Dollarization or Not, Argentina’s Future Will Be Expensive

The good news is that President Javier Milei seems to be backing away from plans to dollarize the Argentine economy. That is also the bad news.

Don’t get me wrong: Dollarization would be great — if the country had a spare $30 billion to back each peso with dollars. But Argentina doesn’t have that extra money ready at hand, and so the Milei regime is looking for some form of dollarization that can both work and be worthy of the name.

In a recent speech, Milei seemed to suggest that formal dollarization — as seen in El Salvador, Panama and Ecuador — isn’t going to happen. His remarks are somewhat confused, so it might be helpful to review different types of dollarization and what they mean.

First is what I call the Zimbabwe path to dollarization: Just push the rate of inflation into the billions or trillions, and the native currency will be replaced by the US dollar. The mechanics are easy, but the process is tragic. It impoverishes the poor and members of the middle class who have been saving in the national currency, or who have written contracts or debts in it.

A second method is to take the domestic currency and try to peg it to the dollar on a one-to-one basis. Argentina tried that in 1991. If Milei managed to establish a one-to-one peg of the Argentine peso against the dollar today, ask yourself: Which asset would you rather hold? The dollar of course, because of its greater security. Not surprisingly, the earlier Argentina dollar peg collapsed in 2002 once uncertainty about its credibility took hold, and high inflation followed once again.

Milei hints at this method when he mentions making the peso fixed “like a rock” (“como una roca”). But this path is dominated by strict dollarization. If the Argentine government had enough dollars to promote a one-to-one peg, it would do better by converting all pesos to dollars outright, and giving up on the peso.