“The only person who can end inflation is me,” said Javier Milei, Argentina’s presidential candidate who won Sunday’s primary election.
“In what way? Dollarize the economy,” said the self-described libertarian economist who leads the economy. free progressleading the presidential race in the primary with more than 30 percent of the vote.
The result makes Millais the favorite in the Oct. 22 election, ahead of Mauricio Macri’s former security minister, Patricia Bullrich, and current economy minister, Searle. Sergio Massa.
One of Milei’s key campaign promises was to dollarization of the economy Ditch the devalued Argentine peso, dissolve the central bank, and impose a “chainsaw” on state spending.
“When I talk about burning down the central bank, it’s not a metaphor, I want to blow it up, but it’s literally. In other words, let it implode and leave all the rubble behind,” said Mire, whose plan is to make The country stopped printing paper money and all transactions were conducted in dollars.
These measures, he assured, will end the suffering of the majority of Argentines who must cope Annual inflation rate of 115% The poverty rate is close to 40%.
What did Millay suggest?
A supporter of politicians such as Donald Trump or Jair Bolsonaro, Millay assured that dollarizing the Argentine economy was technically feasible.
To that end, he announced that, if he becomes president, he will work with his advisers to “begin discussions on the format for presenting a dollarization bill to Congress.”
Initially, his proposal was to achieve dollarization in two and a half years, but later he came up with the idea of implementing the plan in the shortest possible time.
However, for dollarization to take place, there must be dollars, which is exactly what Argentina does not have, because of the vastly reduced foreign exchange reserves and the limited dollar currency.
Faced with this problem, Mi Lei assured that she had found a solution.
“We are advancing negotiations and We already have dollars to dollarize the economy Value in market dollars. We will continue to work hard to solve a big problem in Argentina, which is inflation,” Millais wrote on her X social network account (formerly Twitter), without explaining how she obtained the funds.
About $35 billion is currently needed to implement the idea without devaluation, according to estimates by the candidate’s advisory group.
Miray said the central bank shutdown would allow dollars it holds as international reserves to be put into circulation, increasing the amount of dollars in circulation.
In other words, he pledged, the end to the inflation problem would be “they take the printing presses away from the politicians”.
To realize her plan, Milei intends to push for a series of structural changes such as State reforms, labor market flexibility, and economic opening are required before moving toward dollarization.
The second step is to eliminate the institutions that oversee financial institutions so that a “competition among currencies” can occur.
“Once it is deregulated, you can choose what you want. You can use gold, Swiss francs, pounds,” he said in a statement to local media.
The final stage of dollarization involves exchanging some of the central bank’s funds for “public debt” and using other resources to pump dollars into the economy, eventually closing down the institutions that print Argentine pesos.
Some of his advisers believe that, in the end, Argentines chose to save in dollars; that is, they chose dollars as their currency.
“It’s almost impossible”
Economists consulted by BBC Mundo believe that dollarization is unlikely, and even if it does, it will not solve the fundamental problems of the economy.
“It’s almost impossible to dollarize the Argentine economy day in and day out because the central bank doesn’t have dollars,” Sebastián Menescaldi, associate director at consultancy EcoGo, told BBC Mundo.
The economist argues that for dollarization to happen, people would have to borrow dollars, but with the country’s high debt ratios, access to these loans is extremely unlikely.
The success of dollarization is also uncertain.
“You will be subservient to another country’s monetary policy, which can be harmful. Convertibility has already happened to us. The evils of excessive fiscal deficits or economic imbalances can also persist. Dollarization is not a panacea.”
And, viewed from another angle, Murray proposes a set of pre-dollarization reforms that are not easy to implement.
Menescardi said these structural reforms “They make sense”, but the point is that if these reforms are implemented, then “dollarization doesn’t make sense anymore”.
From a political standpoint, if Milley becomes president, she would have to have the support of Congress to move forward with her dollarization proposals, and in fact, she has no votes.
‘The social cost will be very high’
“Dollarization is impractical,” Claudio Caprarulo, director of consultancy Analytica, told BBC Mundo. “It is impossible to dollarize the Argentine economy as Mire proposes. “
Under the hypothetical scenario, “the social cost would be very high,” the economist argued.
He added: “In order to dollarize, the currency will depreciate significantly, inflation will be very strong at first, and workers’ wages will also drop significantly.”
Faced with the idea of closing the central bank, Caprarulo sees it as yet another “extremist proposal” from Milley.
“You need to have the tools to carry out economic and monetary policy, and that’s done through central banks,” he noted.
This is because central banks play a role not only in regulating the exchange rate but also in regulating the financial system in order to avoid systemic crises and mitigate external shocks that could damage a country’s economy.
The closest thing Argentina has ever come to dollarization was convertibility in the early 1990s, when it was a fixed exchange rate regime where one peso was exchanged for one dollar.
The economist argues that convertibility has exposed “all the shortcomings and problems of pegging national currencies to the dollar” under fixed exchange rates.
“By replacing the national currency, the economy becomes less flexible and less competitive. It doesn’t solve the problem‘, he added.
While he acknowledged that convertibility ended the hyperinflationary process, he also argued that in the medium term it contributed to problems such as high unemployment and made the economy “very vulnerable to international flow conditions”.
How does it compare to dollarization in Ecuador
There are three dollarized countries in Latin America: Ecuador, El Salvador, and Panama.
Millay cited Ecuador’s dollarization as an example of its success, affirming that Ecuadorians are “much wealthier” than Argentines.
One of the possibilities, in terms of speed of implementation, could be a “hybrid” of dollarization in Ecuador and El Salvador, the candidates declared, in order to implement a similar policy.
Ecuador started dollarizing more than 20 years ago when the economy was going through such a serious crisis The measure is seen as a last resort to save a troubled country that is suffering from hyperinflation of 96% and the complete devaluation of its currency, the sucre.
At the time, President Jamil Mahuad was dollarizing the Ecuadorian economy in an atmosphere of political polarization that led to the government’s downfall.
The following year, then-President Francisco Flores of El Salvador announced that the country would use two currencies: the colon and the dollar.
But once the colone ceased to circulate, the dollar became the country’s only currency.
Unlike Ecuador, which changed its currency in response to the economic shock, El Salvador’s dollarization was more motivated by economic interests, as it was necessary to ratify a free trade agreement with the US that eliminated tariffs for both parties.
Although there are three dollarized countries in Latin America, the situation is very different.
“They are very small economies that are directly integrated into trade with the US”Caprarulo explained.
Ecuador started dollarizing after going through a very serious crisis, especially in the banking sector.
“Argentina is not suffering from a banking crisis and banks have a lot of dollar liquidity to deal with deposits from depositors,” he added.
Regarding the impact of the measure, he believes that “Ecuador has not addressed its growth and productivity problems. The country exhibits many social problems and vulnerabilities”.
Menescardi also said it was difficult to compare such different countries.
“Our country is much bigger than Ecuador or El Salvador. Our markets are different and our economic relations are different”.
Some economists, including Steve Hanke, a professor at Johns Hopkins University and a fellow at the CATO think tank, have defended the candidate’s ideas.
“Javier Millay understands that the only way to finally solve the Argentine peso problem is to formally do what most Argentines do informally: dollarization.”
“I totally agree with him”’, the American economist, who was an adviser to President Carlos Menem between 1989 and 1999, told BBC Mundo.
Hanke believes that the only way to end the decline in the value of the “pathetic peso” is to implement Mire’s idea.
“Millay’s critics denounced him as a demagogue,” continued Hanke, “but he was the only prominent politician in Argentina with a credible proposal to control inflation.”
As he said in a previous interview with BBC Mundo, he assured Argentina “You should shed your weight and put it in a museum.”
In Argentina, however, many analysts see Milley’s proposal as a political message to win votes, rather than a realistic proposal that he could put into practice if he is elected president.
“It’s a well-armed populist message, but the capacity to execute it doesn’t exist today”Minescardi insisted.
“One of the things we’ve learned from exiting convertibility is that locking yourself into a very rigid monetary system can lead to a sharp increase in poverty and unemployment, and dollarization can lead to that as well.”
The economist argues that while dollarization can reduce inflation, it can also lead to greater concentration of income and greater instability.
In any case, it’s still two months before it’s determined who gets to the Rose Palace, and, With Milley back in the primary, all stages are open.
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