On November 19, libertarian firebrand and political outsider Javier Milei won Argentina’s presidential runoff election. His victory comes amid a grave economic crisis. Inflation has risen above 140 percent, and over 40 percent of Argentines now live in poverty. While Milei ran on a bold free-market agenda, his signature proposal was to drop the Argentine peso, close Argentina’s central bank (the Banco Central de la República Argentina, BCRA), and adopt the U.S. dollar as the new national currency.
Now, though, the “dollarization” plan may be on hold. Luis Caputo, who previously ran the BCRA, is leading Milei’s economic transition team, and will be the next economy minister, has said dollarization is a “medium-term goal.” Emilio Ocampo, an economist and more fervent dollarization proponent, whom Milei previously tapped to lead (and shut down) the BCRA, has left the new president’s team.
Despite these developments, Milei, himself an economist, maintains that closing the BCRA is “non-negotiable.” Hopefully, he will stick to his guns. Dollarization is in fact the best option for monetary reform in Argentina.
If Argentina adopted the dollar, it would essentially import U.S. monetary policy set by the Federal Reserve in Washington, D.C. Argentine inflation would then be closer to the U.S. inflation rate. While the U.S. is still reeling from a historic inflation surge, our comparatively low inflation would be a blessing to Argentines. In fact, Argentina is already heavily dollarized, albeit informally, as many people prefer to buy, sell, and save in dollars, when possible. Inflation-ravaged Venezuela and Lebanon are similarly informally dollarized. In Latin America, Panama, Ecuador, and El Salvador are already formally dollarized and have consequently seen relative macroeconomic stability.
Criticisms of Milei’s plan mostly fall into two categories. The first includes the general arguments against dollarization. Many economists point out the reasons for one country not to be tied to another’s currency. Adopting a foreign currency means that a nation forfeits its ability to earn seigniorage—the profits a central bank generates from creating money. A dollarizing country essentially loses a form of tax revenue.
Another criticism is that U.S. monetary policy may not be ideal for a large exporter like Argentina. If the dollar strengthens, Argentine exports will get more expensive, which could send its economy into recession. By contrast, an independent currency would let Argentina’s central bank depreciate the currency to soften economic blows.
This worry is not just hypothetical. In the 1990s, Argentina pegged the peso to the dollar in what was called the “Convertibility Plan.” When the dollar strengthened, the Argentine economy experienced a painful contraction. The BCRA also failed to maintain adequate dollar reserves to maintain the peg, which led to a “speculative attack” and currency crisis. While full dollarization would be safer than the 1990s currency peg (because there would no longer be a domestic currency to protect), large swings in the dollar’s value could be destabilizing.
These arguments make sense for countries that pursue at least somewhat prudent macroeconomic policies, but they are not persuasive in cases like Argentina’s, where profligate fiscal policymakers pressure the central bank to monetize their spending. Currency crises and periods of high inflation (even hyperinflation, in one case) are regular occurrences in Argentina’s history. Since 2017 alone, the Argentine price level has risen 22-fold. Think of a currency like a vehicle. Both provide a certain amount of freedom that should not be misused. A habitual drunk driver should hand his car keys to a more responsible friend; the same can be said for the BCRA.
The second category of criticism of Milei’s plan deals with the mechanics of Argentine dollarization. Skeptics, including economists such as former IMF official Alejandro Werner, observe that the BCRA does not have enough dollars to replace the existing monetary base of pesos (i.e., physical pesos in circulation plus central bank reserves). Right now, the BCRA has a $7.5 billion currency-reserve deficit, meaning that it owes more dollars than it holds. Argentina’s monetary base is about $20 billion at the official exchange rate and $8 billion at the black-market exchange rate. This makes dollarization difficult because Argentina would have to borrow dollars, which it would do to replace the monetary base, and then pay off the dollar-denominated debt. Critics fear that initiating dollarization would require a further devaluation of the peso, sparking a collapse of the currency and immense economic and social strife.
While this concern is legitimate, it is not insurmountable. As Hoover Institution economist John Cochrane notes, if Milei’s government shows that it is truly committed to getting the country’s fiscal house in order and making the economy productive, creditors will want to lend. A clearly stated commitment to dollarization would stabilize the peso-dollar exchange rate and make the transition easier.
Nicolás Cachanosky, an economist at the University of Texas–El Paso, explains that the full dollarization process does not need to happen instantly. The Ecuador and El Salvador examples show that dollarization for the public can take place over a year or two; Argentina would have time to borrow the requisite dollars. Cachanosky observes that the hardest assets to dollarize would be short-term bonds or “liquidity bills” issued by the BCRA, but such bonds could be restructured and paid off over several years.
Though acquiring the dollars necessary for dollarization will require some heavy lifting, Mercatus Center economist Scott Sumner argues that now would be a good time to do it. First, because much of the economy is already informally dollarized, it will be easy to acquire dollars through taxation (albeit not immediately). Second, the dollar is currently quite strong relative to other currencies. While the dollar could continue to appreciate, it’s more likely to depreciate. If Argentina were to dollarize now, a likely depreciation of the dollar would boost exports and avert the sort of economic contraction that took place at the end of the Convertibility Plan.
A final objection to dollarization is that it doesn’t get at the roots of Argentina’s economic problems. Even though dollarization would end the government’s ability to abuse the peso, it could still pursue bad fiscal policies either by implementing heavy taxes (something it already does) or by issuing dollar-denominated debt, on which it could default.
But dollarization proponents are arguing not that it’s a silver bullet but a way to restore desperately needed price stability. Dollarization should take place alongside the similarly important market-oriented fiscal and regulatory reforms Milei wishes to implement. Taken together, such changes would set Argentina on a new economic path.
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