News Analysis
Argentina’s President-elect Javier Milei has set forth an ambitious agenda that clinched him victory in the recent election, including a pledge to abolish the country’s central bank and switch to the U.S. dollar.
Despite speculations of a potential shift towards more moderate policymaking in the lead-up to his inauguration, Mr. Milei reiterated his determination to shutting down the central bank, calling it “non-negotiable.”
With Argentina now gearing up for the possibility of a nation without a central bank and a shift from the peso to the U.S. dollar, many economists are discussing whether these will be successful measures to resuscitate the economy.
“It’s completely feasible,” says Daniel Lacalle, chief economist at Tressis, a Madrid-based investment firm.
At first, it might appear to be an unorthodox public policy pursuit to dismantle a central bank and abandon a currency. However, Mr. Lacalle told The Epoch Times that the public has already prepared for the change as households have rejected the peso.
“We need to understand first that the Argentine peso is a failure. It’s a currency that the Argentine citizens don’t accept,” he said, adding that they save, produce, and conduct vital transactions in dollars.
While the president-elect does not have enough support in Congress or among provincial governors, Heritage economist Peter St. Onge says dollarization has become a “relatively mainstream concept.”
“If they can also switch over to the dollar, I think that it won’t be that bad,” he told The Epoch Times. “You’ll probably see an outcome more or less like Ecuador has gotten, or maybe El Salvador, which also has the right populist president at this point. So it could definitely be a huge improvement for the people of Argentina.”
It’s Happened Before
Dumping a currency for the U.S. dollar at a national level is not unprecedented, either.
In 1999, before it adopted the euro, Montenegro engaged in dollarization. In January 2000, Ecuador became a dollarized economy. In 2001, the U.S. dollar became legal tender in El Salvador. Twenty years later, the country also adopted Bitcoin as legal tender. After facing hyperinflation, Zimbabwe made the greenback the African country’s primary currency, though the government recently announced that it plans to drop the U.S. dollar in 2025.
But what about central banks? Abolishing central banks has not been common in the post-Bretton Woods world order. However, many developing countries, except in Latin America, did not have central banks until the 1950s and 1960s.
For states where central banks were absent, there was a free-banking climate. Commercial banks were granted monopoly privileges by governments regarding the issuance of notes. In other nations, there were monetary institutions that governments monitored. Economists purport that these types of monetary systems where governments were restrained produced decent results, primarily in the form of low inflation. Moreover, politicians’ access to printing presses was limited due to the private sector controlling money in circulation or stringent regulations surrounding monetary policy governance.
Some observers have questioned how Argentina would participate in the international community since other central banks would no longer have a counterparty to engage with moving forward.
This is not a problem, notes Mr. Lacalle, because countries worldwide have created and maintained a “dollarized corridor,” so it would be a simple endeavor to generate liquidity from internal and external sources. Mr. Milei’s monetary policy efforts are about stabilization and limiting “the profligacy of government spending,” he added.
Mr. St. Onge echoed this sentiment, explaining that once countries have the U.S. dollar, they do not need the rest of the infrastructure.
“For a lot of the current contacts between central banks, they’re more or less trying to prop each other up,” he said. “There’s this almost cartel system among the central banks of the world.”
Dollarization in 2024
There has been some consternation about the speed of implementing the Milei government’s reforms.
Despite expectations of an accelerated process, it might be a lengthy crusade because the government will need to dollarize bank deposits, currency in circulation, and the central bank’s liabilities. But the sooner the initiative begins, the better it is for the economy and growth prospects, says Nicolás Cachanosky, the co-author of the paper “Dollarization: A Solution for Argentina.” He thinks dollarization can be achieved in 2024 without limiting growth.
Mr. Cachanosky believes dollarization serves as a fast remedy for the inflation crisis, adding that there is a high cost the country could face if there is a new currency crisis or monetary crisis. He did caution that it does not guarantee that dollarization will avert a default, result in comprehensive fiscal reforms, or lead to effective governing. But it grapples with the inflation problem.
“It works equally well with both competent and ineffective governments, which is precisely what Argentina needs today,” he told Bloomberg Línea.
Meanwhile, recently writing for the American Institute for Economic Research, Mr. Cachanosky says it has “never been cheaper” for Argentina to dollarize than it is today.
“Official dollarization would largely formalize the informal dollarization that has already occurred,” Mr. Cachanosky wrote.
For dollarization critics, they should be more worried about other proposals to revive the peso, efforts that “would likely require even more dollars than dollarization.”
“If Argentina lacks the resources for dollarization, it most certainly does not possess the means to rescue the peso,” Mr. Cachanosky added.
Mr. Milei’s visit to the United States might prove a pivotal moment in the early days of the libertarian’s leadership. The president-elect plans to meet with officials from the U.S. administration, the International Monetary Fund (IMF), and the World Bank this week. With tens of billions of dollars due, Mr. Milei and his team might need to negotiate new agreements.
Argentina is the biggest debtor country of the IMF, owing about $46 billion to the global institution.
The Real Challenge
“A big reason why he won was the runaway inflation,” Mr. St. Onge told The Epoch Times.
But one hurdle that could prove to be challenging for Mr. Milei to overcome is government spending, despite it being a driving force behind inflation.
In Argentina, 30 percent of the population works for the government, and another 30 percent are welfare recipients, so it might be more challenging for the public to see the connection between inflation and spending, he noted.
“Neither of those groups want to cut the government spending, which is what’s driving inflation in the first place,” Mr. St. Onge explained. “The amazing thing is that he won with 60 percent of the population, who are clearly incentivized to keep the system running, and he managed to actually win an election.”
Hitting a Roadblock?
The office of Mr. Milei confirmed that he will carry out his signature campaign pledge to shut down the central bank, clarifying it to be a “non-negotiable matter.” The Nov. 24 statement posted to X responded to “false rumors” that the libertarian economist is putting together a more moderate Cabinet than initially anticipated.
Last week, Bloomberg threw a wrench into Mr. Milei’s reform efforts after it reported that his “boldest campaign proposals … appear at least on hold for now amid a staffing shakeup.” Analysts argue that he could shift to more moderate policymaking heading into his inauguration. Carlos Rodriguez, a hawkish adviser to Mr. Milei’s presidential campaign, confirmed on social media that he was exiting. Emilio Ocampo, a pro-dollar advocate, is no longer expected to become head of the central bank once Mr. Milei is confirmed into office.
Mr. Milei, who has stated that he does not intend to engage in “gradualism,” has tried to calm down these reports. In addition to the statement that removing the central bank is not negotiable, Mr. Milei said that he plans to send an immense package of reforms to stabilize the economy on Dec. 11, one day after his inauguration. Speaking in a broadcast interview with LN+ TV, Mr. Milei stated that it was “urgent” to solve “the central bank’s problems as soon as possible” by “halting monetary emissions” that manufactured the inflation currently ravaging Argentina.
“Today, my priority is to avoid hyperinflation,” he said.
The official annual inflation rate is around 140 percent, with the South American country facing multiple episodes of hyperinflation over the past 30 years. The peso recently touched a record low of more than 1,000 pesos per U.S. dollar. The gap between the national currency and the value of the government-controlled official exchange rate is approximately 200 percent.
The newly elected leader will also contend with a recession as economists forecast that Latin America’s third-largest economy will contract by nearly 3 percent next year.
From The Epoch Times
