Lessons from Argentina’s Dollarization Debate: The Challenge of the Commitment Device (Nicolás Cachanosky, December 11, 2023, AIER)
Unlike a fixed peg or a currency board, a government cannot easily abandon dollarization.
Argentina has frequently abandoned fixed pegs. It has also voided peso convertibility to the US dollar. These options are unavailable under dollarization. De-dollarizing would require the government to introduce an entirely new currency that the public does not want. Consider the challenge of currency in circulation. Would the government go into individual houses and compel owners to exchange their US dollars for a new currency they reject? A dictatorship might pull off such a move. But in a democracy such a move would likely see incumbents ousted.
The experience of Ecuador illustrates the point. Rafael Correa, who was president from 2007 – 2017, was an outspoken opponent of dollarization. But he never openly announced plans to de-dollarize Ecuador. His attempt to introduce the dinero electrónico was a total failure. As popular as Correa was, he couldn’t surpass the popularity of the US dollar.
As a monetary regime, dollarization is an institution independent of local politics. That would make a big difference in Argentina, where the average terms of the Ministry of Economics and the Central Bank president are only 1.4 and 1.5 years, respectively. Argentina cannot offer a predictable fiscal and monetary policy with key officials turning over so frequently. Since dollarization is difficult and politically costly to reverse, it establishes credibility in countries where other options are not viable.