The Case for Dollarization in Argentina: A Path to Economic Stability (Nicolas Cachanosky, 12/19/23, Econ Lib)

The primary rationale lies in the necessity for a credible commitment device. This paper by Emilio Ocampo explains how dollarization can serve as such for Argentina. Drawing from the experience of Ecuador under Rafael Correa, we see that dollarization acts as a credible institutional constraint that diminishes the costs associated with a populist regime. In a country where political shifts are frequent, and the probability of populism returning to power is 100%, establishing a stable monetary system becomes indispensable for sustained economic success.

Dollarization is Cost-Effective and a Safer Solution:

In relative terms, dollarization is the most cost-effective and safest alternative. With an annual inflation rate hovering around 160% (and expected to go up in the coming weeks), the demand for Argentine pesos is practically nonexistent. Dollarization facilitates the redenomination of financial liabilities in pesos into US dollars, eliminating the risk of a run against the peso. This would not only stabilize the currency but also afford the government more time to enact necessary changes. Given the combination of high inflation and a lack of credibility in Argentine politics, the amount of US dollars required to sustain the peso exceeds the US dollars needed to implement dollarization. Those who argue that dollarization is not possible due to the lack of dollars at the central bank need to think seriously about where they intend to obtain the dollars to bring the peso back to life. Furthermore, as dollarization implies phasing out the peso, its success becomes more plausible than reviving the peso. […]

Argentina’s persistent struggle with inflation, which has averaged 60% annually since the mid-1940s, has impeded long-term planning and economic growth. The nation has exhausted every textbook solution to high inflation, all of which have proven futile.