Dollarization in Argentina: What are the Advantages and Disadvantages of this Idea by Javier Milei?

While some say that Argentina's dollarization will reduce its inflation, others say switching to the dollar would bring more inequality to the southern country

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Photo: TW-JMilei

LatinAmerican Post | Christopher Ramírez Hernández

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Leer en español: Dolarización en Argentina: ¿Cuáles son las ventajas y desventajas de esta idea de Javier Milei?

In recent years, Javier Milei has positioned himself on the Argentine and Latin American political spectrum as one of the region's most disruptive and irreverent characters. Thanks to his ultra-neoliberal discourse, the current candidate for the Presidency of Argentina is positioned as one of the opponents to be defeated by the traditional politics of his country.

Milei's influence in the situation in the south of the continent is such that in recent weeks he has made the entire region talk about the idea of transforming the Argentine economy as it is known today through dollarization.

Possible Advantages of Dollarization

For the politician who calls himself "independent," it is clear that basing his country's economy on the dollar and not on the peso would be an advance that would allow this sector of society to improve quickly and well-directed.

"When we do this recomposition, the GDP (Gross Domestic Product) in dollars is going to be much bigger, and the dollars are going to be bigger," he said. Thus, according to Milei, with the increase in the economy, "income in dollars will also begin to grow," so "the number of homeless and poor will shrink."

Now, the dollarization that would come to power from the hand of Milei would bring with it the disappearance of the Central Bank, an idea that the liberal politician has defended for a long time. The goal is to ensure by all possible means that the economy is based yes or yes only on the dollar and on the market so that without the Central Bank, the peso could be "eliminated."

In this sense, the economist and historian Emilio Ocampo and Nicolás Cachanosky, co-authors of "Dollarization, a Solution for Argentina," explained in their book that dollarization in Argentina could mean greater economic independence on the part of citizens, who would see how Your country's economy is based on a much more stable and international currency than you have today.

For the writers, dollarization would bring a profound reform of the banking system, putting "the savings of Argentines out of the reach of political power."

Now, one of the essential points to see the change to the dollar as a solution to the current crisis in Argentina is precisely the hope that this change will reduce inflation considerably; to explain it, Ocampo, in conversation with Infobae, cited the most famous example in the region: Ecuador.

"Ecuador's inflation rate was similar to ours. The country was in default, the banking system was bankrupt, poverty was 60%, and real wages were 50 dollars. They could not be less favorable conditions. But today, Ecuador has one of the lowest inflation rates in Latin America and a better growth rate," he indicated.

Thus, by promoting the gradual reduction of inflation, dollarization would also help improve economic agreements with significant axes of today's political world, such as the European Union.

You can also read: Will the BRICS manage to promote a counterweight against the dollar?

Possible Disadvantages

Of course, Milei's statements, as well as Emilio Ocampo, who would be in charge of establishing the route to the dollar if the politician arrives at La Casa Rosada (the presidential headquarters in Argentina), aroused fear among various political sectors and academics. According to opponents, the biggest fear is that the dollarization that Milei intends to be "unilateral," a term that would call into question the success of this project.

As indicated to CNN by the director of C&T Asesores Económicos, María Castiglioni, "it would be to stop having your currency and adopt the dollar," that is, to lose a part of the economic sovereignty that you had when leaving your currency for a foreign one.

Of course, beyond the patriotic discourse, this appreciation would not demonstrate a risk of dollarization to the Argentine economy, but rather it was due to a reality that explains a report shared to the public by the director of the Center for Argentine Political Economy (CEPA), Hernán Letcher:

“Dollarizing implies replacing the existing pesos with dollars.” In the case of the unilateral strategy that Milei intends, this is achieved by exchanging all the pesos in circulation for the dollar reserves that the Central Bank of Argentina has; and that is where the most significant problem lies since these reserves are not very extensive.

Regarding figures, the economist and associate director of Eco Go, Sebastián Menescaldi, assured that "if today we exchange the monetary base for net international reserves, the necessary exchange rate would be 4,632 Argentine pesos." This, translated into a broad spectrum, would create the need to obtain approximately 23 billion dollars to leave parity at current values.

The problem lies in the fact that, according to Gustavo Reyes, an economist. However, "the Central Bank has reserves of some 36,500 million dollars". Many of these correspond to depositors, another to China (lender), and another significant to International organizations. "So (the Central Bank) has less than 2 billion of its own," he added in an interview with the Télam news agency.

If the reserves available to exchange pesos for dollars are not high enough, it is necessary to lean towards an extreme devaluation of the current currency. That is, Argentines will have to deliver more pesos for fewer dollars. This would lead to a considerable drop in wages and, therefore, a loss of competitiveness for local companies.

This is shown by the CEPA report, which explains that the best scenario is one in which the dollar could cost 224 pesos since the salary would be 840 dollars, similar to the current private average in the country.

Now, everything gets worse with a more significant devaluation: with a dollar at 705 pesos, the salary would decrease by 68%; at 2,430 pesos (-90%); to 2,860 (-92%); to 9,880 (-98%), which would considerably affect the Argentine people.

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