Since Milei's win I have seen a number of folk out there (mainly on X/twitter ) claiming he cant dollarize because he simply lacks access to the necessary US dollars and being fully indebted already , there is no capacity for him to borrow further USD funds to convert over the domestic currency base. Being a right of centre voter myself, I am very hopeful for the Argentine people his win sees then turning a page economically, a reset to a better future. It's actually should be a boon for Galan on a couple fronts , which I will get into why I think that later in the post. That said I too had arrived at a similar conclusion / concern that Milei couldn't pull this dollarization off as much as it makes good economic sense because he wouldn't be able to access the needed US dollars.
However this isnt as big an issue as one might think when you look into it a bit more .
If one is genuinely interested in this topic, would suggest you start here with this excellent primer on dollarization in general ;
John is a former professor at University of Chicago , Booth School of Business ( that's the same University Milton Friedman was a professor at by the way), so while he might be "the grumpy economist" as he calls himself, he is no dummy economist.
For mine key takeways from John's article is that dollarization is like a "pre-committment" to do X,Y,Z which sures up your bonafides to creditors. You no longer have the easy get out of jail cards like devalue your currency further or allow rampant inflation that normal debtor countries do. Your choices are simply, default if you cant pay back dollars, so it signals to creditors you are very now very genuine.
Dollarization is no panacea. It will work if it is accompanied by fiscal and microeconomic reform. It will be of limited value otherwise. I'll declare a motto: All successful inflation stabilizations have come from a combination of fiscal, monetary and microeconomic reform.
Reminds me a bit of Australia in early 80's .Argentina has to do a raft of microeconomic reforms now and cut government spending, it's no longer an option, but a necessity. Milei as a libertarian is exactly the sort of person who wont shy away from this other necessary medicine that goes with dollarization. This need to always be keeping an eye of micro-economic reform is something even countries like our own suffer from. Microeconomic reform has pretty much been forgotten about here in Oz for the last 20 years and we are "un-reforming" now with our industrial relations approach in the country at present. We have gone with a lazy economic model of just let in more migrants to keep pushing along GDP ( and propping up house prices), which works at keeping GDP ticking along but brings with it a tendency for higher inflation unless you keep up the Microeconomic reform.
Microeconomic reform is really hard work but, its often involves lots of small incremental changes from the ground up in an economy, hence its often unsexy and often there are winners and losers so its always open to political attack. But it delivers by far the biggest and enduring gains long term. The benefits Australia saw from 1990's through 2010 was really set up by all the hard work de-regulating the economy in the 80's so when finally inflation was bought under control by early 90's, the economy had a clear pathway to grow unimpeded for more than a generation. Some tough decisions now from Argentina to to get its economy back on track and inflation back down to normalised levels equally too should set it up for success over the next 20-30 years. Especially when you consider this economy has a lot of resources including lithium and an educated workforce , so there is no reason for Argentina to be a basket case economy.
A complete reset for the Argentine economy should significantly lower the costs of doing business in Argentina , encourage productivity and ultimately encourage capital flows back into the country. This will also ultimately help all business in country by lowering costs of accessing debt and hence should help Gln also accessing finance for our later project stages by removing some of the "country" risk associated with Argentina.
The other thing Cochrane points out is dollarisation is likely to work much better if Argentina really snuggles up close to the US, because trade flows with the US encourage a flow of US dollars into Argentina, the very thing they need to repay debt with. Even better if there is a free trade zone or something similar opened up between Argentina and the US ( ie Free trade agreement - FTA) . The more Argentina makes itself like the 51st state of US, the less disruptive dollarization is likely to be. Most Argentine exports are already denominated in US dollars being commodities in nature, so again this all helps. With Milei's win and hence from their side a desire to dollarize, and equally with a strong desire in US to expand their access to countries with critical minerals , I would expect the probability now of seeing an FTA emerging between Argentina and United States as very high over the coming years.
Key takeaways in this article are dollarizing in Latin America isn't something new. El Salvador and Ecuador already have successfully done it. Getting the USD needed to dollarize the domestic currency base is not as hard as it sounds because many folk in Argentina already have a lot of USD. Its been in a sense the defacto currency in Argentina to some extent for many folk for many years. These dollars now can be encouraged into domestic banks and could be borrowed by the Government to fund conversion over time of local currency into USD. Then as the economy expands through the raft of reforms, the government can pay of this extra borrowing in USD.
Also as the article explains there a number of ways this can be done progressively over time ;
"In an El Salvador‐type, voluntary dollarization scenario, the circulating national currency can be dollarized as it is deposited or used to pay taxes, in which case the sums are converted to dollars once they enter a state‐owned bank account. Hence, “there is no need for the central bank to buy the circulating currency” at a moment’s notice.
Here's another great takeaway paragraph from the article ;
The Economist adds that, even with dollarization, Argentine politicians “would still try to borrow too much, and there would be no central bank to inflate the debt away.” This fully misses the essential point behind the adoption of the dollar, which is to protect ordinary people’s purchasing power from the excesses of chronically profligate politicians and often subservient—or simply incompetent—central bankers. As we have mentioned, by depriving the local political class of all ability to manipulate the currency, dollarization separates fiscal policy from monetary policy.
Milei's biggest problem with implementing dollarization now is likely going to be getting it through a Congress he doesn't control. People are not stupid but if he is blocked by those means and if artfully played, may set up his party to gain sufficient electoral support at the next congressional elections to allow him to implement his agenda.
Interesting times for Argentina and Galan. After researching the topic ( as opposed to a host of clowns you find on X who are happy to spout off but do no research on any topics) I have no doubt dollarization can indeed be pulled off and is not made impossible by their being a lack of USD. Dollarization is in fact a very sensible policy to adopt for a country that has been beset by fiscal profligacy for generations.
GLN Price at posting:
63.5¢ Sentiment: Buy Disclosure: Held
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