Connect with us

Hi, what are you looking for?

Economy

Dollarization in Argentina: A Missed Opportunity

Protest in front of the National Congress building in Buenos Aires, as lawmakers debate Milei’s reform package. Jan 31, 2024.

Argentina has grappled with chronic inflation and economic instability for decades. On the campaign trail, Javier Milei promised to scrap the peso and officially adopt the US dollar. Milei emerged victorious in the presidential election in November 2023. Since assuming office, however, Milei has not dollarized Argentina as promised. Instead, he has chosen a more gradual approach, implementing a series of fiscal and structural reforms that he believes will lay the groundwork for future dollarization. 

Is Milei’s revised strategy feasible and effective, or is it a missed opportunity to restore confidence and stability in the Argentine economy?

In our book, “Dollarization for Argentina,” Emilio Ocampo and I argued that the optimal choice for Argentina is to embrace dollarization as early as possible, even preceding other reforms. Our argument is grounded in the belief that dollarization acts not as a substitute for other reforms, but as a catalyst for them: a necessary (but not sufficient) condition for Argentina’s economic recovery.

Dollarization would quickly eliminate high inflation. It would also mitigate the risks of currency crises, devaluations, and capital flight, which have been persistent issues in Argentina for years. Furthermore, dollarization would lower borrowing costs, attract foreign investment, and promote trade and integration with the US and other dollarized nations. Our predictions are not wishful thinking.  They are exactly what has been observed following dollarization in other countries, such as Ecuador in 2000.

The advantages of dollarization extend beyond economics. By adopting the dollar early on, the government would garner the trust and support of the public. This boost in public confidence would provide the government with the political capital and latitude necessary to implement other much-needed reforms, such as those to the tax system, pension system, labor market, judiciary, and institutional quality.

Regrettably, this envisioned scenario is not playing out in Argentina. Milei has postponed dollarization and is currently attempting to pass a comprehensive mega-law encompassing major reforms. These reforms include achieving a balanced budget by year-end, reducing public spending, overhauling the tax code, and privatizing state-owned enterprises. Nevertheless, he faces formidable opposition and resistance from Congress, unions, and provinces. Compromises, such as dropping some proposed tax increases, have already been made to secure votes for the remaining components of the mega-law.

This situation poses several problems. Firstly, it highlights Milei’s weaker-than-expected political power just two months into his term. Secondly, it raises concerns about his ability to meet fiscal targets and reduce inflation, which reached 210 percent in 2023. Thirdly, it casts doubt on the sustainability of his monetary plan, involving a crawling peg of the peso to the dollar at a 2 percent monthly rate. If faith in the government’s commitment to this plan wavers, it could prompt a rush to buy dollars. In the worst case scenario, Argentina would find itself in a full-blown currency crisis.

In contrast, early dollarization would have created a different dynamic. The effects of dollarization would have been swifter and more apparent than those of fiscal and other reforms, which typically take at least a year to complete. The public would have experienced the positive impact sooner, fostering greater willingness to support the government’s reform agenda. Additionally, the government would have avoided the credibility cost associated with changing strategy and reneging on the promise of dollarization.

The delayed implementation of dollarization in Argentina presents challenges that could have been avoided had Milei honored his promise to abandon the peso straightaway. Milei’s current approach raises questions about his political strength, economic goals, and the sustainability of his revised monetary plan. Swift and decisive action through dollarization would have set Argentina on a more promising path, providing immediate relief to its economic woes and garnering the crucial public support needed for comprehensive reforms. Dollarization may still take place in Argentina, but later — and at a higher cost.

Enter Your Information Below To Receive Free Trading Ideas, Latest News And Articles.






    Your information is secure and your privacy is protected. By opting in you agree to receive emails from us. Remember that you can opt-out any time, we hate spam too!

    You May Also Like

    Investing

    Understanding Modified Adjusted Gross Income It’s true that you won’t find your modified adjusted gross income listed on your Form 1040, but that doesn’t...

    Investing

    Tax Day, or the deadline for filing your 2022 federal income tax return, falls on April 18, 2023. But what happens if you are...

    Investing

    As a parent, grandparent, guardian, or even an aunt or uncle, you want the best for the children you love and take care of....

    Investing

    Each quarter, our investment team comments on the markets and economy over the past quarter and looks forward at what the next period might...

    Disclaimer: Dealwithbiz.com, its managers, its employees, and assigns (collectively “The Company”) do not make any guarantee or warranty about what is advertised above. Information provided by this website is for research purposes only and should not be considered as personalized financial advice. The Company is not affiliated with, nor does it receive compensation from, any specific security. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. Any investments recommended here should be taken into consideration only after consulting with your investment advisor and after reviewing the prospectus or financial statements of the company.


    Copyright © 2023 Dealwithbiz.com