Why dollarize Argentina?
Below is the translation of the complete remarks I prepared for a media interview contrasting the views of those in favor and against dollarization in Argentina.
No economy can work without sound money. The inability to have a stable currency implies the inability to have an economy that, in the long run, develops rather than one that stumbles from crisis to crisis. If the monetary problem is not solved, there is no economic plan or super-minister1 able to bring order to the country's economy.
The fundamental problem facing any monetary stabilization program is that of having credibility. It doesn't matter the technical consistency of a monetary stability program; if it is not credible, it won't work. For example, it is of little use to declare the independence of the Argentinian central bank if that independence has zero credibility. Given the level of institutional anomie in the country, the possibility of quickly generating high levels of credibility is nil.
Unlike other monetary stabilization plans, the credibility of well-designed and well-implemented dollarization is less dependent on the political will to respect such a monetary regime. It is easier for a populist government to get out of convertibility with the Brazilian real or restrict the US dollar from competing with the peso than to take away people's US dollars. Another advantage of dollarization is that it does not involve imposing a new currency on the public. To dollarize is to accept that the public has already chosen the US dollar. Keeping the peso alive, adopting the Brazilian real, or creating a new regional currency, requires overcoming the (impossible?) task of convincing the public to abandon the US dollar and adopt a currency they do not want. These models may work very well in theory but are not feasible in reality.
The discussion on whether to dollarize Argentina has two crucial issues. The first is to accept that the country is in what economists call a second best. The possible alternatives for the country are all suboptimal. It doesn't make much sense to dismiss a monetary reform as dollarization on the basis of not having an unattainable level of perfection. No monetary reform, then, would be acceptable. The second issue is to be realistic with the country's feasible alternatives. It is often heard in Argentina that dollarization is not the answer; the answer is to find inspiration in cases such as Peru, Uruguay, or Brazil, which maintain their currency. This argument and saying that instead of dollarizing, Argentina has to do things the right way are the same. The comment is as trivial as it is useless. Argentina has repeatedly shown that it cannot "do things the right way." Monetary policy is a powerful tool. And if it is not used well, also very dangerous. In such a case, adopting another country's currency is better. The reality is that thanks to populism, Argentina is closer to being Ecuador than Peru, Brazil, or Uruguay.
But international experiences tell us more than how its neighbors solved their inflationary problems. These experiences also rule out common fears around dollarization. In particular, the fear that a dollarized economy is exposed to external shocks. However, when we analyze the performance of dollarized economies in the region, we see that these fears are unfounded. Major shocks, such as the financial crisis of 2008, the reversal of the price of commodities, and Covid-19, have affected Argentina more than Ecuador.
Most critics exaggerate this fear for two reasons. First, they minimize how much a central bank can become the source of the most destabilizing shocks affecting a country. The Argentinian central bank generates more intense and lasting imbalances than the rest of the world. Monetary policy often magnifies the impact of external shocks. Secondly, it is a mistake to analyze dollarization as an extreme case of a fixed exchange rate regime. In reality, it is a change of institutional regime that profoundly alters the functioning of the economy (in nerdy terms – don't forget Lucas' critique).
I end with two final comments about the benefits of well-designed and well-implemented dollarization. First, it is a solution for Argentina. It is not the only one but perhaps the one that offers the most chances of success. Dollarization's advantage on this front is because the alternative plans depend on the credibility that our political system cannot generate. A new failure of a stabilization plan would put the country on a path of no return. There is no margin for error. A monetary reform must minimize the probability of failure instead of maximizing the use of the domestic monetary policy.
Second, a well-designed and implemented dollarization maximizes the probability of making an expansive adjustment. Without a positive shock to expectations, the inevitable fiscal adjustment would be contractionary, eliminating the political capital needed to complete the country's other reforms.
In the act of humility that the Argentine economic crisis calls for, Sergio Massa (not an economist), the new Minister of Economics, likes to present himself as a “super-minister.”
Como competis con la moneda mas apreciada del mundo?