Economy 13-09-2018

Dollarization, a pill or a poison for Argentina?

As the economic situation in Argentina worsens, more voices appear that propose to resort to dollarization as an effective measure to get out of the crisis. Is this measure capable of saving Argentina or will it only aggravate existing problems?

The Argentine peso has been devalued by 100% so far this year. The US bank Citibank indicated in its report that inflation in Argentina could reach 48.5% in 2018 and reach 50% at the beginning of 2019.

Options against the economic debacle

The journalist Mary Anastasia O'Grady considers in her article published in The Wall Street Journal that adopting the dollar would be an effective measure that would help Buenos Aires get out of this crisis.

For his part, Argentine economist Guillermo Calvo said in an interview with the Argentine newspaper La Nación that dollarization is something that Argentine authorities would have to think more seriously from now on.

"As long as Argentina does not do the latter, it will not be able to grow," Calvo said, although he added that for now it is premature to make dollarization, which would also not help alleviate the problem of debt and current account deficit.

In addition, Calvo admitted that dollarization would deprive the Argentine authorities of intervening in the exchange rate. The central banks of many countries tend to manipulate the exchange rates of the national currency through interventions to support the commercial activity of the exporting companies.

Why dollarization will not help Argentina?

Despite the voices that advocate for dollarization, there are others who consider it a bad idea. The economist and former deputy economy minister Carlos Rodríguez said in an interview with the Argentine daily Clarín that a country that does not have enough dollars can not dollarize its economy.

The expert believes that dollarization is unable to solve structural problems and is only an "alternative B", which the Argentine authorities can use if the peso collapses.

The journalist Claudio Fabián Guevara highlights in his article for Telesur that the current situation in Argentina is similar to the one that occurred in 1989, which was marked by hyperinflation.

At that time, the Argentine authorities decreed the Convertibility Law of the Austral, which established a fixed exchange rate between the national currency and the United States, at the rate of 1 US dollar per 10.000 australes or later a convertible peso.

Although this measure helped to reduce inflation significantly since 1997, Argentina went on to face problems that were caused by its application.

If in the first years the Argentine authorities could obtain dollars in abundance when going to the privatization of the state companies and retirement funds, once finalized this process they had to accumulate external debt.

They did so because Argentina's agro-export economy was unable to produce sufficient foreign exchange earnings.

According to Fabián Guevara, the approval of this law finally contributed to the December 2001 crisis in Argentina. The columnist thinks that the proposal to dollarize the economy of Argentina can not be explained only by the internal context.

"The imperial need to maintain the hegemony of the dollar has been more important than the exploitation of oil in the history of the last decade," he writes.

The journalist points out that while a block of emerging countries, headed by Russia, China and India, is looking for a way to replace the dollar as an international reference currency, the dollarization of Argentina would be a symbolic conquest for those who are trying to maintain the hegemony of the North American currency.

According to the author, if the authorities decide to replace the peso with the dollar, they will not be able to do so because they will need too many international reserves that are currently losing due to the accelerated exchange rate crisis.

The experience of others

Argentina is not the only country in which discussions about dollarization were held. Ecuador even went beyond simple conversations and adopted dollarization 18 years ago. This measure applied to fight against high inflation worked only at the beginning, according to the Clarín newspaper.

The economist of the consulting firm Maxinver Eduardo Blasco points out to the Argentine environment that despite the positive effects, dollarization did not help to definitively solve the problems facing this country.

"Ecuador continues to face fiscal and economic problems and with a high country risk, it remains a country that is very dependent on oil and other primary products and has a very low level of industrialization," he says.

In turn, Federico Furiase, expert of the consulting company EcoGo, emphasizes that dollarization would not solve Argentina's problems but "would put them under the carpet". In this regard, it considers that the only way to achieve a competitive exchange rate for exports is to try to lower inflation. For that it is necessary to achieve the reduction of the fiscal deficit.

In addition, similar ideas about the dollarization of the economy also emerged in Venezuela. The opposition candidate in the most recent presidential elections, Henri Falcón, champion of Avanzada Progresista, promised to dollarize the economy of reaching the presidency of Venezuela.

According to the journalist Leonardo Vera, this idea would not be viable in the case of the Caribbean country. To dollarize an economy you have to have dollars in abundance and Venezuela does not have them, like Argentina.

In addition, Vera recalls, in her article published on the Prodavinci portal, that the economies that opted for dollarization one day managed to implement it only because "de facto the dollar was the usual means of payment in society."

Sputnik



 
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