The recent success of Javier Milei in the Argentinian presidential race indicates that citizens of the region’s second largest nation have chosen to embrace drastic measures in order to address the severe economic issues plaguing the country.
It is understandable that 56% of voters supported the right-wing libertarian candidate, given Argentina’s economic struggles in recent years despite having a top-performing football team. With inflation at 140%, a three-year drought causing a decline in agricultural output, and nearly 40% of the population living in poverty, the country’s currency has also significantly depreciated by 90% in just four years.
Milei proposes to eliminate the peso and adopt the US dollar as the currency for Argentina. A less extreme version of this plan was attempted in the 1990s, following a period of economic downturn and hyperinflation. The Buenos Aires government set the exchange rate at one peso to one dollar, known as convertibility. However, after a severe recession and public outcry over limitations on bank withdrawals, this strategy was abandoned in 2002.
The incoming president of Argentina has expressed his desire to take more drastic measures. According to his plan, the central bank of the country would essentially be eliminated and the economy would be completely “dollarized”. This would result in monetary decisions for Argentina being made in Washington, rather than Buenos Aires.
Panama and Ecuador are among the countries that have taken this path, but Argentina, a member of the G20 group comprised of major developed and developing nations, is the largest one to do so.
There are clear issues with Milei’s economic trial. The primary concern is that Argentina and the US have vastly different economies, meaning what may be the appropriate monetary approach for one may not work for the other. Nations must exercise caution when relinquishing the ability to determine their own interest rates and currency value.
The second issue is more pragmatic: where could Argentina acquire its US dollars? Currently, the central bank has very few reserves of US dollars and does not have access to international capital markets to obtain the necessary stocks to sustain the economy. In theory, Milei could request a loan from the International Monetary Fund, but the likelihood of approval is low. Argentina is already the largest borrower from the IMF and has a debt of $44 billion.
The IMF has reservations about the possibility of adopting the US dollar in the near future. The local currency would need to be significantly devalued before implementing dollarisation, which would lead to higher prices and inflation.
Furthermore, despite the potential resolution of technical challenges linked to the abandonment of the peso, Milei’s drastic approach could backfire swiftly. Dollarization is irreversible and poses a risky decision with no possibility of retreat, potentially trapping Argentina in an unsustainable path and causing an economic downfall.
Mark Weisbrot, the co-director of the Center for Economic and Policy Research thinktank in Washington, said Argentina was paying a heavy price for the mistakes of a previous administration led by Mauricio Macri in the year after 2015.
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Weisbrot cautioned against a reckless and self-destructive strategy that would only exacerbate the situation. As demonstrated in Argentina’s case, things can deteriorate significantly.
Milei’s speech after winning did not mention dollarization or getting rid of the central bank, causing people to wonder if he may change his extreme proposals. Along with changing the currency, these proposals involve significant reductions in welfare benefits and the closure of over twelve government departments.
Nicolás Saldías, a top expert on Latin American affairs at the Economist Intelligence Unit, a branch of the Economist Group that conducts research and analysis, expressed that Milei’s suggested changes would not be well-received by many Argentinians, particularly those with lower incomes. He also predicted that the proposed reforms would incite backlash from the country’s influential labor unions and social movements, leading to heightened political polarization and division in the near future. This is expected to result in a brief period of initial support for Milei.
Source: theguardian.com
