currency boards

[Chris Burford]

At 14:32 20/07/99 -0400, you wrote:
>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

The Argentinan case is important, not least because the government argues,
if I understand rightly, for a single dollar zone throughout the Americas. 

But even if the currency boards are flawed, I am sure Doug does not mean
the comments here as the last word.

Juan Jose Barrios obviously has much more information about the actual
situation in Argentina that may be relevant. No doubt the Menem government
is not the most progressive one for getting the best out of currency boards. 

I accept that currency boards do put severe deflationary pressure on an
economy when the balance of payments turns unfavourable, but I cannot see
that logically the central bank should not be able to lower interest rates
(the USA and Europe have just done so in 1998) or why a country with a
currency board should not be able to have the option of changing the parity
level with the reserve currency.

However flawed the Menem regime, and however technically flawed currency
boards are, they are attempts to get control of the economy of a country to
insulate it against the ravages  of international finance capital. 

The price is high, and one of the ironies of Hong Kong was that the
currency board was imposed by the imperial administration. However, it
built up a pool of government assets which at a crucial turning point in
the crisis of 1998 allowed Hong Kong to defeat the currency speculators.

Now that  was also made possible by substantial government assets (the
reverse of a national debt) accrued from the public ownership of freehold
in land and the auctioning of leases. It was also aided by a regime that
was prepared to buy up 13 billion dollars of stocks to punish the raiders'
scam clearly without the Communist Party of China in the background vetoing
this on the grounds that it was a form of socialism. 

In a drastically weak position it might still be in the interests of Russia
for example to have a currency board, linked to the Euro.  That would be
quite interesting geo-politically, and in terms of internal politics. Large
areas of the country have survived on barter, so why must the
remonetarisation of the economy be dependent on the IMF?

I am in fact much more in favour of an international campaign for a
currency transfer tax,  but even partial and limited attempts by
governments as debatable as Argentina and Chile to resist the blind global
hegemony of western finance capital, may have a progressive aspect to them.

Chris Burford

London