Dollarization versus other Monetary Reforms
In Argentina, discussions about dollarization and potential alternative proposals for the next government are ongoing. Various options, including convertibility with the Brazilian real, currency competition, BCRA (Central Bank of Argentina) independence through legislation or constitutional reform, and emulating strategies from neighboring countries, have been brought into the conversation.
While these proposals may hold theoretical promise, two significant challenges hinder their practical implementation. Firstly, the required assumptions for their success aren't always based on reality. For instance, arguments surrounding the Optimal Currency Area theory may not hold true in the case of convertibility with the real. Secondly, these monetary reforms often lack credibility, meaning their effectiveness is compromised from the moment they are introduced.
It’s crucial to clarify a key point here. It’s possible to devise a short-term monetary regime that can temporarily stabilize the situation - a temporary patch. However, the real goal should be to find a sustainable and credible solution for the country’s monetary challenges. A well-designed and implemented dollarization can work under good and bad governments.
Unfortunately, Argentina faces a situation where even its own constitution is frequently disregarded, and short-term political considerations take precedence over everything else. In terms of institutional stability, Argentina ranks notably low. Credibility, a crucial factor, is often ignored in formal models, but it plays a pivotal role in reality.
The potential cost of another failed anti-inflationary plan could be extremely high, potentially trapping the country in a cycle of poverty that would be challenging to escape. This is why our dollarization proposal seeks to minimize the risk of failure. Can Argentina withstand yet another currency crisis? Is it worth risking monetary independence at the expense of increasing the likelihood of failure? Isn’t the value-at-risk too high?
Ultimately, the fundamental difference between those supporting and opposing dollarization lies in their assumptions about the credibility that Argentine politics can generate. The historical context suggests that there is a lack of sufficient credibility in Argentina’s policy landscape. What’s missing are compelling arguments demonstrating that Argentine policymakers possess the credibility needed to make alternative plans that are both credible and enduring solutions rather than mere quick fixes.
In contrast to other plans aiming to uphold the peso, the credibility of dollarization is less contingent on local politics and offers greater independence.
The original post in Spanish can be found here.
Next: How to Dollarize Argentina.