In a recent New York Times article, Paul Krugman dismisses the idea that dollarization might improve Argentina’s economy. He describes dollarization as a magical solution. In doing so, Krugman commits the strawman fallacy. He overlooks the constraints and institutional anomie that alternative monetary reforms face in Argentina.
Argentina currently grapples with one of the world’s highest inflation rates. With the latest inflation rate reaching a staggering 160 percent, it is dangerously close to hyperinflation. The core issue driving this economic turmoil is the absence of institutional constraints and credible commitment devices in the country’s monetary policy. The lack of effective constraints allowed the Kirchner administration to print too much money, as has come to be expected in Argentina. Inflation has averaged 60 percent per year since the mid-1940s.
Dollarization isn’t a fantastical solution, as Krugman claims. It has actually worked in the real world. Facing the specter of hyperinflation, Ecuador embraced dollarization in 2000. Its economy stabilized. Average incomes rose, the poverty rate fell, and the country’s income distribution improved. Zimbabwe similarly turned to dollarization in 2009 to quell rampant hyperinflation. These cases underscore the practicality of dollarization in addressing the kind of out-of-control inflation that has persisted in Argentina.
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