The BRICS summit will be held in South Africa in mid-August. Argentina is considered to be one of the possible candidates to join the association. As is known, one of the main topics of the summit is the creation of a single BRICS currency, which could become an alternative to the dollar. However, economists Gabriela Calderon de Burgos and Daniel Raisbeck from the Cato Institute in Washington believe that Argentina should abandon its national currency and switch to the dollar to improve the national economy. They outlined their arguments in an article recently published on the institute’s website.
Argentina’s annual inflation rate is above 100 per cent for the first time since 1991. It is therefore not surprising that uncontrolled price rises will be the main topic of the country’s presidential elections this October.
According to a poll published in March this year by the Universidad de San Andrés sociological service, 92 per cent of Argentines are “totally dissatisfied” with the current state of the economy. The left-wing Peronist coalition Frente de Todos and the main centre-right opposition Juntos por el Cambio have named inflation as the country’s most serious problem.
Under former President Mauricio Macri, the average inflation rate doubled from about 27 per cent to 54 per cent. Under current President Alberto Fernandez, inflation has risen from 42 per cent in 2020 to the current 114.2 per cent.
In addition, Argentina is recovering from the debt crisis. In 2018, as the Argentine peso plummeted against the dollar, Macri turned to the International Monetary Fund for a $57 billion loan, the largest in IMF history. The two sides reached an agreement with creditors to restructure the $65 billion debt.
At the same time, 29 per cent of Argentines believe that the country should switch to using the dollar. In other words, almost a third of citizens believe that the best remedy for the country’s chronic bouts of inflation is to deprive Argentine politicians and officials of the ability to print any money. From the word go.
The only presidential candidate proposing dollarisation of the economy is Javier Miley, a pro-free market economist. Critics denounce him as a demagogue with an arsenal of dubious antics, but he is the only prominent politician in Argentina with a credible proposal to curb inflation.
Argentina’s convertibility system in the 1990s
As the debate on the dollar transition gathers momentum, some critics are trying to question the very idea of “dollarisation”. They recall Argentina’s convertibility system in the 1990s, which pegged the peso to the US dollar and caused inflation to fall from more than 2,600 per cent in 1989-1990 to 1 per cent in 1998.
That said, as Johns Hopkins University economist Steve Hanke explains, the convertibility system had its drawbacks. It allowed the central bank to sterilise foreign exchange inflows and neutralise outflows because there were no limits “on the amount of foreign assets held at the central bank relative to the central bank’s monetary liabilities”.
The central bank was also allowed to “hold and change the level of domestic assets on its balance sheet.” Consequently, it pursued a discretionary – and often aggressive – monetary policy.
In addition, the Argentine Central Bank retained the ability to act as a lender of last resort and regulated reserve requirements for commercial banks. Eventually, the convertibility system went into a dual currency regime (with different official exchange rates for imports and exports). But in 2001, speculators smelled “blood” and the peso lost parity with the dollar in the foreign exchange markets. In January 2002, Argentina implemented a rapid abandonment of its fixed exchange rate.
The alternative of official dollarisation, by which the country grants foreign currency the status of legal tender, is the equivalent of a tightening of the stranglehold: it mothballs the central bank and completely destroys the local currency. This is precisely the kind of rigid regime Argentina needs today.
Critics of dollarisation from left and right
The Argentine left has denounced any dollarisation initiative, calling it a “Trojan horse against the working class” and the embodiment of the dream of US imperialism, which wants to make the dollar the universal currency.
Much more interesting is the resistance that dollarisation has encountered in centre-right circles and even in classical liberal or libertarian circles. José Luis Espert, a market economist, has publicly opposed the measure. Dollarisation, Espert argued, would be a leap in the dark because it would leave little room for macroeconomic policy measures such as reducing domestic demand through devaluation shocks.
Whether right or left, advocates of monetary sovereignty miss the main point of dollarisation, which is to protect the purchasing power of ordinary people from the excesses of chronically profligate politicians and often subservient – or simply incompetent – central bankers. In fact, it is not surprising that, along with partially dollarised Peru, the three fully dollarised countries in Latin America – Panama, Ecuador and El Salvador – have had the lowest inflation rates in the region over the past 20 years.
While the United States has seen the highest inflation rate in four decades, the dollarised trio of Latin America – all whose gross domestic product (GDP) per capita growth has surpassed that of Argentina over the past 20 years – have not seen double-digit inflation rates due to the COVID-19 pandemic.
It turns out that if you don’t let the local ruling class print money indiscriminately, positive results start to appear. As the same economist Hanke observed, dollarisation is equivalent to establishing the rule of law in the monetary sphere.
Dollarisation does not mean, as sovereignty advocates claim, the capitulation of a country’s monetary policy to the United States. As economist Juan Luis Moreno-Villalaz argued in the Cato Journal in 1999, Panama’s banks, which were integrated into the global financial system after a series of liberalisation measures in the 1970s, place their resources inside or outside the country without serious restrictions, adjusting their liquidity according to local demand for credit or money.
Thus, Panama’s monetary policy is determined by changes in the money supply resulting from the interaction of local factors and the specific conditions of global credit markets, not by the US Federal Reserve. Fed policy affects Panama as much as the rest of the world.
The Argentine state must pay its obligations regardless of its official currency. As for the assets and liabilities of commercial banks, they will remain the same after dollarisation – except for the new unit of account – in terms of their current value in US dollars.
A switch to the dollar, on the other hand, would introduce much-needed fiscal austerity, even if strict fiscal rules are still necessary to contain deficit spending. Working together, dollarisation and a fiscal discipline regime would lower interest rates and limit the future size of the debt.
The question of reserves
The economist Roberto Cachanoski argues that Argentina currently has insufficient reserves for dollarisation. These objections, however, stem from the erroneous assumption that there are certain conditions that a country must meet before it can establish currency management or a dollarised system.
As Hanke of Johns Hopkins University argues, “a monetary fund does not require preconditions for monetary reform and it can be started quickly. Public finances, state-owned enterprises, and trade do not have to be reformed for the monetary fund to start issuing currency.” The same applies to official dollarisation.
In terms of reserves, only Argentina’s central bank is short of dollars. On the other hand, Argentine citizens and companies hold a lot of hard currency, even if, in a logical attempt to protect themselves from frequent banking transactions in the country, they keep them under their mattress, or in other jurisdictions. According to Argentina’s National Institute of Statistics and Census, Argentines held more than $246 billion in foreign bank accounts, safe deposit boxes and mostly undeclared cash at the end of 2022. This amount exceeds 50% of Argentina’s GDP in current dollars as of 2021.
If Argentina were to switch to the dollar, or even announce much-needed reforms such as the abolition of price and exchange controls, it would be reasonable to expect that much of the hard currency held abroad would return to the country. The mere announcement of dollarisation in January 2000 led to an immediate increase in deposits, even though the beleaguered banks were offering negative interest rates.
Let’s be frank: Roberto Kachanoski is not in favour of preserving the Argentine peso, but rather in favour of ridding it of its legal tender status and allowing free competition between currencies. However, the practical effect of full monetary freedom in Argentina would be a widespread adoption of the US dollar, which already thrives on the black market. Under either scenario – simply ending the use of the peso as legal tender or officially declaring the dollar as Argentina’s currency – the country would be able to overcome inflation. With the right set of supply-side policies, Argentina could also return to economic growth.
Argentina’s next government should move towards dollarisation by taking seriously the technical problems that dollarisation poses. As former Chilean Labour Minister José Piñera observed, referring to his own country, radical reforms require conservative execution. Regardless of which party wins the presidential election in 2023, dollarisation must remain at the centre of political discourse.
