Opinion Sur
Total deregulation of the currency exchange market is the certain sentence for an unsustainable indebtedness. This outline can be favorable in the short term due to capital inflow, but, in reality, it activates the clock in the time bomb for the later drainage of currency when confidence is lost. In this framework, it is convenient to differentiate inflow and outflow of capitals in a deregulated market from capital flight, which consists on the dollarization and sterilization of economic surpluses generated in the domestic market.
The extraordinary outflow of currency took place between 2018 and 2019 as result of the senseless policies carried out by Cambiemos government that led to the widely accepted conviction that the whole process was no more than a massive capital flight. However, a large part does not fit in such characterization.
To explain this issue better, it is necessary to understand the nature of the mistakes of the neoliberal policy in terms of foreign currency market, that is, the original sin of neoliberalism in terms of currency exchange: the full liberalization.
Full liberalization implies to enable the absolute freedom for inflow and outflow of operators that is, suppliers and demanders of currencies, with no restriction whatsoever. This implies that nobody is asked why s/he wants the currency for or, what is worse, nobody is forced to sell currency in the country (make an offer) where s/he has obtained them, not even to local exporters that can also leave currency abroad (no inflow).
Moreover, there are no restrictions regarding capital inflow and outflow, being for real investments (IED) or financial (loans and cancellations), nor about the term that capitals that enter the country must stay before leaving again.
Furthermore, there is no verification whether remittances of profits abroad or cancellation of external debts correspond or not in terms of quality and quantity with the previous capital inflows, real or financial. In other words, profits are inflated or auto-loans between local branches and their headquarters invented with no limitations. Finally, profit remittances can correspond, also with no limitations, to local capitals not originated abroad.
With this normative framework, or better called “de-regulated[1],” neoliberalism was able to dilute the concept and stigmatization of capital flight, as everything is now the exercise of free-market practices.
Examples
- Exporting entities, being paid abroad, have the liberty of not bringing back currencies to the country. They are not doing capital flight, but rather directly leaving abroad the currencies and thus not violating any law.
- Speculative investor, realizes that the country is paying interest rate five-times bigger than international rates, buys securities in pesos (LEBACs) and, if exchange rate skyrockets, s/he sells them after a few months obtaining the rate difference in dollars (carry trade), without circumventing anything because s/he did not assume any commitment regarding time of compulsory permanence in the country. Moreover, s/he is not engaging in capital flight because it was the same amount of capital s/he brought in the first place plus interests.
- Multinational enterprise brings capital to open a local branch and them transfers profits abroad, with no limitation in terms of concept or quantity and can also sell the branch to another local enterprise and transfer abroad the initial investment, thus, the net balance would be a larger currency outflow than inflow.
As seen above, all these situations, though they might favor capital inflow for a short period, particularly speculative capitals of very short term activate the clock of the time bomb of further currency drainage when confidence is lost.
The most pathetic is, when such bomb explodes, currency drainage in the framework of an exchange market completely deregulated, could not be characterized in strict sense as capital flight, simply because it is an excess in currency demand over its supply after a period where the relationship is reversed.
The role of the Central Bank
In a small economy from the periphery, as in Argentina, total liberalization of the foreign exchange market and the consequent fluctuations in currency supply and demand produce great volatility in the exchange rate. To make matters worse, in a fully deregulated market, exchange rate is unique, that is, it has no alternatives.
However, deregulated exchange market does not imply necessarily that there is a free-floating exchange rate. Under this type of framework, monetary authority can intervene in the quality of both supplier and demander to try avoiding excessive fluctuations that, in an economy as ours, it destabilizes other variables, such as prices for example.
When the Central Bank in Argentina (BCRA) intervenes at peak times to avoid a fall in exchange rate, it accomplishes it by buying currency with pesos, which has the advantage of accumulating reserves, but the disadvantage of printing pesos that it then has to sterilize by issuing rented bonds (LEBACs). By contrast, when drainage starts and begins selling dollars, it shrinks the emission of pesos at the expense of a drop in foreign currency reserves, what tends to amplify the distrust and stimulates a larger demand for dollars.
What is truly curious is that, if the reversion of expectations translates into the aforementioned operations, with a fully deregulated exchange market, we cannot say that BCRA is financing the capital flight; simply, it will be trying to avoid a jump in the exchange rate together with its negative effects over the rest of the economy.
Taking this contradiction to the extreme, following the neoliberal conception, in the end it will be legitimate to call on the International Monetary Fund (IMF) to try to sustain the level of foreign currency reserves and reduce the distrust. In fact, if these operations are not considered capital flight but rather simple fluctuations in the free supply and demand for currency, then the IMF would not be violating its bylaws, which explicitly forbids financing capital flight, and the BCRA would be using and extraordinary resource to control the exchange rate supporting the confidence without losing reserves.
In this context, there can only be two motives to question legally IMF operations and both depend on the fine print of the agreement timely subscribed. One is if it has agreed explicitly that the financial assistance could not be used to withdraw short-term capitals that had entered the market the previous year—quite unlikely, as the IMF has always been more on the side of the creditors than of the borrowers.
The other one is that the government had assumed the explicit commitment that the BCRA would not intervene in the exchange market, especially selling currency up to a certain limit, to control the value of the dollar. This is in fact very likely to have happened, as the IMF historically has been a staunch enemy of control on the exchange rate and always a supporter of letting it rise as much as necessary to balance supply and demand.
Hence, the complicity of both entities, IMF and BCRA during Cambiemos administration, is impossible to conceal. On this base, we should keep on nailing it down so that both sides assume their responsibilities. Because, indeed, BCRA did use those funds to try to control the value of the dollar and the IMF, despite its “online” supervision, seems to have not noticed this situation until the loan was more than 80 percent disbursed.
The true flight
However, inside this whole process there was true capital flight, very difficult to individualize and especially to quantify when it happened. The true flight consists on the financial valorization and dollarization of the surpluses generated in the domestic economic process, or what the BCRA calls “foreign assets formation (FAE, for its Spanish version)” made by residents.
The main characters of the FAE are varied. From multinational enterprises that instead of investing profits generated in the country, make remittances to their headquarters, sometimes disguised in the cost overrun of inputs imported. Up to local enterprises that even when they sell in pesos they valorize their profits in foreign currency and flight them to tax heavens or treasure them in safe deposit boxes just in case, as well as including high-income workers or successful entrepreneurs that save part of their incomes in foreign currency.
Thus, we can characterize more strictly capital flight as the dollarization and sterilization of economic surpluses generated in the domestic market, by both productive as well as financial activities, and associate it with the formation of foreign assets, both those deposit abroad as well as those that sleep under the “mattress” and in safe deposit boxes. The way of materializing this capital flight can be legal, through stock exchange operations by using pesos to buy securities to sell them in dollars (CCL and MEP), or not-so-saint in the denominated “blue” market, where undeclared and ill-gotten capitals generally end up.
The term sterilization has to do with those surpluses that are subtracted from the economic circuit and, thus, do not return to generate more economic activity. Without a doubt, an important part of the IMF loan was used for this true capital flight, despite it is difficult to estimate.
The only thing left is a final reference to the deregulating exchange rate paradigm of neoliberalism. As with many other parts of this ideology, it is founded on the false axiom that the pursuit of individual profit will result in general wellbeing. In this case, the “human right” of being able to buy dollars without any restriction ends up, as usual, making things easy for those who have the capacity for increasing the wealth they already had.
For the rest, there is only austerity and adjustment to pay for the party. Mostly, in a country where external (eternal) restriction makes full employment requires more imports than the exports it can make, even when exporters were forced to settle their foreign currency trade that were obtained in the country. In such conditions, full deregulation of exchange market is a certain sentence for an unsustainable foreign indebtedness.
Published in Cash on January 23, 2022
[1] TN: In the original to say deregulated the author used a neologism to make a word game with the notion “norms and absence of norms” with no exact equivalent in English.
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