In 1991, Argentina embarked on an ambitious exchange rate parity policy, known as the Convertibility Plan, under the leadership of former Argentine president Carlos Menem (1989-1999), who passed away in 2021. The initiative sought at that time to contain hyperinflation accumulated that reached practically 5,000% per year in 1989.
“Argentina was experiencing a period of hyperinflation in the 1980s, much worse than it is today. The situation was really very serious and then the issue of convertibility was decided,” he said in an interview with People’s GazetteLuiz Carlos Day Gama, professor of the Economic Sciences course at the Brazilian Institute of Capital Markets (Ibmec) in Minas Gerais.
The Convertibility Plan established a fixed parity of the Argentine peso in relation to the US dollar – established at one to one. Initially the plan brought tangible benefits.
The first years of Argentina’s first “dollarization”, established through exchange rate parity, were marked by falling inflation, robust economic growth, improvements in social indicators and Argentina’s insertion into the global market.
However, the initial success of the currency peg gave way to significant challenges in the long term. At the end of the 1990s, Argentina began to suffer from the loss of competitiveness of its exports, vulnerability to international financial crises and dependence on United States monetary policies. These challenges, created because of the exchange rate parity policy and fiscal irresponsibility, became crucial obstacles to the success of Menem’s plan.
“The exchange rate parity of the Menem government in the 90s had a negative impact on the general competitiveness of the Argentine economy, but not because there was a one-to-one parity, one peso, one dollar, but because there was a lack of other economic policy support” , explains the professor of Economic Sciences at the Center for Social and Applied Sciences (CCSA) at Mackenzie Presbyterian University (UPM), Josilmar Cordenonssi, in an interview with People’s Gazette.
According to Cordenonssi, the sustainability of the exchange rate parity adopted by Menem’s Argentina would require that its inflation be, at least, equivalent to that of the United States. But what happened at the time was that inflation in the South American country continued to be above American inflation.
“Argentina’s main problem at that time, and continues to be, is excessive government spending and excess demand. [Esse problema] it caused Argentine inflation to continue growing more than the American one and ended up contributing to the failure of the parity plan”, said the professor.
The failure of Menem’s exchange rate parity plan culminated in a crisis that reached its peak in 1999, when the devaluation of the real in Brazil severely impacted Argentine exports, as explained by economist and director of consultancy Eco Go, Marina Dal Poggetto, to BBC.
“Argentina should have also devalued its currency that same year, as Brazil did, but was unable to do so due to the rigid regime that was in force”, said Dal Poggetto.
According to a report from BBCother crises that were occurring at that time, such as the Asian and Russian ones, further aggravated the situation of Argentines, who later began to experience four consecutive years of recession, increased unemployment and poverty.
In 2001, the situation became unsustainable. The then Argentine government led by President Fernando de la Rúa (1999-2001) tried to implement fiscal adjustment measures and renegotiate the external debt, but the confidence of creditors and the population was irretrievably lost. Restrictions on withdrawing money from banks, known as “corralito“, provoked a popular uprising, culminating in de la Rúa’s resignation and political instability.
In December 2001, the interim government, led by Eduardo Duhalde (2002-2003), announced the end of exchange rate parity and allowed the devaluation of the Argentine peso. The Argentine currency quickly depreciated, becoming worth four times less than the dollar in just a few months. This measure resulted in the largest moratorium in Argentine history, with the suspension of external debt payments of around US$100 billion (R$503 million).
More than 20 years later, Argentina finds itself once again plunged into hyperinflation and a deep economic crisis, worsened by the government policies of Peronist Alberto Fernández, who ends his term in December this year.
Javier Milei, libertarian candidate for president of Argentina, who is contesting the second round of the presidential elections on November 19th against Sergio Massa, candidate of Peronism, argues that the dollarization of the Argentine economy would initially solve part of the serious economic crisis that is plaguing the country. country at the moment.
Unlike Menem’s plan, which only “forced” a parity of the peso with the US dollar, Milei wants to adopt the US currency as the country’s official currency.
“I propose free competition between currencies and reform of the financial system. Thus, the most likely thing is that Argentines will choose the dollar and then you will dollarize [a economia
do país],” he said in an interview with an Argentine broadcaster earlier this year.
Differences between plans
The professor of International Relations at Ibmec in São Paulo, Carlos Cauti, highlighted the fundamental differences between the dollarization proposed by Milei and the exchange rate parity policy of the Menem government.
In an interview with People’s GazetteCauti highlighted that the lack of control over public accounts and excessive government spending at that time made the exchange rate parity policy quite unsustainable.
“By printing more currency and setting the obligation at one dollar for each peso, Argentina faced exchange rate challenges,” said Cauti.
Cauti contrasts the Menem government’s policy with the current dollarization proposal defended by Milei, explaining that the libertarian idea would work better because it “eliminates the Central Bank and the government’s ability to print money”.
“The dollarization [proposta por Milei] it forces fiscal responsibility, as the government will not be able to take on debt without guarantees that there are investors willing to buy assets in dollars”, said the professor.
According to Cauti, the dollarization proposal presented by Milei highlights responsibility in public spending as a central element, an approach that, according to the professor, was absent during Menem’s government and the era of exchange rate parity policy.
Cauti states that Milei sees the dollarization proposal at this time as “the only solution” to avoid “persistent fiscal irresponsibility in Argentine politics”. The professor also emphasized the need to “remove the money machine from the hands of politicians”, which could finally guarantee more responsible fiscal management in the South American country.
“Dollarization will certainly be much better than exchange rate parity, because exchange rate parity was economic nonsense,” said Cauti.
Can negative effects of parity be repeated in the dollarization plan?
For professor Carlos Cauti, this can hardly happen. He points out that the concept of dollarization defended by Milei is completely different from Carlos Menem’s exchange rate parity proposal, precisely because the dollarization of the libertarian will be preceded by fiscal responsibility – which will avoid future collapses – and part of the complete replacement of the official currency of the country. country.
For Cauti, Milei’s dollarization proposal has a great chance of being successful and taking Argentina out of the current economic crisis, as it is also intrinsically linked to a more comprehensive trade opening in the country.
According to the professor, Argentina is currently experiencing “a critical situation”, marked by “poor public management, endemic corruption and lack of fiscal responsibility”. It is for this reason that dollarization is the “only viable alternative” to resolve the country’s current economic problems at this time.
Cauti also sees Milei’s proposal as a response to the “historical inability of other Argentine leaders” to formulate a “rational” economic policy. According to him, the economic incapacity and irresponsibility of the last governments was even more evident by the disaster of the current Peronist government of Alberto Fernández and Cristina Kirchner, which is characterized by “high inflation, popular rejection, and for having placed a significant portion of the Argentine population below the poverty line.”
“I believe that several sectors would be positively impacted by dollarization. The poorest sections of the population, who suffer considerably from inflation, would see benefits, as would the middle class,” said Cauti.
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