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Argentina, Milei, Dollarization: A Look Forwards

Senior Analyst

Inaugaration of Javier Milei, 2023 | Credit:

As the global community watched the horrors unfolding in places like Gaza, Ukraine, or Nagorno-Karabakh, one of the most consequential geopolitical events in the Western Hemisphere occurred on November 19th. Javier Milei, an unabashedly anti-establishment, libertarian candidate in Argentina’s presidential election, won with 56% of the vote. With inflation currently sitting at 143%, and with  40% of Argentines currently living below the poverty line, Milei is inheriting a country on the brink of one of the worst economic crises seen. In order to combat this, he is proposing a series of radical reforms, including dollarizing the economy, eliminating the central bank, and drastically cutting social spending. While Milei may prove to be the much-needed reformer for Argentina, he undoubtedly faces a monumental task in successfully achieving any of his campaign’s stated goals.


How Argentina has found itself in this economic catastrophe is quite a long story, but here’s the short version: Argentina was once one of the wealthiest nations in the world, until the Great Depression led to a massive populist movement led by Juan Domingo Perón. Under Perón and his statist/populist economic policies, economic output in Argentina was throttled. Even after Perón was ousted from power, many of his destructive economic policies and traditions were upheld by his ideological allies in the decades after. Add in the fact that the Argentine political system was constantly swinging (often violently) between Perónist control and anti-Perónist control, and it’s not all that hard to imagine how Argentina got to this point.


Back to Milei: One of the biggest challenges he will face in his upcoming presidential term will be solving Argentina’s hyperinflation issue. In this, Milei has proposed a radical strategy: ditching the Argentine peso in favor of the U.S. Dollar, and to fully eliminate Argentina’s Central Bank. Before any non-Argentines scoff at such an idea, consider the fact that Argentina’s political elite have habitually implemented social spending policies that the government of Argentina can’t hope to pay for, and then systematically devalued their own currency in order to pay for it. If that didn’t work, Argentine leaders would typically request a loan from the IMF, and have now become the largest debtors to the IMF, having recently requested the largest bailout in the Fund’s history in 2022 to the tune of $44 billion. This is in addition to the 20 other past bailouts requested of the IMF. In either case, the Argentine political system has proven itself utterly incapable of implementing a sustainable, long-term monetary policy.


That’s precisely where Dollarization would come in. By dollarizing the Argentine economy, Milei would essentially be taking Argentine fiscal and monetary policy out of the hands of the Argentine government. In doing this, it would force lawmakers in Argentina to balance their budgets, leading to long-term, sustainable economic growth. However, as well-intentioned as this plan is, it faces significant hurdles within Argentina.


The first step to dollarizing the Argentine economy would have to be the removal of all pesos in circulation, which would require billions of dollars in order to buy up all of the old currency. Unfortunately, with a government as fiscally irresponsible as Argentina’s, those are billions of dollars they don’t have. One possible way to avoid this would be mass-devaluation of the Argentine peso. Putting the economic consequences to the side, opposition to such devaluations are exactly what Milei based his entire campaign on. If he were to order such a mass devaluation, it’s pretty hard to imagine a world where Milei stays in office long enough to see his reforms through. 


Another crucial issue when considering dollarization also concerns the role of the Central Bank. Beyond just printing currency, the Central Bank also is meant to regulate the entire banking sector, and act as the lender of last resort. In a financial system like Argentina’s where public confidence is at an all-time low, not having the ability to step in during times of crisis could possibly trigger a bank run, which is a pretty surefire way to collapse a financial system. In many ways, a successful dollarization would rely on many outside factors that the Argentine government has no way of controlling or even influencing.


Fortunately for the Argentines, they do have some aces up their sleeve that could possibly tip the scales towards their favor. The biggest advantage Argentina has is not being the first country in their region to dollarize their economy. Just within Latin America, countries like Ecuador, El Salvador, and Panama have all adopted the U.S. dollar as their official currency for the past two decades, with varying degrees of success. What is indisputably true with each of these countries however, is that while problems certainly remain in each of them, they have managed to rise above Argentina by nearly every economic standard, whether it be poverty rate, inflation rate, or real GDP growth, despite their inferior geographic positions. Argentina, on the other hand, has continued to flounder, finding itself among the company of countries like Venezuela, Zimbabwe, or Haiti, all of which more closely resemble failed states.


Another factor in Argentina’s favor is the thriving black market dollar exchanges. Given Argentina’s long-standing state of hyperinflation, citizens have long preferred to store their wealth in the American greenback, despite nearly triple digit interest rates on the local tender. While the official exchange rate set by the Argentine government is roughly 360 pesos for every American dollar, black market dollar exchanges have sprouted across Argentina, where the exchange rate sits at over 1000 pesos per dollar, according to some estimates. Additionally, many economists have estimated that Argentine citizens have collectively over $200 billion worth of U.S. currency stored in places like mattresses or cupboards. If we are to take this as true, then Argentina has caught a lucky break. Such liquidity greatly reduces the strain that officially dollarizing would place on the Argentine government, and could possibly lead to a dollarization campaign that looks much more like a legalization or decriminalization effort, in that most Argentine citizens already have sufficient stores of American currency to justify the switch. Add in Argentina’s thriving black market that only accepts U.S. dollars, and it is possible that dollarization done correctly, combined with other reforms meant to increase economic freedom, could see a revival in Argentina’s domestic industry, outside of their agricultural and petroleum exports. However, with everything else in this article, this assumes a competent and well thought-out solution, something that Argentine politics have a deep tradition of ignoring.


While some may still hold well-founded skepticism at dollarization in Argentina, it is worth considering if Argentina even has an alternative. The short answer is they don’t. The longer answer is that they have tried to address the rampant inflation with a series of structural reforms in the 1990s and through the 2000s. Nicknamed “The Convertibility Regime,” the Argentine government, with the help and oversight of the IMF, pegged the peso

 1:1 with the U.S dollar, eliminated indexing, required that Argentina’s Central Bank back at least ⅔’s of its monetary base with international reserves, and appointed a “currency board” that would help ensure the value of the peso didn’t falter relative to the dollar. Unfortunately, this plan was contingent on strict fiscal reforms that the Argentine political system was not prepared to undertake, and the entire system unraveled, culminating in the Argentine Crisis of 2000-02, which saw monthly inflation rates peak as high as 25.87%. In the eyes of many Argentines, while dollarization may seem like an incredibly risky endeavor, there is no other option. Large-scale attempts at reform have all failed, mostly because it has continuously given far too much autonomy to an untrustworthy political class. Dollarization would at least give the economy of Argentina a much-needed buffer between itself and mismanagement within Argentina’s political elite.


In any case, Javier Milei’s victory in the Argentine presidential election marks a turning point in Argentina’s history, as it could possibly be the beginning of a turn away from the destructive populism inspired by repeated Perónist administrations, and the financial havoc brought on by their irresponsible spending and monetary policies. While Milei himself probably isn’t anyone’s idea of a perfect statesman (he’s already threatening to cut ties with China and Brazil, Argentina’s two largest trading partners), he absolutely should be taken seriously as a global leader. As I have argued in the past, Argentina has the chance to become one of the most powerful countries in the world, and the undisputed first power in Latin America. Instead, the nation has become a poster child for how 80 years of reckless and irresponsible policy decisions can nullify perfect geographical blessings. If Milei and future administrations can sufficiently reform Argentina’s political and monetary system, it is possible that the Western hemisphere will witness some of the most rapid economic growth since Brazil in the 1990s. Only (a lot) of time will tell.





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