Why did Argentine President Millay make dollarization of Argentina a central economic policy?

Executive Summary:

The first fire that Milley burned after becoming president of Argentina was to de-dollarize the Argentine currency, the peso, by more than half at one time. The dollarization of Argentina's currency is the core economic policy promised by Milley in his presidential campaign. Why did Milley make dollarization of Argentina the core economic policy? Is it feasible for Argentina to implement economic dollarization? Before Argentina, all countries that achieved dollarization had successfully achieved economic development and social stability.

1. The first fire that Milley burned after becoming president of Argentina was to de-dollarize the Argentine currency, the peso, by more than half at one time.

There is an old Chinese saying that a new official takes office with three fires. Milley faces a much more difficult economic situation than any Argentine president in recent years. So on the day of Milley's inauguration, he announced in his inaugural speech that he would burn five fires, but starting with the devaluation of the currency:

The first is to liberalize the exchange rate system and greatly depreciate the Argentine peso;

The second is to announce a sharp cut in government spending and rapid austerity to reduce the fiscal deficit;

third, it plans to restructure its debt and reduce it to sustainable levels;

Fourth, the battle for dollarization, a necessary option to restore Argentina's financial credibility;

Fifth, promote the privatization process and increase market vitality.

Among these five fires, although Milley puts the dollarization war in the fourth later, but if we carefully study the other fires, we will find that each fire is actually paving the way for the realization of Argentina's dollarization.

Why did Millet make a big deal about the Argentine currency at the beginning of his tenure?

Second, the dollarization of Argentina's currency is the core economic policy promised by Milley during his presidential campaign.

Argentina's new president, Millay, is a political newcomer who won a seat in parliament just two years ago thanks to his ultra-conservative libertarian party, the Freedom Forward Party. But Milley was originally an economist who described himself as an anarcho-capitalist and promised to improve the lives of 40% of the country's population living below the poverty line by replacing the peso with the dollar and abolishing the central bank.

In his presidential speeches, Milley promised to use "shock therapy" to solve Argentina's economic problems. Specifically, Milley's NEP includes:

Milley was a typical political conservative, insisting on minority governmentalism and anarcho-capitalists, and among some of the policies proposed by Milley, the most important and striking was his promise to abolish the country's central bank, abolish the Argentine peso, and dollarize the currency, which would lead to the de facto dollarization of Argentina's economy.

On December 12, Argentina's new economy minister, Luis Caputo, announced in a televised speech that the Argentine peso would fall from about 391 pesos to 800 pesos to 1 dollar.

He explained the decision, "In the next few months, we will be in a worse position than before, especially in terms of inflation." I say this because, as the president has said, it is better to tell an uncomfortable truth than to tell a comfortable lie."

Argentina has at least 15 different exchange rates, with the official exchange rate currently being 391 Argentine pesos to one dollar, compared to 900 pesos on the black market.

3. Why did Milley make dollarization of Argentina a central economic policy?

More than 100 years ago, Argentina's per capita national income was among the highest in the world. In the 70s of the 20th century, Argentina reached the middle-income level. In 1975, Argentina's per capita GDP exceeded $10,000, ranking among the world's top 10 richest countries and 92% of the average of the 16 rich countries. It is second only to Australia, the United Kingdom and the United States, but ahead of France, Germany and Italy, and is equivalent to the developed country that is now properly developed. China's per capita GDP was only about $156, less than 1.3% of Argentina's. Until 2022, China's per capita GDP was only $12,750, which was about the same as Argentina 47 years ago.

In 1976, Argentina had a coup d'état and the military junta came to power, and the Argentine government debt was $25 billion, and by 2022, his foreign debt had increased to $276.7 billion!

Argentina, whose economic development is in deep trouble, is politically turbulent, and in 2002, there were five presidents in one year!

In 2022, Argentina's GDP per capita was $13,800, an increase of only 15% compared to 47 years ago. China's $12,750, an 82-fold increase from 47 years ago.

Economist Milley, when studying the historical lessons and lessons of Argentina's transition from being rich to falling into the middle-income trap, believes that the pursuit of absolute fairness in socialism has given the ultra-left forces the opportunity to use absolute fairness to rally the support of the people in the middle and low-income strata, but after these ultra-left politicians came to power, in the process of promoting the expansion of state-owned capital and the economic policy of reducing private enterprises, they invariably took advantage of the regulatory loopholes in which the responsibilities and powers of state-owned enterprises cannot be equaled in the process of operation and management, embezzled corruption, and enriched their own pockets.

After the state-owned capital suffered serious losses, the private enterprises faced the continuous collapse of unequal competition from state-owned enterprises, the decline in tax revenues, the loss of jobs, the shrinking national income, and the imbalance between government revenues and expenditures, they adopted extremely dangerous and devastating economic policies. The economic policy of frantically borrowing foreign debt while frantically printing money has led to the continuous shrinkage of national assets, hyperinflation, and a middle-income trap that cannot help itself.

Objectively speaking, a one-time depreciation of the Argentine currency, the peso, against the US dollar by more than 50%, will certainly lead to a currency depreciation and stimulate the country's already severe inflation. Because Argentina has only 21.4 billion US dollars in US dollar reserves, 46 million people, only 470 US dollars per capita, only 21% of the foreign exchange reserves of Chinese in the same period.

However, only in this way can we completely plug the black hole of money printing that eats up Argentina's national wealth and stimulates hyperinflation, win the support of the domestic people to work together to overcome the temporary difficulties, and reduce and restructure Argentina's foreign debt after international creditors see Argentina's courage to revitalize the economy.

4. Is it feasible for Argentina to dollarize its economy?

Many people are worried that Milley will abolish the peso and promote dollarization in Argentina, first, where will the dollar come from, and second, will it lose control of the economy after losing the right to mint money? In the final analysis, is it feasible for a country to dollarize its economy?

From the perspective of economic practice, the dollarization of currencies can generally be divided into three types.

One is the direct use of the US dollar. For example, the United States, as well as Ecuador and Panama in South America.

The second is to directly peg their own currency to the US dollar. For example, our Hong Kong dollar is actually a voucher for US dollars.

Third, in countries and regions where currencies can be freely convertible, the US dollar can be used freely. For example, the euro, the pound, the yen, etc., in essence, are also an indirect dollarization. More than a third of the world's countries fall into this category.

Most of the above three types of countries and regions have stable economic development and social stability, and most of them belong to developed countries, at least they are also upper-middle developing countries. No country or region has lost its sovereignty or left its economy backward because of the use of the dollar. Therefore, from the perspective of economic theory and economic practice, it is completely feasible and desirable for a country to realize the dollarization of the economy.

In economic theory and practice, the monetary right in national sovereignty has never been a narrow power to issue a single currency. In the era of gold and silver coins before the paper money of money, those countries that did not have gold and silver mines naturally could not mint gold and silver coins by themselves, in fact, the monetary system of these countries at that time was the same as the full use of the dollar today.

It can be said that the choice between a single currency, a core international currency, or both a national currency and a free use of an international currency is the monetary right in national sovereignty.

As for where the money for dollarization of the Argentine economy comes from, there is no need to worry. For example, Milley plans to commercialize and privatize all the previous state-owned assets, that is, sell these assets to global capital, and use the money of global investors to promote Argentina's economic development. In this way, aren't the dollars needed for Argentina's dollarization coming from all over the world?

Fifth, before Argentina, countries that had achieved dollarization had succeeded in achieving economic development and social stability.

From the perspective of economics and the history of human economic activities, in some countries that do not have a sound monetary system and a rule of law system, the effect of using the international core currency is actually more conducive to economic and social stability than the use of their own single currency. For example, Venezuela, Iran, and Zimbabwe all use their own single currency, but their national currencies are seriously depreciated, like waste paper, and their national currencies have become a tool for vested interests to deprive the masses of wealth.

The complete abandonment of the use of the national currency and the direct adoption of the US dollar as the official currency are aimed at stabilizing the economy and preventing further currency devaluation.

Argentina is not the first country to try dollarization. Prior to that, in 2000, Ecuador had taken similar measures in response to the severe economic crisis at the time.

After the abolition of the local currency and the implementation of the dollarization policy, the effect is also leveraged. It has not only reduced inflation, but also made rapid economic development. Ecuador's GDP increased fivefold from $18.3 billion in 2000 to $110 billion in 2022.

The first country in the world to use the U.S. dollar as legal tender outside of the United States was Panama. Since 1907, the country has used the US dollar as its currency in circulation, and the national currency is balboa, which is equivalent to the US dollar, but the issuance is very small, and the US dollar is basically used within the territory. GDP per capita increased from $4,060 in 2000 to $17,400 in 2022.

Ecuador and Panama, which have dollarized their national currencies, rank first and second respectively in terms of economic growth among the nine countries in South America.

[Author: Xu Sanlang]