Should Argentina Dollarize?
Perhaps. But that is only a first step toward better economic growth.
To combat Argentina’s soaring inflation rate, presidential candidate Javier Milei wants to replace the domestic currency with the dollar.
The argument for dollarization is that high inflation reflects high money growth, a proposition Milton Friedman immortalized in his statement that “money is always and everywhere a monetary phenomenon.” Dollarizing adopts the U.S. money growth rate, which is far lower than Argentina’s, and so should lower inflation.
Dollarization has ardent defenders but also critics. My own view is in between.
If dollarization just means adopting the dollar as the national currency, it is hard to be passionately for or against. Dollarization by itself does not address other policy areas, such as government interference in the economy or excessive expenditure, so it should not impact economic growth or fiscal balance in either direction. Further, lower inflation by itself will have no major effects on the economy, since in the long run the money growth rate does not affect real output.
If dollarization means adopting the dollar and adopting pro-market polices, then changing currencies might coincide with faster growth or better fiscal balance. Argentina could achieve this, however, by adopting pro-market policies or slowing expenditure without dollarizing. Improved fiscal balance, moreover, means less pressure on the central bank to monetize the debt and thus helps lower inflation. Faster growth from pro-market reforms means higher tax revenue, again reducing pressure for inflation.
The main argument for dollarization, therefore, must be that it increases the likelihood of less intrusive government generally. That is possible but not automatic. The risk is that dollarization ends up being a distraction or a substitute for more fundamental reforms, which are often politically difficult.
The bottom line is that dollarization by itself is a reasonable policy. But Argentina must also scale back government interference and slow expenditure growth to improve its economy long term.
My view is that the problems with fiat currency are often overstated. The key question is what's the alternative? Every choice of monetary system is subject to bad decisions by the central government about how to adjust the amount or growth rate, whether to abandon a peg or a gold standard, etc.
Stated differently, I view the fundamental problem as fiscal rather than monetary. when governments spend too much, they face a huge temptation to address that by printing money, one way or another.
Wouldn’t dollarization exacerbate the inherent problems with fiat currency?