Why ‘Dollarize’?

Argentina embraces a gimmick.

Photo Credit: Getty

The newly inaugurated president of Argentina, Javier Milei, is variously described as a radical libertarian, a right-wing populist, and an ultraconservative. Rather than try to sort out the nomenclature—which is confusing enough in the United States, where the “far-right” element connected with Donald Trump is well to the left of Hillary Rodham Clinton on trade and national defense, and is practically McGovernite on entitlements—it would be better to ask whether his policy proposals are any good. Dollarization, the one currently most prominent in international headlines, probably isn’t. 

Dollarization is just what it sounds like: Under the plan, Argentina would abandon its national currency, the Argentine peso, and start using U.S. dollars instead. This is not unprecedented: About a dozen countries (including Ecuador, El Salvador, and Zimbabwe) use the dollar as an official currency. Seven countries in the Middle East and Africa “peg” their currencies to the dollar, meaning that their currencies trade at a fixed rate rather than fluctuating against the dollar in foreign-exchange markets. Hong Kong’s currency is pegged to the dollar, too, though this causes enough trouble for the formerly free territory now under Beijing’s bootheel, and it may rescind the policy. Argentina already tried pegging its currency to the dollar, to no great success, and it currently maintains a “crawling peg,” meaning that the government seeks to allow the peso to lose value against the dollar in an orderly, regular way. 

But the crawl is about to become a gallop. Milei already has devalued the peso by more than 50 percent against the dollar as a “shock therapy” measure. Devaluation reduces the real value of debts denominated in the devalued currency, makes your exports cheaper for overseas buyers, and, in theory, can stimulate the economy. It also makes your people poorer, at least temporarily, and can make imports painfully expensive. 

Read the full article on The Dispatch.