Supporters of Javier Milei wave replica dollar bills with his face at a rally in Buenos Aires.CRISTINA SILLE (Portal)
More than 14 million Argentines voted for 53-year-old Javier Milei in response to the inflation crisis that has hit the country. After his recent electoral victory against Peronist candidate Sergio Massa, Milei will assume the presidency of Argentina on Sunday December 10th. His proposals to mitigate the crisis include “blowing up” the central bank, reducing the role of the state to a minimum and cutting social spending and dollarizing the economy.
There are three countries in Latin America that have already adopted the US dollar as their official currency. The first country to do this was Panama in 1904. Ecuador followed, replacing its Sucre with the dollar in 2000. El Salvador subsequently adopted the greenback as its official currency in 2001.
What does “dollarization of the economy” mean?
In economics, “dollarization” means the adoption of the U.S. dollar as a country’s official currency. According to expert Eduardo Levy Yeyati, US currency serves as a means of payment and exchange, as a foreign reserve, as a unit of account and as legal tender. Economist Juan Manuel Telechea says that to dollarize Argentina’s economy, the Argentine pesos in circulation must be replaced. “Not just banknotes and cash, but also bank deposits. “All of this has to be exchanged for dollars.”
Javier Milei appointed Emilio Ocampo, director of the Center for Economic History Studies at Argentina’s UCEMA University, to be responsible for the development and implementation of the dollarization plan. In his book “Dollarization: A Solution for Argentina,” Ocampo proposes two reforms to effectively implement the substitution of the Argentine peso. The first is to adopt U.S. currency as legal tender. The dollar is declared the official medium of exchange for commercial and financial transactions in Argentina. Citizens and businesses would be required to accept the currency as payment to replace the peso. Ocampo’s second reform stipulates that Argentines’ savings remain “outside the reach of political power.”
“We propose to replace the corporativist, clientelistic and protectionist system that has existed for over 70 years with a competitive, open and globally integrated economy. Such a system change is not possible if dollarization is not accompanied by other structural and institutional reforms,” says Emilio Ocampo.
According to Juan Manuel Telechea, Milei’s dollarization plan is an “absurdity” that would require at least $30 billion to implement. “There are not enough dollars to implement dollarization. If someone were to say how many dollars it would take to dollarize the economy, we’re not talking less than $30 billion. Basically, it is such a high value that it seems very difficult to achieve under Argentine conditions.”
Which countries have dollarized their economies in Latin America?
In Latin America, Ecuador, Panama and El Salvador use the US dollar as legal tender. In the case of Panama, the government declared the dollar the official currency in 1904, triggered by the construction and operation of the Panama Canal. In the Caribbean country, the dollar exists alongside the local currency, Balboa, which is used for small purchases and has an equivalent value of one US dollar.
A development bank employee presents dollars to a customer in Santa Rosa, Ecuador, in 2021. Philippe Lissac (Getty Images)
The economic crisis in Ecuador that began in 1998 forced President Jamil Mahuad to initiate a full process of dollarization. The Ecuadorian Sucre was replaced by the US dollar for financial transactions in 2000. It became the only currency in circulation in the country. Mahuad’s government introduced a fixed exchange rate of 25,000 sucres per dollar, which led to an increase in the prices of products and services.
El Salvador adopted the US dollar as legal tender in 2001, abandoning the colon, its national currency. Under the government of Nayib Bukele, the Central American country also adopted Bitcoin as its official currency. In both countries, dollarization led to an increase in the cost of living and progressive deindustrialization, leading to unemployment and forcing them to rely on their exports for survival.
How did the Argentine peso to dollar conversion work during Carlos Menem’s government?
Javier Milei’s proposal would not be the first time that Argentina has relied on the dollar to save its economy. In 1991, President Carlos Menem resorted to privatization and one-to-one convertibility between the Argentine peso and the dollar to curb hyperinflation. Domingo Cavallo, two-time economy minister, was in charge of implementing the measure. Convertibility, which established a fixed parity between the Argentine peso and the U.S. dollar, was backed by the central bank’s reserves. However, this led to Argentina’s worst economic crisis in December 2001.
Twenty years after the Corralito (the infamous Argentine bank run), the proposal to dollarize Argentina is back in the public debate with the future installation of Javier Milei in the government’s Casa Rosada. The proposal was criticized in a letter by Thomas Piketty, Jayati Ghosh and more than 100 economists. “Dollarization appears to offer a solution to Argentina’s chronic inflation problem and could be tempting if the value of savings and consumption capacity is destroyed by runaway inflation. The current lack of foreign exchange reserves would make the initial peso-to-dollar exchange rate high enough to generate more inflation.”
According to economists, the convertibility of the Menem government created an “illusion of stability” that led to unemployment and loss of income in 2001: “It caused an even greater crisis due to the fiscal and monetary constraints of the peso-dollar exchange rate peg.” Finally, they warn, that implementing the dollarization of the economy would ignore the lessons of economic history. Argentina would surrender its monetary sovereignty to the volatility of the US currency and lose its fiscal space.
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