Javier Milei, the “anarcho-capitalist” candidate who came first in the August primaries with his “Avanza la Libertad” party, owes much of his electoral success to his promise to dollarize the Argentine economy. Distressed by hyperinflation and increasing poverty, many Argentines see the adoption of the dollar as the official currency “the long-awaited solution” to the economic crisis in which the country has been mired since 2018.
With inflation now at record levels (124% annually) and another 20% peso devaluation in August, Argentina’s economic nightmare seems as long as an endless night.
In this context, the appearance of Javier Milei, an anti-establishment candidate who advocates shock economic measures, was only a half-surprise for many observers.
Herald of a “libertarian” capitalism, imported from the United States, that wants to reduce the role of the State to a strict minimum, this former economist turned media animal widely won the “open primaries” on August 13, a kind of great election, of electoral nature to decide between candidates from the same side, organized before the first round of the presidential elections, which will be held on October 22.
With 29.86% of the votes, he achieved a score that no survey had predicted and surpassed Patricia Bullrich, the candidate of the right-wing party Together for Change, and the Peronist candidate (and current Minister of Economy) Sergio Massa.
Since then, the proposals of this long-winded candidate – who, for example, wants to put an end to the political “caste”, which he compares to rats – have come to the fore: abolish the Central Bank and eight ministries (including Health and Education), revisit the liberalization of abortion (obtained by Argentines in 2021), eliminate all legislation on environmental protection… But it is one of its emblematic proposals, the disappearance of the peso in favor of the dollar – the “ dollarization”, which is the subject of endless debate.
Rejection from the political class
“Given the poor record of the last two presidencies, that of Mauricio Macri and that of Alberto Fernández, the speech of Javier Milei, who wants to be a candidate to break with the elites that have governed Argentina poorly, has merit, credibility and substance” explains Gaspard Estrada, executive director of the Political Observatory of Latin America and the Caribbean (Opalc).
“From my point of view, this explains why Javier Milei’s proposals arouse the interest of a part of public opinion.”
In fact, after the presidency of the liberal Mauricio Macri (2015-2019) and then that of the center-left Peronist Alberto Fernández (2019-2023), the combined effects of inflation, devaluations, the health crisis and budget deficits have increased the poverty rate from 30% to more than 40% in the country.
The evolution of the poverty rate in Argentina
Thus, when Javier Milei brandishes a chainsaw promising to cut state spending, or when he waves, laughing, giant $100 bills bearing his image, the candidate inevitably attracts sympathy from an anguished political class that no longer has a solid base, in response. what to offer Argentines to get out of an endless economic crisis.
Dollarizing, is it feasible?
However, since assuming the role of favorite, the former economist has moderated his project a bit. Thus, dollarization became a “system of free currency competition” from which, ultimately, the dollar would emerge victorious against the peso.
For most economists, this plan does not hold up. Like many of his colleagues, Eduardo Levy Yeyati believes that “dollarization generally requires a stock of liquid dollars to replace the monetary base.” According to him, in Argentina “this represents approximately between 20 and 25 billion dollars in international reserves,” but “the central bank recently recorded negative net reserves. Therefore, official dollarization would require a very large loan.”
Given that asking for loans in international markets is a priori impossible for an Argentina constantly on the verge of default, the promise of the anti-elite candidate may be disconcerting.
The IMF, a key player in Argentine political and economic life for at least a quarter of a century, has expressed its concerns. “Dollarization cannot replace sensible macroeconomic policies,” Julie Kozack, its spokesperson, told the press on Thursday, September 28.
For the economists surrounding Javier Milei, including Emilio Ocampo, who would assume the direction of the Central Bank in the event of the election of the ultraliberal candidate, this is a false problem.
For him, “dollarization has already occurred” de facto because, according to data from the Central Bank, Argentines have about 245 billion dollars “under the mattress”, that is, in cash or in accounts abroad, despite the strict exchange regulations. “Argentines have already chosen their currency,” the candidate often repeats, alluding to the frenetic race of Argentines to transform the smallest peso into dollars.
Dollarizing, is it reasonable?
Tempted by dollarization, Argentines seem to have forgotten that a previous similar experience ended in 2001 with an unprecedented debacle: a banking crisis, bloody riots, the dispossession of savers and an explosion of poverty.
In fact, in the 1990s, to remedy hyperinflation that reached between 2,000 and 3,000% annually, President Carlos Menem managed to establish “one for one” convertibility (one dollar for one peso). This decade without inflation that Argentines nicknamed “pizza and champagne” was remembered as a period of opulence, especially for the suddenly dollar-rich middle class.
Dollarization as a remedy to the crisis has not been very successful in other parts of Latin America either. On the continent, three countries have taken this path: Panama in 1904, Ecuador in 1999 and El Salvador in 2000.
Economic journalist Romaric Godin points out, however, that unlike Argentina, “the economies of dollarized countries are often small” and that in the case of El Salvador and Ecuador, these two countries can depend on stable dollar inflows from of oil exports to Ecuador and emigrants’ remittances to the United States.
Gaspard Estrada also points out that “the Ecuadorian experience shows that dollarization by itself is not an instrument that allows solving the problems of an emerging economy in Latin America. Furthermore, it deprives the Argentine State of a monetary policy since it would depend on the decisions from United States”.
However, these technical arguments are unlikely to dissuade Argentines from dreaming of dollarization. In fact, the Minister of Economy, who according to the latest polls could face Javier Milei in the second round, only has proven recipes to propose: print money and increase the budget deficit.
“These are elections of change and the question is which candidate will anticipate a change that will reassure Argentines,” adds Gaspard Estrada. “However, one of the main criteria for choosing Argentines is precisely the economy and the desire to evolve and change economic policy. From this point of view, Javier Milei has the assets to win a possible second round.”
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