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Argentina Sets Itself on the Path to Dollarization

November 21, 2023 By Richard C. Young

By esfera @ Shutterstock.com

After decades of hyperinflation, Argentina has elected Javier Milei as its new president, with a plan to adopt the dollar as legal tender in the country. Cato Institute’s Daniel Raisbeck explains the plan, writing:

Implementing Milei’s economic program is Argentina’s only chance of defeating inflation, regaining monetary stability, and returning to economic growth. A free‐​market economist, the president‐​elect understands that price and currency controls must be done away with, as is the case with all taxes on exports. Milei has even suggested that he will get rid of Argentina’s barriers to global trade unilaterally, a radical and necessary volte‐​face after eight decades of protectionist failure.

Most importantly, Milei plans to dollarize Argentina’s economy and shut down the central bank. Dollarization is the best available means to bring inflation down to single digits rapidly and permanently. Granting the dollar legal tender also protects citizens’ purchasing power by rendering the devaluation of a local currency vis‐​à‐​vis the dollar impossible.

Milei’s own party does not control Congress, although he will likely form a coalition with Juntos por el Cambio, a center‐​right party. Even if he struggles to have all of his intended reforms approved by Congress, dollarization would be a magnificent achievement in and of itself.

As the experience of Panama, Ecuador, and El Salvador shows, dollarized countries in Latin America enjoy lower interest rates and longer loan periods for solvent private sector actors. Moreover, dollarization imposes a hard budget constraint on the local political class, thus providing an institutional curb on public spending that has been sorely lacking in Argentina.

Dollarization is no silver bullet; it guarantees neither high levels of economic growth nor sound fiscal management. Nonetheless, granting the dollar legal tender does tame inflation and provide price stability, thus ushering in the basic conditions that Argentina’s next government needs to implement other, much‐​needed supply‐​side reforms.

If carried out successfully, Argentina’s dollarization can have consequences across Latin America. Since Panama, Ecuador, and El Salvador are relatively small countries, dollarization’s success in the region has been mostly overlooked. Argentina, however, is a large and influential country. A dollarized Argentina would create an enlarged, Latin American “dollar zone” that, informally, also includes Venezuela, a country that has become de facto dollarized.

Read more here.

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Richard C. Young
Richard C. Young
Richard C. Young is the editor of Young's World Money Forecast, and a contributing editor to both Richardcyoung.com and Youngresearch.com.
Richard C. Young
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