December 8, 2023

Argentina’s new president, Javier Milei, has radical plans to turn the country’s ailing economy around.

Top of the agenda for the self-described anarcho-capitalist is “dolarización”—substituting the local currency, the peso, with the US dollar, to tame runaway inflation. That comes with abolishing the central bank and slashing public spending—cuts that Milei symbolized by wielding a chainsaw in the early days of his campaign.

But experts aren’t sold on this solution. For one, Argentina doesn’t have enough dollars to finance the switch. Second, the plan isn’t sustainable in the long run.

“Dollarization is no silver bullet; it guarantees neither high levels of economic growth nor sound fiscal management,” warns Daniel Raisbeck, policy analyst at US libertarian think tank the Cato Institute. It could provide some stability, but in the absence of sound supply-side policies, it could do more harm than good.

Right-wing outsider Milei, who plans to restrict abortion rights, liberalize gun laws, and maybe even allow the sale of human organs, edged center-left economy minister Sergio Massa of the outgoing Peronist government to win the election yesterday (Nov. 19). He is set to take office on Dec. 10.

Throwback: Argentina’s “convertibility plan” of the 1990s

Although Argentina hasn’t tried full dollarization, a “convertibility plan” pegged its peso to the US dollar from 1991 to 2002 in an attempt to curb hyperinflation and fuel economic growth.

It worked—until it didn’t.

A decade on, “fiscal deficits and debt weren’t reined in” and “Argentina lost external competitiveness. Growth collapsed while unemployment and the current account deficit soared,” Mark Sobel, the US chair of the Official Monetary and Financial Institutions Forum (OMFIF), wrote in August.

“Argentina was unable to finance its external deficits and lost market access. Given large dollar-denominated external liabilities, investors sold Argentine paper, interest rates soared unsustainably, heavy capital controls were imposed and the convertibility plan collapsed amid huge economic, social and political dislocation,” Sobel added.

Argentina’s economy, by the digits

50%Argentina’s annual inflation when the covid-19 pandemic broke out in March 2020, further crippling an economy that had already been in recession for two years

140%: Annual inflation in Argentina now

36.5 kg (80.5 lbs)The country’s annual per capita beef consumption, down 4 kg from 40.5 in 2018, when the crisis began

$46 billion: Argentina’s outstanding debt to the International Monetary Fund (IMF). The country is the biggest debtor to the UN’s finance agency. In recent years, it’s taken two big bailouts from the IMF, including a $50 billion loan in 2018—the biggest rescue in the agency’s history—and another $44 billion in 2022

$5 billion: Hit on agriculture and fuel the Argentinian economy has taken since the war in Ukraine broke out last year

44%: Drop in the nation’s soybean production this year compared to the average for the preceding five. Argentina’s soy harvest is forecast to be the smallest since 1988-89, thanks to the drought gripping South America

40%: Share of Argentinian population living below the poverty line

50%: Households in Buenos Aires that live in rented properties because mortgage credit is practically non-existent. “Construction is driven and financed only by the privileged who have access to dollarized income,” Argentinian economist and researcher Eva Sacco wrote for the Monetary Policy Institute Blog in September

9: Times Argentina has defaulted on its sovereign debt, including three in the past two decades

15%Share of GDP by which new president Milei’s government hopes to cut expenses

11: Ministries that Milei has proposed eliminating. Education, health, social development, and labor would all be nixed and absorbed into single “human capital” ministry

$200 billion: US currency held by Argentinians in savings and other deposits elsewhere, according to a radio interview by Emilio Ocampo, Milei’s economic strategist, in mid-August. The country won’t have to lean on central bank reserves or a multibillion-dollar international loan, Ocampo said. “When that money enters circulation, for example, to pay taxes, the Treasury will automatically have currency available to move forward with the process”

16 months: How long it will take for all Argentinian pesos to be exchanged for US dollars, according to Ocampo

AR$7,070-9,994The conversion exchange rate per US dollar using current net reserves, as estimated by consulting firms in March. “Don’t be fooled by these criminals,” Milei said in September, adding that the exchange will be at the blue-chip swap rate of AR$730

Quotable: Dollarization won’t solve Argentina’s financial woes

“In the case of Argentina, it is a fallacy. Ecuador is dollarized and has very big fiscal problems, which is why it does not have access to financial markets. That’s why Ecuador’s bonds trade similarly to Argentina’s, like an economy in distress. So, thinking that by putting you in this straitjacket, society understands that you have to do the rest, I think it’s fallacious. From the economic point of view [of the] size, diversification and sophistication of Argentina, dollarization is clearly not an optimal exchange rate regime.”

Alejandro Werner, former director of the Western Hemisphere department of the International Monetary Fund (IMF), to Americas Quarterly in September

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