Copyright by Jared Steven Berenter 2013 The Report Committee for Jared Steven Berenter Certifies that this is the approved version of the following report: Expanding the Central Bank Mandate in the “Soy Republic”: An Assessment of the Impact of Central Bank Governance on Agricultural Competitiveness and Interest Articulation in Argentina APPROVED BY SUPERVISING COMMITTEE: Supervisor: Chandler W. Stolp Co-Supervisor: James K. Galbraith Expanding the Central Bank Mandate in the “Soy Republic”: An Assessment of the Impact of Central Bank Governance on Agricultural Competitiveness and Interest Articulation in Argentina by Jared Steven Berenter, B.A. Report Presented to the Faculty of the Graduate School of The University of Texas at Austin in Partial Fulfillment of the Requirements for the Degrees of Master of Arts and Master of Global Policy Studies The University of Texas at Austin August 2013 Abstract Expanding the Central Bank Mandate in the “Soy Republic”: An Assessment of the Impact of Central Bank Governance on Agricultural Competitiveness and Interest Articulation in Argentina Jared Steven Berenter, M.A./M.G.P.S. The University of Texas at Austin, 2013 Supervisor: Chandler W. Stolp Co-Supervisor: James K. Galbraith This paper examines the impact of a new Central Bank mandate on agricultural competitiveness and on the ability of the agricultural sector to articulate its policy interests within Argentina’s policymaking process. Reforms to Argentina’s Central Bank charter, passed into law in April 2012, loosened restrictions on Central Bank lending to Argentina’s Treasury and authorized the Central Bank to act to reduce unemployment and spur economic development. The Central Bank carries out its new mandate within a policymaking process characterized by strong presidential authority, weak political institutions, powerful provincial governments, and a budget system that politicizes the transfer of fiscal resources from the federal government to the provinces. Within these policymaking dynamics, this paper analyzes the actions of the Mesa de Enlace, an interest group coalition comprised of Argentina’s four largest agricultural producer associations, and its response to changes in Central Bank governance. My argument is twofold. First, I argue that the new mandate in the long run will exert inflationary pressure on Argentina’s real exchange rate, a key determinant of iv competitiveness for primary commodity exports, particularly soy. Public statements made by various representatives of the Mesa de Enlace indicate strong opposition to the nominal overvaluation (atraso cambiario) of the peso. Second, I argue that the new mandate politicizes an already-politicized Central Bank. Given the agricultural sector’s waning influence in institutionalized policymaking channels, executive intrusion in Central Bank operations is economically harmful. Such government interference serves to diminish agricultural considerations in monetary policymaking and to encourage the Mesa de Enlace’s exploitation of informal channels for interest articulation, creating disincentives for robust investment and causing undesired work stoppages, hoarding, and social protest. v Table of Contents Table of Contents................................................................................................... vi List of Figures......................................................................................................... x Chapter 1: Linking Monetary Policy, Agricultural Competitiveness, and the Domestic Economy through the Real Exchange Rate ................................................... 1 Introduction.................................................................................................... 1 Why Argentina as a Case Study?................................................................... 6 The Stop-Go Cycle and Macroeconomic Stability................................ 7 Comparing Rules-Based and Flexible Monetary Regimes ................... 8 Government Intervention in Agricultural Markets ............................... 8 The Weight of Export Agriculture in Argentina’s Economy................. 9 Why Soy?....................................................................................................... 9 Outline of the Paper ..................................................................................... 11 Chapter 2: Features of Production, Competitiveness, and Government Intervention in Argentine Agriculture .................................................................................. 14 Introduction.................................................................................................. 14 Features of Argentine Agriculture ............................................................... 15 Regional Differences in Agricultural Production............................... 17 Patterns of Production in the Pampa and Regional Economies......... 19 Producer Profiles................................................................................ 20 The Soy Value Chain................................................................................... 21 “Soyafication” and the and Expansion of the Agricultural Frontier. 22 Transition from Pasture to Cropland .......................................................... 24 Complementary Services, Infrastructure Development, and Market Integration for Processed Soy Byproducts ................................ 26 Defining Agricultural Competitiveness: Explaining the Agricultural Boom in Argentina............................................................................................. 30 Technological Modernization ............................................................. 31 Key Infrastructure for Agricultural Markets ...................................... 33 vi Retail, Supply Chain Integration, and Value Added........................... 35 Conclusion ................................................................................................... 36 Chapter 3: The Political Economy of Prices, Global Market Integration, and Agricultural Incentives in Argentina’s Export Sector ................................. 37 Introduction.................................................................................................. 37 The Role of Export Agriculture in the Argentine Economy........................ 39 Exploring the Relationship between International Prices and Agricultural Output ................................................................................................. 43 Real Exchange Rate and Exchange Rate Misalignment: Currency Value as an Agricultural Interest............................................................................ 45 Definition of the Real Exchange Rate................................................. 45 Predicting Change in the Real Exchange Rate................................... 48 Sources of Exchange Rate Misalignment............................................ 50 Impact of Exchange Rate Misalignment on Agricultural Production and Competitiveness in an Open Market.......................................... 51 Strategies for Preventing Real Exchange Rate Misalignment............ 54 The Politics of Real Exchange Rate Compensation .................................... 56 The Politics of Export Taxes........................................................................ 57 A Trade-Off between Price Stability and Profit?................................ 58 Conclusion ................................................................................................... 60 Chapter 4: Central Bank Policymaking and its Impact on the Agricultural Sector62 Introduction.................................................................................................. 62 History of Monetary Policy During and Post-Convertibility: An Evolving Central Bank Mandate ........................................................................ 64 The Central Bank’s Mandate under Convertibility ............................ 64 Impact of the Convertibility Mandate on the Macroeconomic Environment .................................................................................................... 65 The Export Economy under Convertibility ......................................... 68 Post-Devaluation: A New Monetary Policy........................................ 70 The New Charter: Returning to the Original Mandate ................................ 72 vii Predicting the Potential Impact of the New Mandate on the Agricultural Sector ............................................................................................................. 75 Monetary Expansion: Countercyclical Monetary Policy and Credit Allocation................................................................................... 76 Central Bank Independence and Inflation .......................................... 79 Management of Foreign Exchange Reserves and Currency Market Intervention................................................................................ 83 Conclusion ................................................................................................... 85 Chapter 5: Policymaking in Argentina and Channels for Articulating Monetary Policy Interest.......................................................................................................... 87 Introduction.................................................................................................. 87 Central Bank Decision-Making: Executive Delegation of Monetary Authority ............................................................................................................