Argentina’s president-elect wants to replace its peso with the dollar. Why?
Argentina’s president-elect wants to replace its peso with the dollar. Why?
Argentina has a new president-elect, Javier Milei, and he has a whole list of radical policies to fix that country’s severe economic problems. In fact, for a time he campaigned carrying a chainsaw to symbolize the drastic cuts he planned to make to government spending. Among his plans: getting rid of the country’s central bank and its currency, the peso. Instead, Argentina would use the U.S. dollar.
Why would he do this?
“It eliminates the inflation problem,” said Daniel Raisbeck, a Latin America policy analyst at the Cato Institute, a libertarian think tank.
“Inflation problem” is an understatement — it’s at 140% in Argentina. Raisbeck said the government has basically been printing money to finance its deficit spending. But if there is no Argentine peso, there’s no printing of Argentine pesos, so there’s no Argentine peso inflation.
“Dollarization acts as a straightjacket, so politicians can’t pay debts by printing money,” Raisbeck said.
But moving to the dollar is a straightjacket in other ways too.
“When you give up your own currency and adopt another country’s, you lose the ability to have your own monetary policy and, obviously, exchange rate policy,” said Monica de Bolle, a senior fellow at the Peterson Institute for International Economics, a nonpartisan think tank. “It’s a big thing to give up.”
So if there’s a recession, you couldn’t use monetary policy to help your economy out. And if your currency can’t fluctuate, you can’t make exports more competitive, for example.
Stephen Kaplan, associate professor of international affairs at George Washington University, said this actually happened to Argentina in the 1990s. The country didn’t quite ditch the peso, but it did try for a time to peg it to the value of the dollar. But then a trade competitor, Brazil, devalued its currency.
“And all of a sudden, Brazil was more competitive internationally. Argentina struggled to compete with Brazil and other nations, and unemployment started to rise over time, and you got deflation,” Kaplan said.
That experiment ended in 2002. But dollarizing your economy doesn’t have an easy exit, said DeBolle.
“No country that has decided to adopt another country’s currency has ever been able to reverse that situation,” she said.
Once you go with the dollar, you’re stuck with it.
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