Common currency should not reduce dollar supremacy in the region, says Oxford economist

The proposal for a common currency between Brazil and Argentina, which gained prominence and dominated part of the economic debate, with the visit of President Luiz Inácio Lula da Silva (PT) to his Argentine colleague, Alberto Fernandéz, last week.

But the adoption of a monetary reference for commercial transactions should be a longer-term project and tends not to take away the supremacy of the dollar in the region —especially among Argentines—, evaluates Diego Sánchez-Ancochea, who is head of the Department of International Development at the University of Oxford (UK).

A specialist in regional inequality and a student of the situation in Latin American countries, he also believes that the strengthening of relations between countries in the region, with special attention to Mercosur, can help in Brazil’s reindustrialization plans, but that the government still will face a number of obstacles to achieve this goal.

President Lula has been talking about rescuing Brazil’s role in international trade, closing international agreements and bringing Brazil closer to neighboring countries. How does this fit in with the quest to reindustrialize the country, as the president also signaled? In an ideal world, regionalization in southern Latin America would help national reindustrialization projects. This has always been the dream of great Latin American economists, such as [o argentino] Raul Prebisch. On the one hand, one can seek an increase in trade relations between Mercosur countries that increases aggregate demand in all member countries.

What would be the ideal way to achieve both goals? It would be important to develop regional value chains that increase the productive efficiency of new sectors, as well as investment. This obviously requires a much more active policy of creating incentives and a commitment from all Mercosur leaders to promote the regional model again. It is a laudable goal, but full of obstacles, as history has shown.

On his first international trip, Lula said he wanted to intensify Mercosur integration, first looking at an agreement with the European Union and only then thinking about something with China, as Uruguay wants. Is it the right decision? Despite recent problems, we continue to live in a globalized world where building value chains at the regional level is essential to be able to compete with China and expand investment, especially from large regional economic groups. In addition, integration is also a key political project that can contribute to greater collaboration on key issues, including the environment. But it is important that this push is realistic and also considers obstacles, including insufficient trade between member countries.

Can the creation of a common currency for business between Mercosur countries help trade and reduce inequalities between North and South? I believe that the creation of a common currency will only be a long-term project and that it faces numerous political and economic obstacles. Undoubtedly, it could contribute to increasing trade and, above all, services in the Mercosur countries. However, I do not believe that this in any way threatens the supremacy of the dollar in the region or that it will be a central instrument to try to reduce international inequalities in the coming years.

With a more difficult scenario for the world economy, especially for regions dependent on trade in basic products, such as Brazil, are Latin countries in a position to reduce poverty, as President Lula promises to do? President Lula is right when he says that reducing poverty and reducing inequality must be priorities for Latin American governments, given the huge gap they have in these areas. While rapid progress on both goals is difficult due to macroeconomic constraints, it is always possible to take steps in the right direction. I believe it will be particularly important to try to introduce tax reforms that increase tax collection and make it more progressive, as well as to introduce social and employment policy reforms in a creative way. Ultimately, it’s a matter of priorities.

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Diego Sanchez-Ancochea, 47

Born in Madrid, Spain. He is an economist, having studied at the Complutense University of Madrid, the New School for Social Research (in New York) and the University of Oxford, in the United Kingdom, where he is head of the Department of International Development. He is the author of “The Costs of Inequality in Latin America”.