currency boards

[Doug Henwood]

Oh yes, the present crisis in Argentina, with its much touted 
currency board (i.e., effective dollarization), is a good negative 
example of the relationship between a currency's value and national 
productivity levels. Argentine industry is just no match for the 
U.S., but it's adopted the U.S. currency as its standard. The effect 
of this is to make Argentine products progressively more expensive on 
world markets. Without the dollar peg, the Argentine peso would sink 
in value if it were freely traded. With the dollar peg, the country 
doesn't have the outlet of devaluation, so it's got a nasty recession 
instead. And because the Argentine central bank can't lower rates and 
pump liquidity, it's powerless to fight the recession.

As someone put it at a recent IMF forum, Argentina looked to the 
currency board as an attempt to buy "credibility in a bottle." That's 
appropriate in a world where everyone seems to think that finance 
comes first and the real sector is an afterthought. But things don't 
work that way.

Doug