Argentina’s President-elect Javier Milei set forth an ambitious agenda that clinched his victory in the recent election, including a pledge to abolish the country’s central bank and switch to the U.S. dollar.
Despite speculation of a potential shift toward more moderate policymaking in the lead-up to his inauguration, Mr. Milei has reiterated his determination to shutter the central bank, calling it “non-negotiable.”
With Argentina now gearing up for the possibility of a nation without a central bank and a shift to the U.S. dollar from the peso, many economists are discussing whether these measures would help resuscitate the economy.
“It’s completely feasible,” says Daniel Lacalle, chief economist at the Madrid-based investment firm Tressis and an Epoch Times contributor.
At first, it might appear to be an unorthodox public policy pursuit to dismantle a central bank and abandon a currency. However, Mr. Lacalle told The Epoch Times that the public has already prepared for the change as households have rejected the peso.
“We need to understand first that the Argentine peso is a failure. It’s a currency that the Argentine citizens don’t accept,” he said, adding that they save, produce, and conduct vital transactions in dollars.
While the president-elect doesn’t have enough support in Congress or among provincial governors, Heritage Foundation economist Peter St. Onge says dollarization has become a “relatively mainstream concept.”
“If they can also switch over to the dollar, I think that it won’t be that bad,” he told The Epoch Times. “You'll probably see an outcome more or less like Ecuador has gotten, or maybe El Salvador, which also has the right populist president at this point.
“So it could definitely be a huge improvement for the people of Argentina.”
It’s Happened Before
Dumping a currency for the U.S. dollar at a national level isn’t unprecedented, either.In 1999, before it adopted the euro, Montenegro engaged in dollarization. In January 2000, Ecuador became a dollarized economy. In 2001, the U.S. dollar became legal tender in El Salvador. Twenty years later, the country also adopted bitcoin as legal tender. After facing hyperinflation, Zimbabwe made the greenback the African country’s primary currency, although the government recently announced plans to drop the U.S. dollar in 2025.
But what about central banks? Abolishing central banks hasn’t been common in the post-Bretton Woods world. However, many developing countries, except in Latin America, didn’t have central banks until the 1950s and 1960s.
For nations where central banks were absent, there was a free-banking climate. Commercial banks were granted monopoly privileges by governments regarding the issuance of notes. In other places, there were monetary institutions that governments monitored. Economists suggest that these types of monetary systems, where governments were restrained, produced decent results, primarily in the form of low inflation.
Moreover, politicians’ access to printing presses was limited because of private sector control of money in circulation or stringent regulations surrounding monetary policy governance.
Some observers have questioned how Argentina would participate in the international community since other central banks would no longer have a counterparty to engage with moving forward.
That’s not a problem, Mr. Lacalle notes, because countries worldwide have created and maintained a “dollarized corridor,” so it would be a simple endeavor to generate liquidity from internal and external sources. Mr. Milei’s monetary policy efforts are about stabilization and limiting “the profligacy of government spending,” he said.
Mr. St. Onge echoed this sentiment, explaining that once countries have the U.S. dollar, they don’t need the rest of the infrastructure.
“For a lot of the current contacts between central banks, they’re more or less trying to prop each other up,” he said. “There’s this almost cartel system among the central banks of the world.”
Dollarization in 2024
There has been some consternation about the speed of implementing the Milei government’s reforms.He thinks dollarization can be achieved in 2024 without limiting growth.
Mr. Cachanosky believes dollarization serves as a fast remedy for the inflation crisis, adding that there is a high cost the country could face if there is a new currency crisis or monetary crisis. He did caution that it doesn’t guarantee that dollarization will avert a default, result in comprehensive fiscal reforms, or lead to effective governing. But it grapples with the inflation problem.
“Official dollarization would largely formalize the informal dollarization that has already occurred,” he wrote.
For dollarization critics, they should be more worried about other proposals to revive the peso, efforts that “would likely require even more dollars than dollarization,” he said.
“If Argentina lacks the resources for dollarization, it most certainly does not possess the means to rescue the peso.”
Mr. Milei’s visit to the United States might prove a pivotal moment in the early days of the libertarian’s leadership. The president-elect is expected to meet with officials from the U.S. administration, the International Monetary Fund (IMF), and the World Bank during his whirlwind trip that began on Nov. 26. With tens of billions of dollars due, Mr. Milei and his team might need to negotiate new agreements.
The Real Challenge
“A big reason why he won was the runaway inflation,” Mr. St. Onge told The Epoch Times.However, one hurdle that could prove to be challenging for Mr. Milei to overcome is government spending, despite it being a driving force behind inflation.
In Argentina, 30 percent of the population works for the government, and another 30 percent are welfare recipients, which could make it more challenging for the public to see the connection between inflation and spending, he said.
“Neither of those groups want to cut government spending, which is what’s driving inflation in the first place,” Mr. St. Onge said. “The amazing thing is that he won with 60 percent of the population, who are clearly incentivized to keep the system running, and he managed to actually win an election.”
Mr. Milei is set to take over the presidency of Argentina on Dec. 10. His critics describe his plan as a radical economic vision that may clash with the country’s complex political reality.
According to a recent Fitch Ratings report, Mr. Milei will assume office in the midst of a “severe economic crisis.”
Hitting a Roadblock?
The office of Mr. Milei confirmed that he will carry out his signature campaign pledge to shut down the central bank, clarifying it to be a “non-negotiable matter.”
Analysts argue that he could shift to more moderate policymaking heading into his inauguration. Carlos Rodriguez, a hawkish adviser to Mr. Milei’s presidential campaign, confirmed on social media that he is exiting. In addition, Emilio Ocampo, a pro-dollar advocate, is no longer expected to become head of the central bank once Mr. Milei is inaugurated.
Mr. Milei, who has stated that he doesn’t intend to engage in “gradualism,” has tried to calm these reports. In addition to the statement that removing the central bank isn’t negotiable, Mr. Milei said that he plans to send an immense package of reforms to stabilize the economy on Dec. 11, one day after his inauguration.
“Today, my priority is to avoid hyperinflation,” he said.
The official annual inflation rate is around 140 percent, with the South American country facing multiple episodes of hyperinflation over the past 30 years. The peso recently touched a record low of more than 1,000 pesos per U.S. dollar. The gap between the national currency and the value of the government-controlled official exchange rate is approximately 200 percent.
The newly elected leader also must contend with a recession as economists forecast that Latin America’s third-largest economy will contract by nearly 3 percent next year.
