Could Argentina Be the Next Latin American Country to Dollarise Its Economy?

As Argentina grapples with an unpayable debt load, triple-digit inflation, severe drought and rising economic hardship, the idea of abolishing the crumbling peso and adopting the US dollar gains ground. 

There is a great deal riding on Argentina’s national elections in October. The reverberations will probably be felt across Latin America as the competition for strategic influence in the region as well as access to its coveted resources intensifies. China long displaced the US as Argentina’s largest trading partner, but the US is doing everything it can to regain lost ground, including, as we reported in January, rejigging the Monroe Doctrine, a 200-year old US foreign policy position that opposed European colonialism on the American continent:

It held that any intervention in the political affairs of the Americas by foreign powers was a potentially hostile act against the United States. Now, it is applying that doctrine to China and Russia.

Gen Richardson detailed how Washington, together with US Southern Command, is actively negotiating the sale of lithium in the lithium triangle to US companies through its web of embassies, with the goal of “box[ing] out” US adversaries.

The country where the US appears to be enjoying most success in this endeavour is Argentina, whose government even recently participated in the US-created Mineral Security Partnership, which Reuters dubbed a “metallic NATO”. But as the country grapples with unpayable debt, triple-digit inflation, severe drought and rising economic hardship, “Argentines are looking for a radical shift,” according to The Economist. The outcome of the upcoming election could even define the future of Argentina’s currency regime for years, if not decades, to come.

Dollarisation vs Dedollarisation

Much of the talk in recent months has been about dedollarising Argentina’s trade with China and Brazil, its two largest trading partners. In late April, the government announced it will start paying for Chinese imports in yuan rather than dollars. It activated the $18.5 billion million swap arrangement that same month, paying around $1 billion of its Chinese imports in yuan instead of dollars. As Reuters reported, the measure is intended to ease the country’s dwindling dollar reserves.

Argentina has been struggling with dollars for years, but this year its foreign currency reserves hit a critical low after a historic drought caused total agricultural losses of around €17.6 billion, or 3% of Argentine GDP. Dollar shortages are becoming an increasingly common problem among emerging market economies as central banks burn through their currency reserves in a desperate bid to stem the depreciation of their currencies.

Like 18 other emerging markets, Argentina has applied to join the BRICS-plus grouping, for which it can count on the full support of BRICS member Brazil. In fact, Brazil’s President Luiz Inácio Lula da Silva recently said he was conducting talks with fellow BRICS members Russia, China, India and South Africa about fining ways of helping Argentina’s economy. At the same time, Brazil and Argentina and discussing ways of reducing the influence of the US dollar in their bilateral trade. From Buenos Aires Herald:

Da Silva is attempting to persuade other BRICS leaders to have their economy ministers change an article in the group’s rules that would allow it to financially support non-BRICS countries such as Argentina through the New Development Bank, which is currently headed by his political ally and former Brazil president Dilma Rousseff.

On May 29, Da Silva will take part in a BRICS meeting where he expects to discuss the change. He said during the conference that he has spoken to Rousseff and also China’s President Xi Jing Ping about it.

Da Silva also vowed to continue working with Brazil’s Congress and exporters to Argentina to promote bilateral trade. This is likely to come in the form of credit for these companies to keep selling to Argentina and the development of mechanisms to trade in pesos and reais, skirting the U.S. dollar. Economy Ministers Sergio Massa and Fernando Haddad are expected to follow up on the work next week.

If the candidate chosen for the coalition of Peronist parties Frente de Todos — Alberto Fernández will not be running for a second term and two-time President Cristina Kirchner de Fernandez has also withdrawn from the race — emerges triumphant in November, it is safe to assume that the resulting government will continue to pursue BRICS membership, dedollarisation and the expansion of bilateral trade with both China and Brazil, its two largest trading partners. As the Argentinean broadcaster TN recently reported, China’s consolidation as Argentina’s number-one trading partner is a growing source of consternation for both the US and Europe:

The US and EU’s greatest fear is not only that China becomes the main trading partner but that, with that status, it will be able to influence bids and gain control of strategic sectors in Argentina such as telecommunications, ports, routes, military inputs and energy.

The two other main challengers in October’s election are Together for Change, a pro-US liberal-conservative bloc that helped propel Mauricio Macri to the presidency in 2015 but which is yet to choose a candidate; and Freedom Advances, a grouping run by the libertarian economist and congressman Javier “the Wig” Milei that paints itself as fiercely anti-communist and the last bastion of economic freedom in Argentina, and is currently leading in the (notoriously unreliable) polls. Given the prevailing economic uncertainty and despair in the country, with inflation surging to a record 109% year-over year in April, Milei has found fertile ground for his eclectic mix of right wing demagoguery and hair-brained economic policy proposals.

Those proposals range from classic neoliberal fare (charging poor people for public healthcare, cutting retirements and pensions, removing currency controls and “taking a chainsaw to public spending”) to more extreme measures that one Argentinean economist described as “proposed by fanatics that think it’s best to blow everything up”. They include selling off all public assets, shutting down Argentina’s central bank, abolishing the Argentine peso and adopting the US dollar as the official currency.

“If you want to end the scam of monetary emission to cover for the treasury and end inflation, given that Argentine politicians are thieves, the only way is to close down the Central Bank and, at least at the beginning, dollarize [the economy],” Milei tweeted last month.

A Popular Idea Among Some

Currently, 11 foreign nations and non-US overseas territories use the dollar as their official currency of exchange. Six of them are in Latin America and the Caribbean: Ecuador, Panama, El Salvador, the British Virgin Islands, Turks and Caicos, and Bonaire. Milei would like Argentina to be the next.

The idea enjoys support among certain US economists. They include Johns Hopkins Prof Steve Hanke, who once served as adviser to President Carlos Menem whose decision in the early ’90s to fix the Argentine peso at a wholly artificial and unsustainable value of one U.S. dollar paved the way to the financial crisis and currency devaluation of 2001, from which Argentina’s economy has never properly recovered. Things got even worse in 2016 when the Macri government bailed out creditor holdouts like Paul Singer’s Elliott Management. Two years later, it hit up the IMF for the biggest bailout in the Fund’s history ($57 billion), most of which went to foreign investment funds so that they could abandon their stakes in Argentine bonds and take their money abroad (h/t vao).

How many IMF programs does it take for a country to become the WORLD’S BIGGEST DEADBEAT? Look no further than Argentina. By my measure, the ARG peso has depreciated against the USD by a STUNNING 57% since Jan 1, 2022. It’s time to dump the pathetic PESO and DOLLARIZE NOW. pic.twitter.com/8ibrZ5qDRS

— Steve Hanke (@steve_hanke) May 19, 2023

Milei himself describes Menem as Argentina’s best ever president. He also has ties to the US-based, Koch-funded Atlas Network, which since its inception in 1981 has forged loose partnerships with more than 450 “free-market” think tanks around the world, including many in Latin America. As Lee Fang reported for The Intercept in 2017, the network has operated “as a quiet extension of U.S. foreign policy, with Atlas-associated think tanks receiving quiet funding from the State Department and the National Endowment for Democracy, a critical arm of American soft power.”

Like many right-wing politicians in Latin America, Milei also has ties to the Spanish far-right party VOX and even participated in VOX’s Viva 22 event, where he told the crowd: “Do not be afraid, take the battle to the left, we are going to win, we are productively and morally superior.”

Milei’s proposal to ditch the peso and embrace the dollar is opposed by roughly 60% of voters but has gained traction among a certain segment of the population as Argentina’s currency crisis deepens. The central bank has been burning through its meagre dollar reserves as it tries to stop a slide in the peso’s parallel-market exchange rate. According to a report published by Argentinean consultancy firm 1816, the country’s liabilities in foreign currency already exceed total reserves by around $1 billion — the worst such ratio since the nation’s brutal economic crisis and bank runs of the early 2000s.

Argentina’s economy is already heavily dollarised given the Argentine peso’s more-or-less uninterrupted fall in value over the past 23 years. At the beginning of the century it was fixed by law at parity with the dollar but is now worth less than half a cent in US dollar terms. As El País puts it, “Argentina is a country with two currencies that keeps whatever dollars it can get under the mattress.” Not only are savings kept in dollars; many real estate transactions are conducted in the US currency. Even rentals and smaller transactions often require greenbacks.

A Quick Fix With Dangerous Implications

But there is a huge difference between having a dual-currency regime — as is the case with many emerging market economies with weak local currencies — and abandoning your national currency altogether. Many see dollarisation as a quick fix to resolving Argentina’s chronic financial and economic troubles, pointing to Ecuador’s history of relatively low inflation since adopting the dollar in 2000. But many other countries in Latin America, including Mexico, Brazil, Peru, Paraguay and Bolivia, have also managed to keep inflation in check without having to eliminate their currency and adopt the dollar. In fact, both Brazil and Mexico’s inflation rates are currently below the EU average.

There are also serious doubts about whether Argentina will be able to formally adopt the dollar even if Milei wins the election (and that is still a big “IF”). For a start, his political grouping is unlikely to secure control of congress or the necessary broad-based political support to enact such a reform. Plus, supplanting the peso with the US dollar would require substantial foreign currency reserves that the country currently doesn’t have and is unlikely to get.

“Argentina is not in a position to undertake dollarization because this requires Central Bank dollar reserves it doesn’t have,” said economist Julián Zícari, who wrote a book on the history of Argentina’s economic crises, adding that “trying to [dollarize] would cause a complete evaporation of wages and pensions.”

It would also mean the end of any semblance of Argentinean sovereignty, as the South Korean economist Ha-Joon Chang warned during a recent visit to the country:

If you want to adopt dollars as your official currency you should apply to become a colony of the United States of America because that’s what it makes you. This means your macroeconomic policies will be written in Washington DC…

Argentina unilaterally accepting the US dollar as a currency is insane because you don’t have labour market integration and you don’t have fiscal transfers — it’s not as if the Americans are going to say, “Oh you cute guys in Argentina, now that you want to use the dollar as your currency we will accept more immigrants from you.” No, this is the worst idea.

Instead, Ha-Joon Chang said, Argentina should focus on creating a new social pact aimed at increasing investments in R+D (the country only invests the equivalent of 0.5% in R+D, compared to 4.5% in South Korea, 2.4% in China and 1.2% in Brazil) in order to put to use the rich human talent the country has at its disposal while also reducing the economy’s dependence on primary resources. Without significant investments in R+D, he said, there can be no sustainable development for a middle-income country like Argentina.

But in order to do all that, Argentina will have to stabilise its macroeconomic situation. And that will mean tackling the myriad causes of the economic crises it frequently faces, including its over-dependence on imports and its chronic incapacity to generate sufficient exports, which in turn leads to a chronic shortage of foreign reserves and productive investment.