The Argentine peso has had a tumultuous life. In the 1980s it was temporarily dethroned by a new currency called the austral. An arranged marriage with the dollar in 1991 produced some years of bliss but ended in a ruinous divorce. More recently, the peso has suffered the humiliation of being tagged the worst-performing currency in emerging markets.
Now an Argentine economist running for president is proposing to put the currency out of its misery once and for all. Javier Milei, who’s also a congressman, says that to quash triple-digit inflation, the nation should formally adopt the dollar. “The peso melts like ice in the Sahara Desert,” Milei likes to say, alluding to the currency’s rapid depreciation: It’s lost half of its value against the dollar just in the past year.
If Milei wins the presidency in October and follows through on his pledge, Argentina will become the largest economy to dollarize. Its gross domestic product is about five times that of Ecuador’s, which is the biggest among the seven sovereign nations that have embraced the greenback, according to the International Monetary Fund.
If more haven’t done so, it’s because it’s a last-ditch solution for countries in desperate straits. Argentina certainly fits the bill: Inflation reached 109% in May, and the central bank’s benchmark interest rate sits at 97%. Economists surveyed by Bloomberg have penciled in a recession for 2023; it would be the third in five years.
A byzantine system of currency controls and differential exchange rates has not succeeded in breaking the peso’s slide. (A new 2,000-peso bank note is worth $4.) Instead, the thicket of red tape is spurring a de facto dollarization. Landlords now demand dollars as payment, as do lawyers, sellers of musical instruments and wedding venues.
“Dollarization is already taking place,” says Diana Mondino, an economist and finance -professor who’s running for Congress under Milei’s banner. “Argentines are saving in dollars and making more and more transactions in dollars.”
Milei has publicly endorsed a dollarization plan advanced by Emilio Ocampo, a descendant of an illustrious Argentine family who has an MBA from the University of Chicago Booth School of Business and worked as an investment banker at Salomon Brothers Inc. in New York during the 1990s.
A book Ocampo wrote on dollarization sold out in Buenos Aires bookstores last year. But the broader public is skeptical. Two recent polls that each surveyed about 1,000 Argentines showed that more than 60% oppose dollarization. “The dollar is an object of desire in Argentina, but most Argentines don’t know what dollarization is nor understand how it can affect the local economy,” says Gustavo Córdoba, director of polling company Zuban Córdoba y Asociados.
Argentines’ weariness to get hitched to the greenback is rooted in trauma. In the early 1990s, as the country battled hyperinflation, economists advising President Carlos Menem proposed a bold solution: Peg the peso to the dollar one for one. The arrangement, known as a currency board, was wildly successful in its early years. Inflation evaporated and growth picked up, helping turn Argentina into an emerging-market darling. Menem’s government took advantage of the turnaround in investor sentiment to crank up bond issuance to fund persistent budget deficits.
Argentina’s good fortune ran out in the late 1990s, when the combination of sagging prices for the country’s grain exports and a rush of money out of emerging markets plunged it into a deep recession. The country secured a rescue package from the IMF, but a revolving door of presidents struggled to revive the economy. President Eduardo Duhalde, in office for fewer than 15 days, severed the peso’s link to the dollar in early 2002, sending the currency into free fall.
Steve Hanke, a professor of applied economics at Johns Hopkins University who’s one of the world’s most enthusiastic advocates of dollarization, says he advised the Menem administration to switch to the greenback in the 1990s. He’s still convinced that’s the best route. “It’s time to mothball the central bank of Argentina and the peso and put them in a museum,” he said in an email. Milei says that if he’s elected president, he’d “blow up” the central bank.
Within Argentina, several economists have pronounced themselves against dollarization, saying it would effectively cede control over monetary policy to the US Federal Reserve. Among the possible downsides is that a strong dollar would spur Argentine demand for imports while making exports more expensive, potentially setting the stage for a balance of payments crisis.
Others say Argentina’s leadership should focus on reining in its chronic budget deficits, which they claim are the root cause of peso weakness and inflation. “Dollarization is putting a fat man in a straitjacket instead of prescribing the fat man a better diet,” says one former central bank official who requested anonymity to speak candidly.
Argentine economist Luciano Laspina echoed that view, using a different metaphor, in an April 27 tweet that read: “We don’t have to change collars, we have to stop being dogs.”
Members of Argentina’s political establishment have watched nervously as Milei, a self-described libertarian, has climbed in the polls. In a TV interview in April, Buenos Aires Mayor Horacio Rodríguez Larreta suggested that Ocampo’s plan would subject Argentines to a much bigger devaluation at the outset than if the country were to dismantle currency controls.
The former Wall Street banker likens dollarization to a pizza: There are a variety of options for toppings, he says, but the dollar is always the crust. One type of pie would be a bimonetary system where the dollar and the peso are both legal tender. Another would oblige Argentines to trade in all their pesos for dollars.
Ocampo, who gave up a career in finance to write books about Argentine history, says he’s not on the payroll of Milei’s campaign and hasn’t stumped for him.
Even if he wins the presidency, Milei will have to negotiate huge obstacles to enact dollarization, starting with the problem that his coalition is unlikely to secure a big enough block of seats in Congress to push it through.
Ocampo acknowledges that despite his best attempts to make his plan accessible, the mechanics are difficult for a general audience to grasp. “There’s no TikTok explanation for this,” he says. “Argentina’s problem is very complex, and we’re designing complex financial engineering to resolve it. For better or worse, Argentina will dollarize.”
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