‘Dollarisation of Argentina and ending fraud in Peso’ was the most important electoral promise of Argentina’s president-elect Javier Milei, a self-described “anarcho-capitalist”. However, in a surprising turn of events following his victory, Milei has withdrawn from this promise.
In a recent television interview reported by the Financial Times, Milei stated, "We need to assess whether the market situation allows a solution like the one Emilio Ocampo proposes, and whether he is prepared to implement a plan different from the original one."
During his election campaign,
Milei vehemently criticized Argentina’s Central Bank, dubbing it the 'worst garbage on the earth,' and declared that Emilio Ocampo, a leading advocate of dollarisation in Milei’s team, would head it with the intention of shutting it down. However, according to the Financial Times, an anonymous source close to Ocampo confirmed on Thursday that he won’t be accepting the position.
“He (Ocampo) was never going to the central bank to implement someone else’s poor plan, which he doesn’t agree with,” the source explained.
Emilio Ocampo, a 60-year-old historian and economist, serves as the director of the Center for Economic History Studies at Argentina’s UCEMA university. In his book titled ‘Dolarización: Una solución para Argentina (Dollarization: A solution for Argentina),’ Ocampo proposes two reforms to replace the Argentine peso.
The first entails the adoption of the US Dollar as a legal tender, officially recognizing it as a means of exchange for commercial and financial transactions. The second reform suggests a mechanism where Argentines’ savings are beyond the reach of the country’s political power.
Ocampo, quoted by the Spanish newspaper El País, stated, “We propose to replace the corporatist, clientelistic, and protectionist system that has been in place for over 70 years with an economy that is competitive, open, and globally integrated. This kind of system change is not possible if dollarisation is not accompanied by other structural and institutional reforms.”
Steve Hanke, a professor of applied economics at John Hopkins University, told CNBC that dollarisation could bring down interest rates and, if implemented correctly, lead to a substantial economic boom in Argentina.
However, a significant question remains unanswered: from where will Milei borrow dollars? The
International Monetary Fund (IMF) appears to be out of the question, considering Argentina's existing substantial debt of nearly $44 billion with the IMF. The Guardian, in its piece on 'Does Javier Milei’s dollarisation plan for Argentina make any economic sense?,' highlights the IMF's skepticism about the feasibility of dollarisation in the short term. It emphasizes that the peso would require substantial devaluation before dollarisation, and a weaker currency could exacerbate inflation.
How has dollarisation worked in the past?
Looking at historical precedents, even if Argentina decides to proceed with the dollarisation plan, it won’t be the first country to do so. The US dollar is used as legal tender in Ecuador, Panama, and El Salvador. In 1991, Argentina's President Carlos Menem turned to privatisation and one-to-one convertibility between the peso and the dollar as a measure to curb hyperinflation. However, this move led to the country's economic crisis in 2001.
