Argentina's Domingo Cavallo is a crusader whose work is not yet done.
Running for president in the October elections, the outspoken former economics minister is likely to be the only candidate with a sincere commitment to reform.
Having seen him implement and then vigorously maintain Argentina's strict dollar peg when he headed the Finance Ministry from 1991 to 1996, financial markets, increasingly
nervous about the country's currency arrangement, would love Cavallo to win outright.
However, opinion polls only give the Buenos Aires congressman around 15% of the vote. This means Cavallo will probably use his stature as a proven reformer to lever his way into an administration run by the incumbent
or the opposition center-left
. Both of these forces, currently running neck and neck in the polls, support the currency board and free markets, but include members whose desire for further reform is questionable.
By contrast, the
-educated Cavallo is bursting with radical ideas: His most ambitious is a monetary union within
, the trade bloc that includes Brazil, Argentina, Paraguay and Uruguay. The proposal aims to create the equivalent of the euro, Europe's new pan-continental currency.
But with Brazilian markets soaring after the country ditched its dollar peg in January, Cavallo, with his zealous advocacy of fixed currencies, has to face this criticism: Is he using old tricks to win yesterday's battles? In an exclusive interview after a speech Monday at the New York-based
Council of the Americas
pressed Cavallo on his beliefs.
pointed out that many countries with fixed exchange rates, including most of continental Europe, China and Argentina, have high rates of unemployment, little in the way of structural reform and anemic exports.
Could fixed currency regimes be the cause of this? Not at all, said Cavallo, who argued that such arrangements actually propel real reform, as firms and workers know that the government can no longer help them with "artificial" assistance like devaluation or inflation.
As a result, "Argentina's currency system is becoming more durable," he said.
The markets don't seem to reflect this, however. Argentina's bonds trade at higher yields than those issued by Mexico, which has a floating currency. "But Mexico is next to the U.S., which is doing very well, while Argentina borders Brazil, which has much less growth than the U.S.," Cavallo responded.
He quickly pointed out that Argentina's economic growth has been far superior to Mexico's in the '90s and, because devaluation has been avoided, the average Argentine's purchasing power has held up in dollar terms, which is key in Latin America with its history of debased currencies and high inflation.
More profoundly, the 52-year-old Cavallo claimed that Argentina's currency board has created among the political parties an across-the-board acceptance of reform that doesn't exist in Mexico, where opposition to free-market policies is still strong in the major parties.
He is also calling for deep changes to Argentina's labor law and tax system to spur productivity increases. Progress on these fronts has been slow since Cavallo was asked to resign in 1996 by
President Carlos Menem
, after a rocky period in which he feuded with Menem, accused top political figures of corruption and reportedly used resignation threats to get his way.
If he gets into the next Cabinet and is again prevented from pursuing tough policies, will the dollar peg's days be numbered? "No, not at all," he said, quickly adding that he believes such measures will get done. When asked why the new government will be any more pro-reform than the current one, he gave the somewhat evasive reply: "If we devalued, we'd never get around to tackling labor reform."
Cavallo's bold plan for a single Mercosur currency first requires the organization's other members to fix their currencies
Argentina. He believes the Brazilians will do this when they realize it's the only way to get their interest rates down to manageable levels. This all looks great on paper, but it's hard to see the Brazilians returning to a fixed-exchange rate anytime soon.
What's more, Cavallo's scheme appears to be a variation of an old diplomatic trick whereby small states limit the influence of large ones by hemming them into international organizations where power is more equally shared. Just as Belgium now has more or less the same voting power as its large neighbor Germany on the
European Central Bank
, so would Argentina have equal footing with much bigger Brazil on the institution running Mercosur monetary policy.
Cavallo didn't deny that greater influence over Brazil is partly his aim. He admitted that it'd be helpful for Argentina to "have a seat at the table" of a Mercosur monetary authority, but he said it wouldn't be that different from having a say within such international bodies as the
World Trade Organization
. And, he added, "This
Mercosur plan is not just a power game; it would also create benefits for our people."
Cavallo is certainly convincing. But because he is something of an ideologue when it comes to fixed exchange rates, one gets the feeling that he ignores certain facts that contradict his worldview.
Last year, he told
that Brazil wouldn't devalue when most other pundits thought differently. His homeland could be next to rudely contradict him.