2023-11-27 08:32:00
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The plans of the newly elected President Javier Milei are hardly feasible for the South American country.
What is it regarding? During the election campaign, the new Argentine President Javier Milei announced shock therapy for the economically stricken country. The heart of his program is so-called dollarization. Milei wants to abolish the local currency, the peso, and replace it with the US dollar as a means of payment. This should defeat hyperinflation and bring the country the much-needed economic stability.
What is the basic idea? By abolishing the peso and adopting the dollar as a means of payment, Milei wants to prevent Argentine politicians from continuing to print money to compensate for deficits in the future. This is intended to prevent excessive inflation in Argentina. The fact is: in October the annual inflation rate in Argentina was over 140 percent.
Dollar peg 30 years ago
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Argentina pegged the peso to the dollar 30 years ago. This initially led to an economic boom that many Argentines still remember positively today. “But by linking to the dollar, a country loses a lot of economic policy leeway and thus competitiveness,” says economics professor Barbara Fritz.
Inflation in Argentina fell from hyperinflation to 40 percent in the first year – so prices rose by 40 percent in dollars. However, export products became more expensive to the same extent and therefore less competitive. The result: a strong deindustrialization process in Argentina. “That brought the country into economic chaos and ultimately into what was then the biggest debt crisis of the post-war period,” says Fritz. That’s why dollarization would now be a “very dangerous experiment.”
How does this work politically? In principle, the new president would need a majority in both chambers of parliament to pass a corresponding law. However, he doesn’t have this. Furthermore: “If Argentina wanted to replace the peso with the dollar, it would need a lot of dollars to start with,” says economics professor Barbara Fritz. She teaches at the Latin America Institute at the Free University of Berlin. But the central bank currently only has around $20 billion on its books – and it has already been committed.
It would be a disastrous form to introduce dollarization.
Can Milei push through dollarization? If a law to adopt the dollar were to pass in parliament and Milei were to abolish the peso without the central bank’s foreign exchange, the result would be that the population would receive very few dollars when exchanging their pesos. “That would be an economy that had practically no liquidity,” says Fritz. “It would be a catastrophic form to introduce dollarization.” That’s why she doesn’t believe that Milei will find a parliamentary majority.
Legend: During the election campaign, Javier Milei campaigned with dollar bills that showed his likeness. Archyde.com/Matias Baglietto
Are there other possibilities? The Argentine population has an estimated $200 to $250 billion in savings. However, a lot of it is in banks abroad – because rich Argentines don’t trust their own politicians. In order to use this money for dollarization, it would have to enter the economic cycle in Argentina. But the economist Fritz does not currently see the conditions for this to exist. There is too much mistrust towards politicians.
After dollarization, the door back is effectively closed.
Could dollarization be reversed? To date, no country that has chosen the dollar as its currency has found its way back to its own currency, said Fritz. Ecuador tried, but the South American country failed miserably. “Dollarization is very difficult to reverse – the door back is practically closed,” emphasizes the Berlin economist.
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