Chile’s peso has been surging on a combination of factors, including rising copper prices, a recent dollar-bond sale, a need for international investment for earthquake recovery, and a “flight to safety” as investors seek stable places to stash their money amid turbulent times. Exporters of goods other than copper, such as Chilean sea bass and organic blueberries, started raising hell weeks ago because they end up with fewer pesos for their dollars, and hence less money to pay their workers, pay the electricity bill, or have a nice dinner of Chilean sea bass and organic blueberry tart. (Hah, just kidding, those products aren’t available in Chile no matter how many pesos you’ve got.)
The risk in this sort of situation is that a country with one really big, high-priced import can develop what’s known as Dutch Disease, but which writer Lisa Marginelli said should really be called Caracas Cough, since Venezuela had it long before Holland.
The short of it is that the currency strengthens because of the single famous export and the ease with which its producers can burn through dollars buying up local currency. This in turn makes life harder for everyone else who produces anything in the country: exporters get fewer pesos for their exports, as noted above, while citizens living on paychecks are able to buy imports more cheaply than locally produced goods. Local leatherworkers and other craftspeople have an incentive to stop making belts and start selling cheap goods from abroad, even with high protective tariffs. Other people see the chance to beg rather than work. It can be more worthwhile for a farmer in Venezuela to spend his time begging at the ministry than taking his chances tending crops. Eventually, you even lose the farm-to-market produce sector — Venezuela, for example, imports a lot of eggs and Christmas trees from Canada.
The best policy for an export-dependent developing nation, then, may be to intervene in the currency market in one way or another to avoid volatility and excessive currency strengthening. Few people believe one can control an exchange rate long-term, but it is possible to avoid peaks and valleys.
The current peso appreciation is the first big one since the inauguration of President Sebastian Piñera, who claims to be more a free-marketeer than his predecessors. The problem with Dutch Disease is it’s a market failure. If you let the free market run its course, you end up with a monoculture economy that is ever-more-vulnerable to price changes in your sole commodity export. The last two days have saved Piñera’s crew from having to make the decision about whether to intervene. The finance minister is in business newspaper Estrategia today saying that he’s tried to avoid weakening the peso, but leaves unsaid that he also hasn’t done anything to stop its strengthening. If copper’s rally picks back up and the peso goes to 450 to the dollar, it will be very interesting to see what happens to President Sebastian Piñera’s rhetoric.
Disclosure: My savings are not in Chilean pesos, so the last two months have cut my spending power here in Chile by 10%. So I’m with the blueberry exporters.