Why ‘Dollarize’?

The newly inaugurated president of Argentina, Javier Milei, is variously described as a radical libertarian, a right-wing populist, and an ultraconservative. Rather than try to sort out the nomenclature—which is confusing enough in the United States, where the “far-right” element connected with Donald Trump is well to the left of Hillary Rodham Clinton on trade and national defense, and is practically McGovernite on entitlements—it would be better to ask whether his policy proposals are any good. Dollarization, the one currently most prominent in international headlines, probably isn’t. 

Dollarization is just what it sounds like: Under the plan, Argentina would abandon its national currency, the Argentine peso, and start using U.S. dollars instead. This is not unprecedented: About a dozen countries (including Ecuador, El Salvador, and Zimbabwe) use the dollar as an official currency. Seven countries in the Middle East and Africa “peg” their currencies to the dollar, meaning that their currencies trade at a fixed rate rather than fluctuating against the dollar in foreign-exchange markets. Hong Kong’s currency is pegged to the dollar, too, though this causes enough trouble for the formerly free territory now under Beijing’s bootheel, and it may rescind the policy. Argentina already tried pegging its currency to the dollar, to no great success, and it currently maintains a “crawling peg,” meaning that the government seeks to allow the peso to lose value against the dollar in an orderly, regular way. 

But the crawl is about to become a gallop. Milei already has devalued the peso by more than 50 percent against the dollar as a “shock therapy” measure. Devaluation reduces the real value of debts denominated in the devalued currency, makes your exports cheaper for overseas buyers, and, in theory, can stimulate the economy. It also makes your people poorer, at least temporarily, and can make imports painfully expensive. 

The dollar has had a rough go of it with inflation in the past few years, but it has weathered the storm as well or better than the euro and other near-peers. The U.S. inflation rate went north of 8 percent in the immediate post-COVID era, which was a lot more than Americans were used to but which would be a smashing success for many other countries around the world. There are a lot of idiots in our economic village, but the dollar still looks pretty good from many vantage points around the world. 

The problem—one problem, anyway—is that the ladies and gentlemen in Washington often are poor guardians of the best interests of the American people, and they (rightly) have very little incentive to take the interests of the Argentinian people into account when making monetary-policy decisions. The sort of thing the United States has been doing in the past couple of years to fight inflation—using interest rates to try to fight inflation, which is to say, using monetary policy—is something that the government of Argentina won’t be able to do on its own if it outsources its money matters to the United States. And that’s effectively what it’d be doing: Pegging your currency to the dollar, or even simply adopting the dollar as Milei means to, means outsourcing the bulk of your monetary policy to a foreign country. If that sounds like a radical step on its own—and it is—just consider the bad experiences that many of these countries have had with their own national banks and monetary-policy authorities. 

From the local point of view, there is an understandable sense that this would be far from the worst-case scenario, given how poorly Argentinian authorities have done the job in the past. But improving monetary policy would not solve Argentina’s economic troubles, which mostly are not monetary in nature but fiscal. Yes, Argentina has done a poor job nurturing its currency, but its basic problem is that its government spends far too much money, running up huge debts and, from time to time, defaulting on them. Argentina has, in fact, defaulted on its sovereign debt nine times during its history as an independent country. 

Having national control over monetary policy has real value. One of the basic structural problems with the European Union is that there is a lot of real diversity among the various national economies within the bloc, and, when there are economic challenges, forcing Germany and Greece to follow a single monetary policy can have some pretty hairy and unpleasant side effects. (The euro is a very fine mascot for European solidarity, but the single currency has always seemed to me among the least desirable features of European economic union. The benefits of having national monetary flexibility surely outweigh the costs that would be imposed by currency exchange in a nearly frictionless digital world, even accounting for the need for some businesses to hedge against exchange-rate risk.) Maybe the Greeks are better off in general with monetary policy dictated by Brussels, but the arrangement takes an important policy tool out of the toolbox. And substituting good governance by foreigners for reform at home is a model with obvious built-in limitations. 

Whether Argentina would be better off with a monetary policy dictated by Washington is far from obvious. What they really need is a fiscal policy contracted out to Stockholm or Oslo or Copenhagen. Say what you will about those Nordic welfare states, but our northern friends tend to have debt/GDP ratios a heck of a lot lower than we do in the United States: Sweden’s debt was under 30 percent of GDP as of June, whereas in the United States it is more like 120 percent. There’s more to national prosperity than low public debt (Singapore has relatively high levels of public debt, while Afghanistan has almost none), but piling up unsustainable amounts is a good way to hobble an economy—or wreck it. 

Milei’s dollarization scheme is, from this point of view, probably best understood as a gimmick, as “magical thinking” as Paul Krugman puts it in an interesting and useful column. It is a single, dramatic policy that can be done all at once, whereas Argentina’s real economic problems require a hundred thousand smaller reforms—along with effort and discipline that have to be sustained for a very long time, across different governments and in different economic situations. Time will tell if Milei is the kind of leader who can lead that sort of long-term effort. But without fixing the fiscal side, expectations for monetary reform—even a radical program such as dollarization—should be modest. 

Of course, that isn’t true only for Argentina—it’s true for the United States as well. And, unlike countries with smaller economies, the United States cannot outsource big policy portfolios to better-governed foreign powers, tempting as it might be to deputize the Swiss, the New Zealanders, or even the Canadians to handle issues with which they have demonstrated a particularly compelling competency. 

There just aren’t enough Swiss francs or Kiwi bureaucrats to go around.