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Friday, May 5, 2023

Can Dollarization Fix Argentina’s Inflation Problems?

Dollarizing may be a quick and effective solution to a pressing issue, but in order for Argentina to escape its seemingly permanent crisis, the list of changes is going to have to be more extensive.

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At a slow but steady pace, public interest for dollarization in Argentina is growing. Initially, those who supported the elimination of the peso were viewed as crazy: How could a nation deprive its 45 million inhabitants of their currency? But Argentina is a country with never-ending inflationary conditions: The current annual inflation rate is over 100 percent and rapidly accelerating, while many fear that hyperinflation—which the country experienced multiple times during the 20th century—is coming back. In that context, doing away with the peso may not be as crazy as it sounds.

As a matter of fact, the idea that Argentina should dollarize can be traced back to at least the late 1990s, the decade when the country came closest to eradicating inflation. Back then, the currency board system implemented by former President Carlos Menem fixed the value of one peso to one dollar. This seriously limited the Central Bank’s ability to print money and even caused deflation, but there was no assurance that the law which kept the system alive would survive. This prompted members of the Menem administration to initiate talks with Fed officials and gauge their interest for dollarization in Argentina. In the end, however, the government was unable to control its deficit and the peg was terminated in 2002 after the country ran out of options for financing its excessive level of public spending.

Today, one of the main arguments in support of dollarization in Argentina is the fact that the use of dollars would not be an imposition by the government, but merely a recognition of the current state of affairs. Dollarization has, in some aspects, already occurred. For example, large transactions do not take place in local currency. Nobody buys or sells a house in pesos. Additionally, and without distinction of social class, everybody in Argentina knows that if they save up any money, they need to do so in foreign currency. People repudiate pesos and everyone tries to get rid of them as fast as possible.

The reason Argentines prefer to use dollars is not hard to comprehend: pesos lose value more rapidly than dollars, euros, or other currencies. This happens, in turn, because the government continues to print money to finance its deficit. But this is where opponents of dollarization raise an objection. The main argument against dollarization is that eliminating the government’s ability to create money does not guarantee that it will cease running deficits. On the contrary, they argue, it is that particular problem which should be addressed in the first place, the solution of which would likely render dollarization superfluous since inflation would disappear. The dollar by itself, they claim, is not a solution to Argentina’s problem.

Other arguments against dollarization relate to the potential decrease in purchasing power that Argentines would suffer. First, US inflation has accelerated in recent years and is in any case never equal to zero, which means money would still lose value over time. But second, and most importantly, any potential dollarization would have to occur at a specific exchange rate, and critics contend that the amount of actual dollars on the part of the Argentine government is so low that a brutal devaluation of the peso would ensue before dollarizing.

Against these critiques, proponents of dollarization claim that the adoption of the dollar has helped other countries stabilize, like Ecuador. In their book Dollarization: A Solution for Argentina, Emilio Ocampo and Nicolás Cachanosky discuss the Ecuadorian experience extensively. They contend that, even though the government is still running deficits, inflation has ceased to be a problem in this country, and that the economy is not more vulnerable to external shocks than before. These economists also point to the fact that not even a strong populist leader like Rafael Correa was able to overturn dollarization, as the dollar itself was always more popular than him. Dollarization, they say, creates the right incentives for the economy even vis-à-vis fiscally irresponsible administrations.

In Argentina, this dollarization plan is currently backed by presidential candidate Javier Milei, who is polling at over 20 percent. Economists at the Frente de Todos and Juntos por el Cambio, which represent the current and the former administration respectively, tend to reject this solution. But last year, a representative of Juntos por el Cambio introduced a bill in the House of Representatives to dollarize and continues to advocate it today, while discussions on dollarizing in Argentine newspapers and TV channels take place daily. As Milei grows in the polls and inflation accelerates, dollarization seems to be going mainstream.

It is understandable that dollarization is considered a serious alternative for Argentina. Time after time, it has become apparent that the Argentine government is incapable of offering its citizens a stable currency. The problem is that, all too frequently, the government is also unable to do other things, like spending less than what it collects through taxes or even providing basic services like the justice administration.

Dollarizing may be a quick and effective solution to a pressing issue, but in order for Argentina to escape its seemingly permanent crisis, the list of changes is going to have to be more extensive.


  • Marcos holds an MA in Social Sciences from the University of Chicago and a BA in Political Science from Torcuato di Tella University.