Much of the population is totally misinformed on the issue of the exchange rate as an economic policy instrument. This is an issue that people think it's not important unless when they decide to travel abroad. People need to understand that the exchange rate is a key factor of a national development project given that it interferes favorably or unfavorably on the competitiveness of exports and expenditure on imports, in forward or reverse of the domestic industry, the rise or fall of inflation rates, the increase or decrease of the country's production costs and the rise or fall of international reserves, among other factors. A stable exchange rate can lead to a prolonged period of economic growth, while an unstable exchange rate is able to reverse any growth process as what is currently happening in Brazil.
In defense of exchange rate fixed as one of brazil
1. 1
IN DEFENSE OF EXCHANGE RATE FIXED AS ONE OF BRAZIL'S
DEVELOPMENT FACTORS
Fernando Alcoforado *
Much of the population is totally misinformed on the issue of the exchange rate as an
economic policy instrument. This is an issue that people think it's not important unless
when they decide to travel abroad. People need to understand that the exchange rate is a
key factor of a national development project given that it interferes favorably or
unfavorably on the competitiveness of exports and expenditure on imports, in forward
or reverse of the domestic industry, the rise or fall of inflation rates, the increase or
decrease of the country's production costs and the rise or fall of international reserves,
among other factors. A stable exchange rate can lead to a prolonged period of economic
growth, while an unstable exchange rate is able to reverse any growth process as what is
currently happening in Brazil. It is worth noting that there are three types of exchange
rate regimes: 1) floating exchange rate; 2) floating exchange rate with exchange rate
bands; and, 3) fixed exchange rate.
The floating exchange rate system is one in which the market establishes the values of
exchange rates through the law of supply and demand. In this system can occur great
changes in exchange rates in short time intervals. The floating exchange rate system has
the advantage of the very market regular exchange rates, not causing exchange rate
distortions in the economy. However, it has the disadvantage can occur overvaluation of
foreign currency causing excessive inflation, while the depreciation of such currencies
may result in lower exports. In a floating exchange rate regime, political and economic
instabilities are immediately transferred to the exchange rate, intensifying further the
derangements of the economy. To make matters worse, in this scenario of currency
devaluation, the only way for the Central Bank to keep prices inflation relatively
tolerable is generating a brutal recession (through rising interest) that sharply raises
unemployment, lower wages and end the demand. This occurred, for example, recently,
in Greece, Portugal, Spain and Italy.
The floating exchange rate is the rate prevailing in most countries of the world.
According to the Institute Ludwig von Mises Brazil, floating exchange rate does not
work well for countries still developing that have a long history of monetary or political
instability, whose central bank is not seen as trustworthy. In these countries, any sign of
new instabilities, the exchange rate does not fluctuate, it sinks. And along with the
exchange rate occurs the price inflation and the fall in the standard of living of citizens
[INSTITUTO LUDWIG VON MISES BRASIL. Os três tipos de regimes cambiais
existentes - e qual seria o mais adequado para o Brasil (The three types of
exchange rate regimes - And what would be the most appropriate for Brazil). Available
on the website < http://www.mises.org.br/Article.aspx?id=2196>]. As for the floating
exchange rate with exchange rate band that is used in Brazil, the Central Bank of the
country allows the variation in exchange rates within a certain range (maximum and
minimum values). This range is called the exchange rate band. When the exchange rates
is out of this range, then there is the intervention of the Central Bank, which acts by
buying or selling foreign currency. With that, he manages to make the rate pass to
operate within that set range.
The floating exchange rate with exchange rate bands has the advantage of enabling the
exchange rate variation, but no major gains or losses, allowing greater predictability to
the financial market. Another advantage is that the exchange rate band can be changed
2. 2
from time to time, according to the internal or external economic situation, thus keeping
up with the needs of the foreign exchange market. However, it has the disadvantage of
generating foreign exchange artificiality, harming national economic agents. Since
1999, during the second term of President Fernando Henrique Cardoso, Brazil uses the
floating exchange rate system with exchange rate band. However, there are constant
interventions of the Central Bank of Brazil in the foreign exchange market. These
interventions are made by buying and selling dollars (cash market or future) and are
intended to prevent the depreciation or overvaluation of foreign currency (dollar and
euro). Therefore it can be said that Brazil has adopted a floating exchange rate system,
but with some government control [See the article Câmbio Fixo e Flutuante (Fixed and
Floating Exchange) on the website
<http://www.suapesquisa.com/economia/cambio_fixo_flutuante.htm>].
With the floating exchange policy with exchange rate band, the central bank tries to do
both at the same time: determine monetary policy and exchange rate policy, both of
which are mutually exclusive, impossible to be carried out simultaneously generating as
a result mismatches. So it is that by selling a strong currency in the exchange market,
the government receives in Reais increasing the money supply available to the
economy. Buying strong currency, the government will have to withdraw Reais from
circulation. In both cases, inevitably, exchange rate policy just coming into conflict with
monetary policy and the speculative attacks are the inevitable consequence. This has
been verified since it was adopted in Brazil this exchange rate policy in the 1990s. It is
exactly why the choice of a floating exchange rate regime with exchange rate band is
expensive. As this exchange rate regime does not inspire confidence to international
investors as a devaluation can occur at any time, and given the continuing need to
always be attracting dollars to keep international reserves in minimally comfortable
levels to keep the exchange rate within the range specified by the Central Bank , interest
rates must be quite high which will contribute to the uncontrolled increase in public
debt as has been happening in Brazil..
As for the fixed exchange rate is one in which the amount of foreign currency (usually
the US dollar) is fixed by the government. Thus, the national currency is replaced by a
fixed value relative to the currency-ballast. The fixed exchange rate can only work well
through a Currency Board that it is one of the oldest and most traditional monetary
arrangements in the world, losing only to the gold standard, according to the Instituto
Ludwig Von Mises Brasil. The Currency Board is nothing more than a currency
conversion agency, whose sole function is to convert the national currency in a specific
foreign currency (called currency anchor), and vice versa at a fixed exchange rate set by
the government. The Currency Board is merely a translation agency, and literally works
like a home exchange.
With fixed exchange, the Central Bank only creates ballots and coins when receive in
return the currency anchor that could be Dollar or Euro. The Currency Board is the
arrangement that deploys when it wants to adopt a genuine "exchange rate", which
causes the currency of a country becomes a substitute for foreign currency. The only
function of a Currency Board is to exchange national currency (which the government
itself issues) for foreign currency, and vice versa, at a fixed rate. If a country adopts the
US dollar as currency anchor, the Currency Board has the function of exchange, without
charge and without delay, the national currency by the dollar exchange rate fixed. To
function well, the Currency Board, by definition, has to maintain international reserves
3. 3
at a volume equal to or greater than the monetary base of the national currency. The
advantage of the fixed exchange rate is that it enables better control over inflation.
However, it has the disadvantage of being able to cause excessive appreciation of the
national currency if the anchor currency used as a fixed exchange rate is much
appreciated causing the decline in exports and has the advantage to lead to increased
exports if the anchor currency is kept undervalued. To cope with adverse situations for
the country, the government can discretionarily change the exchange rate.
It can be seen therefore that the exchange rate consistent with a national development
project is fixed which results from the government's political expressed in government
decisions and actions as opposed to the floating exchange rate with or without exchange
band resulting from the will of the exchange market. A floating exchange rate based on
market laws, even with exchange rate band, depends almost exclusively on variables
that are not under government control, such as growth of the world economy that may
undermine national development. Unlike Brazil adopting a floating exchange rate with
currency band, China has opted for a fixed exchange rate against the US dollar. China's
exchange rate policy has contributed to become competitive Chinese exports in
international trade and accumulate foreign reserves that reach at the moment US$ 3.33
trillion which come constituting a fundamental instrument for the acquisition of
companies and investments in the global market.
* Fernando Alcoforado, member of the Bahia Academy of Education, engineer and doctor of Territorial
Planning and Regional Development from the University of Barcelona, a university professor and
consultant in strategic planning, business planning, regional planning and planning of energy systems, is
the author of Globalização (Editora Nobel, São Paulo, 1997), De Collor a FHC- O Brasil e a Nova
(Des)ordem Mundial (Editora Nobel, São Paulo, 1998), Um Projeto para o Brasil (Editora Nobel, São
Paulo, 2000), Os condicionantes do desenvolvimento do Estado da Bahia (Tese de doutorado.
Universidade de Barcelona, http://www.tesisenred.net/handle/10803/1944, 2003), Globalização e
Desenvolvimento (Editora Nobel, São Paulo, 2006), Bahia- Desenvolvimento do Século XVI ao Século XX
e Objetivos Estratégicos na Era Contemporânea (EGBA, Salvador, 2008), The Necessary Conditions of
the Economic and Social Development-The Case of the State of Bahia (VDM Verlag Dr. Muller
Aktiengesellschaft & Co. KG, Saarbrücken, Germany, 2010), Aquecimento Global e Catástrofe
Planetária (P&A Gráfica e Editora, Salvador, 2010), Amazônia Sustentável- Para o progresso do Brasil e
combate ao aquecimento global (Viena- Editora e Gráfica, Santa Cruz do Rio Pardo, São Paulo, 2011),
Os Fatores Condicionantes do Desenvolvimento Econômico e Social (Editora CRV, Curitiba, 2012) and
Energia no Mundo e no Brasil- Energia e Mudança Climática Catastrófica no Século XXI (Editora CRV,
Curitiba, 2015).