Could Argentina Be the Next Latin American Country to Dollarise Its Economy?

As Argentina grapples with an unpayable debt load, triple-digit inflation, severe drought and rising economic hardship, the idea of abolishing the crumbling peso and adopting the US dollar gains ground. 

There is a great deal riding on Argentina’s national elections in October. The reverberations will probably be felt across Latin America as the competition for strategic influence in the region as well as access to its coveted resources intensifies. China long displaced the US as Argentina’s largest trading partner, but the US is doing everything it can to regain lost ground, including, as we reported in January, rejigging the Monroe Doctrine, a 200-year old US foreign policy position that opposed European colonialism on the American continent:

It held that any intervention in the political affairs of the Americas by foreign powers was a potentially hostile act against the United States. Now, it is applying that doctrine to China and Russia.

Gen Richardson detailed how Washington, together with US Southern Command, is actively negotiating the sale of lithium in the lithium triangle to US companies through its web of embassies, with the goal of “box[ing] out” US adversaries.

The country where the US appears to be enjoying most success in this endeavour is Argentina, whose government even recently participated in the US-created Mineral Security Partnership, which Reuters dubbed a “metallic NATO”. But as the country grapples with unpayable debt, triple-digit inflation, severe drought and rising economic hardship, “Argentines are looking for a radical shift,” according to The Economist. The outcome of the upcoming election could even define the future of Argentina’s currency regime for years, if not decades, to come.

Dollarisation vs Dedollarisation

Much of the talk in recent months has been about dedollarising Argentina’s trade with China and Brazil, its two largest trading partners. In late April, the government announced it will start paying for Chinese imports in yuan rather than dollars. It activated the $18.5 billion million swap arrangement that same month, paying around $1 billion of its Chinese imports in yuan instead of dollars. As Reuters reported, the measure is intended to ease the country’s dwindling dollar reserves.

Argentina has been struggling with dollars for years, but this year its foreign currency reserves hit a critical low after a historic drought caused total agricultural losses of around €17.6 billion, or 3% of Argentine GDP. Dollar shortages are becoming an increasingly common problem among emerging market economies as central banks burn through their currency reserves in a desperate bid to stem the depreciation of their currencies.

Like 18 other emerging markets, Argentina has applied to join the BRICS-plus grouping, for which it can count on the full support of BRICS member Brazil. In fact, Brazil’s President Luiz Inácio Lula da Silva recently said he was conducting talks with fellow BRICS members Russia, China, India and South Africa about fining ways of helping Argentina’s economy. At the same time, Brazil and Argentina and discussing ways of reducing the influence of the US dollar in their bilateral trade. From Buenos Aires Herald:

Da Silva is attempting to persuade other BRICS leaders to have their economy ministers change an article in the group’s rules that would allow it to financially support non-BRICS countries such as Argentina through the New Development Bank, which is currently headed by his political ally and former Brazil president Dilma Rousseff.

On May 29, Da Silva will take part in a BRICS meeting where he expects to discuss the change. He said during the conference that he has spoken to Rousseff and also China’s President Xi Jing Ping about it.

Da Silva also vowed to continue working with Brazil’s Congress and exporters to Argentina to promote bilateral trade. This is likely to come in the form of credit for these companies to keep selling to Argentina and the development of mechanisms to trade in pesos and reais, skirting the U.S. dollar. Economy Ministers Sergio Massa and Fernando Haddad are expected to follow up on the work next week.

If the candidate chosen for the coalition of Peronist parties Frente de Todos — Alberto Fernández will not be running for a second term and two-time President Cristina Kirchner de Fernandez has also withdrawn from the race — emerges triumphant in November, it is safe to assume that the resulting government will continue to pursue BRICS membership, dedollarisation and the expansion of bilateral trade with both China and Brazil, its two largest trading partners. As the Argentinean broadcaster TN recently reported, China’s consolidation as Argentina’s number-one trading partner is a growing source of consternation for both the US and Europe:

The US and EU’s greatest fear is not only that China becomes the main trading partner but that, with that status, it will be able to influence bids and gain control of strategic sectors in Argentina such as telecommunications, ports, routes, military inputs and energy.

The two other main challengers in October’s election are Together for Change, a pro-US liberal-conservative bloc that helped propel Mauricio Macri to the presidency in 2015 but which is yet to choose a candidate; and Freedom Advances, a grouping run by the libertarian economist and congressman Javier “the Wig” Milei that paints itself as fiercely anti-communist and the last bastion of economic freedom in Argentina, and is currently leading in the (notoriously unreliable) polls. Given the prevailing economic uncertainty and despair in the country, with inflation surging to a record 109% year-over year in April, Milei has found fertile ground for his eclectic mix of right wing demagoguery and hair-brained economic policy proposals.

Those proposals range from classic neoliberal fare (charging poor people for public healthcare, cutting retirements and pensions, removing currency controls and “taking a chainsaw to public spending”) to more extreme measures that one Argentinean economist described as “proposed by fanatics that think it’s best to blow everything up”. They include selling off all public assets, shutting down Argentina’s central bank, abolishing the Argentine peso and adopting the US dollar as the official currency.

“If you want to end the scam of monetary emission to cover for the treasury and end inflation, given that Argentine politicians are thieves, the only way is to close down the Central Bank and, at least at the beginning, dollarize [the economy],” Milei tweeted last month.

A Popular Idea Among Some

Currently, 11 foreign nations and non-US overseas territories use the dollar as their official currency of exchange. Six of them are in Latin America and the Caribbean: Ecuador, Panama, El Salvador, the British Virgin Islands, Turks and Caicos, and Bonaire. Milei would like Argentina to be the next.

The idea enjoys support among certain US economists. They include Johns Hopkins Prof Steve Hanke, who once served as adviser to President Carlos Menem whose decision in the early ’90s to fix the Argentine peso at a wholly artificial and unsustainable value of one U.S. dollar paved the way to the financial crisis and currency devaluation of 2001, from which Argentina’s economy has never properly recovered. Things got even worse in 2016 when the Macri government bailed out creditor holdouts like Paul Singer’s Elliott Management. Two years later, it hit up the IMF for the biggest bailout in the Fund’s history ($57 billion), most of which went to foreign investment funds so that they could abandon their stakes in Argentine bonds and take their money abroad (h/t vao).

Milei himself describes Menem as Argentina’s best ever president. He also has ties to the US-based, Koch-funded Atlas Network, which since its inception in 1981 has forged loose partnerships with more than 450 “free-market” think tanks around the world, including many in Latin America. As Lee Fang reported for The Intercept in 2017, the network has operated “as a quiet extension of U.S. foreign policy, with Atlas-associated think tanks receiving quiet funding from the State Department and the National Endowment for Democracy, a critical arm of American soft power.”

Like many right-wing politicians in Latin America, Milei also has ties to the Spanish far-right party VOX and even participated in VOX’s Viva 22 event, where he told the crowd: “Do not be afraid, take the battle to the left, we are going to win, we are productively and morally superior.”

Milei’s proposal to ditch the peso and embrace the dollar is opposed by roughly 60% of voters but has gained traction among a certain segment of the population as Argentina’s currency crisis deepens. The central bank has been burning through its meagre dollar reserves as it tries to stop a slide in the peso’s parallel-market exchange rate. According to a report published by Argentinean consultancy firm 1816, the country’s liabilities in foreign currency already exceed total reserves by around $1 billion — the worst such ratio since the nation’s brutal economic crisis and bank runs of the early 2000s.

Argentina’s economy is already heavily dollarised given the Argentine peso’s more-or-less uninterrupted fall in value over the past 23 years. At the beginning of the century it was fixed by law at parity with the dollar but is now worth less than half a cent in US dollar terms. As El País puts it, “Argentina is a country with two currencies that keeps whatever dollars it can get under the mattress.” Not only are savings kept in dollars; many real estate transactions are conducted in the US currency. Even rentals and smaller transactions often require greenbacks.

A Quick Fix With Dangerous Implications

But there is a huge difference between having a dual-currency regime — as is the case with many emerging market economies with weak local currencies — and abandoning your national currency altogether. Many see dollarisation as a quick fix to resolving Argentina’s chronic financial and economic troubles, pointing to Ecuador’s history of relatively low inflation since adopting the dollar in 2000. But many other countries in Latin America, including Mexico, Brazil, Peru, Paraguay and Bolivia, have also managed to keep inflation in check without having to eliminate their currency and adopt the dollar. In fact, both Brazil and Mexico’s inflation rates are currently below the EU average.

There are also serious doubts about whether Argentina will be able to formally adopt the dollar even if Milei wins the election (and that is still a big “IF”). For a start, his political grouping is unlikely to secure control of congress or the necessary broad-based political support to enact such a reform. Plus, supplanting the peso with the US dollar would require substantial foreign currency reserves that the country currently doesn’t have and is unlikely to get.

“Argentina is not in a position to undertake dollarization because this requires Central Bank dollar reserves it doesn’t have,” said economist Julián Zícari, who wrote a book on the history of Argentina’s economic crises, adding that “trying to [dollarize] would cause a complete evaporation of wages and pensions.”

It would also mean the end of any semblance of Argentinean sovereignty, as the South Korean economist Ha-Joon Chang warned during a recent visit to the country:

If you want to adopt dollars as your official currency you should apply to become a colony of the United States of America because that’s what it makes you. This means your macroeconomic policies will be written in Washington DC…

Argentina unilaterally accepting the US dollar as a currency is insane because you don’t have labour market integration and you don’t have fiscal transfers — it’s not as if the Americans are going to say, “Oh you cute guys in Argentina, now that you want to use the dollar as your currency we will accept more immigrants from you.” No, this is the worst idea.

Instead, Ha-Joon Chang said, Argentina should focus on creating a new social pact aimed at increasing investments in R+D (the country only invests the equivalent of 0.5% in R+D, compared to 4.5% in South Korea, 2.4% in China and 1.2% in Brazil) in order to put to use the rich human talent the country has at its disposal while also reducing the economy’s dependence on primary resources. Without significant investments in R+D, he said, there can be no sustainable development for a middle-income country like Argentina.

But in order to do all that, Argentina will have to stabilise its macroeconomic situation. And that will mean tackling the myriad causes of the economic crises it frequently faces, including its over-dependence on imports and its chronic incapacity to generate sufficient exports, which in turn leads to a chronic shortage of foreign reserves and productive investment.

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  1. disc_writes

    >“If you want to end the scam of monetary emission to cover for the treasury and end inflation, given that Argentine politicians are thieves, the only way is to close down the Central Bank and, at the beginning [of my government], dollarize [the economy],”

    Mutatis mutandis, that is the way many Italians thought in the 1990s.

    Adopting the Euro has been an unmitigated success for Italy, so I am sure things will turn out great for our Southern American cousins, too.

    1. Joe Well

      Given how Europhilic and anti-American Argentinean elites supposedly are, maybe they should just adopt the euro. /S

      1. Matthew G. Saroff

        I just wanted to say, that you have made the best snark that I have seen in some time.

      2. disc_writes

        It sounds like a fool-proof way to disabuse Argentinians of their europhilia. It worked like a charm for Italians, in any case.

  2. vao

    I had the impression that Argentina was doing so-so (not bad, but not brilliant) for quite a long time after the devastating currency and banking crisis of the early 2000s, till Mauricio Macri implemented a programme that, under the pretense of unleashing and boosting the economy, thoroughly sabotaged its financial basis instead — resulting in a fast increasing debt, a collapsing currency, trade instability, and again recourse to the IMF.

    1. Nick Corbishley Post author

      You’re right, vao. Thanks for reminding me. Have included a couple of sentences to that effect as well as a hat-tip to your good self.

    2. The Rev Kev

      Because of your hint, I read the Wikipedia entry for Mauricio Macri and he sounds like quite a piece of work-

      ‘He moved from a fixed exchange-rate system to a floating one, and removed taxes on exports and reduced subsidies on energy to reduce the fiscal deficit. He aligned the country with gradualist neoliberalism and re-opened Argentina to international markets by lifting currency controls (which he reinstated shortly before his term ended), restructuring sovereign debt, and pressing free-market solutions. Domestically, he pursued moderate socially liberal policies, and liberalized the energy sector.

      Macri strongly opposed the government of Nicolás Maduro in Venezuela for human rights abuses and called for a restoration of democracy in the country. He recognized Juan Guaidó, who was elected President of Venezuela by the National Assembly during the Venezuelan presidential crisis of 2019. Macri improved the relations with the United States and from Mercosur achieved a free trade agreement with the European Union and closer ties with the Pacific Alliance.’

      And of course he attended the WEF at Davos. I have the horrible feeling that this neocon/neoliberal leader is deliberately sabotaging his own country in service of the empire-

    3. James

      Does anybody remember the Argentinian dollar peg from 1991 to 2002?

      “The Convertibility plan was a plan by the Argentine Currency Board that pegged the Argentine peso to the U.S. dollar between 1991 and 2002 in an attempt to eliminate hyperinflation and stimulate economic growth.”

  3. Joe Well

    Some background here on possible populist support for dollarization: now there are multiple exchange rates at which one can get dollars, the least favorable is for the general public and the most favorable is for tourists and companies that do business internationally. So it’s hard to avoid the inference that well connected rich people can get access to the best rate for their own personal use. And as noted, the only way to save in Argentina is in dollars or real estate (real estate prices are very high relative to rent).

  4. Joe Well

    We can see here why smart North Americans don’t retire to Argentina. You can live comfortably on $1000 USD/month now, but how long will that last?

  5. ChrisRUEcon

    With Argentina, it’s the wash, rinse, repeat cycle when it comes to balance-of-payments/currency crises. Here again, Einstein’s “insanity” definition comes to mind. Argentina is never going to extricate itself by submitting more wholeheartedly to the very currency regime that is the reason for repeated beatings (until morale improves).

    Wherefore art thou BRICS transnational unit of account?

  6. Santiago

    Mile is trying to close the central bank and lunch competition of currencies. It is not in fact a dollarization, but part of a plan to separate state from the economy.

    1. Piotr Berman

      close the central bank before lunch and start competition of currencies by dinnertime?

      I understand that in Turkey, they instituted exchange-protected bank account that would guarantee not to decrease in USD or Euro terms, one could also add Yuan protected accounts, and get a stabilized loan secured in part with grains (and meat?) from future years. Would it make sense?

  7. TomW

    Basically, nothing is going to help Argentina. Maybe they could try to get Biden to impose economic sanctions on them. It did wonders for Russias grain exports.
    “He moved from a fixed exchange-rate system to a floating one, and removed taxes on exports and reduced subsidies on energy to reduce the fiscal deficit.”
    Fixed exchange rates were a disaster…I was visiting when the grey market was flourishing, and the unofficial dollar exchange rate was listed in the newspaper. Taxes on exports is leftover from 1950’s economic development theories.
    Consider the Argentine Paradox: “The economic history of Argentina is one of the most studied, owing to the “Argentine paradox.” As a country, it had achieved advanced development in the early 20th century but experienced a reversal, which inspired an enormous wealth of literature and diverse analysis on the causes of this decline.”

    It started the 20th century with a per capita income at roughly the level of Canada, managed to stay out of (and profit from) the century’s World Wars, yet failed to keep up with developed economies.

  8. Isla White

    As a diversion from its routine internal troubles over the last 2 centuries it never hurts the Argentine leadership to agitate over the Islas Malvinas (a.k.a Falklands Islands). Also piggy backing on Spain’s 3 centuries of Gibraltar angst.

    Argentina ratifica objetivo de recuperar soberanía sobre Islas Malvinas

    Buenos Aires / 3 de abril de 2023 / 09:32

    El gobierno de Argentina ratifica objetivo de recuperar el ejercicio pleno de la soberanía sobre las Islas Malvinas. Al cumplirse 41 años del inicio del conflicto bélico con el Reino Unido.

  9. John Taylor

    The Peaceful United States of America will most likely be invading Argentina in the near future, to liberate the People from an oppressive government of course. Always caring about the people America does.

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