in Exchange Rate Politics imply that the liberalization model can solve Latin America's development problems. For example, Wise dismisses "Latin America's strong and patently unsuccessful reliance on FBAR regimes throughout most of the post-World War II period" (p. 4) and refers to "the lackluster prereform period in Latin America" (p. 13). The 1990s may look good compared with the 1980s, but only modestly. As Birdsall and de la Torre note elsewhere, "in economic growth, poverty reduction, income distribution, and social conditions the results [of the 1990s reform period] were discouraging" (2001, 6-7).