The full dollarization of the economy is “a far too risky gamble,” according to the U.S. head of the Official Monetary and Financial Institutions Forum (OMFIF). Without an escape strategy, Mark Sobel warned that full dollarization “could well lead to a far more serious economic contraction and collapse.” Javier Milei’s unusual policy suggestions of dollarization can lead to economic collapse in Argentina.
In a caveat to Argentine presidential candidate Javier Milei, who has proposed that he would completely dollarize his nation’s economy if he were to win political power in the elections from August 22, as well as close the Argentine central bank, Mark Sobel says that “Milei is right to call for fiscal consolidation” but cautiously considers that “dollarization would be too risky a bet”
The decision to dollarize
Javier Milei frequently advocated full dollarization as the solution to Argentina’s economic problems during his campaigns. He also asserted that he had raised the money required to end the use of local currency and dissolve the national bank.
The OMFIF chairperson admitted that Milei’s triumph had caused international investors to pay attention to the Argentine politician’s unusual policy suggestions in an op-ed that was published on August 17. However, Sobel, a former employee of the U.S. Treasury, contended that while complete dollarization is likely to put an end to officials abusing their discretion in controlling a currency, such a program will have its drawbacks – inter alia, dollarization can lead to economic collapse.
He was reported to be stating, “Dollarization is a risky ‘no escape’ plan, a gamble”. It might create the conditions for a severe contraction and crash while diverting attention from the difficult task of repairing the economy, according to Sobel.
The Convertibility Plan’s Demise
Sobel used the so-called convertibility plan, or currency board, as evidence to support his claims that between the 1990s and the early 2000s, Argentina’s high current account deficit and rising unemployment were caused by it. The nation also lost market access and was unable to pay its external debts. This has all the more affirmed the prognosis that dollarization can lead to economic collapse.
This, in turn, sparked a series of events that culminated in the convertibility plan’s failure. The OMFIF chairperson claims that complete dollarization without an escape strategy “may lead to a considerably more serious collapse and contraction”.
After dollarization, Argentina’s growth will be reliant on maintaining a current account surplus and attracting capital inflows through dollarization. That might be possible given high global growth, high commodity prices, alluring investment opportunities, a stable legal system, and a cheap currency. Still, these forecasts are not definite but can, instead, tag along substantial demerits with them.
Conclusion
Regarding the steps of ‘necessary evil’ that the new US government needs to appoint, Sobel has said: “Argentina needs sweeping fiscal consolidation to stop the perpetual cycle of excess borrowing, high and hyperinflation, default, and instability. It needs to slam the brakes on reserve money creation. As painful as this will be, it’s necessary for achieving sustainability and a transition to a better future.”
He further mentioned that Argentina also needs “extensive and sequenced liberalization.” This cannot be fulfilled with “multiple exchange rates or capital controls but with strong banks”, the OMFIF chairperson said.
Most scholars think that due to the low level of confidence in the peso, the dollar has heavily influenced the Argentine economy, and complete dollarization doesn’t seem like a big step. Given their track record of failure, officials would lose their discretion. In theory, dollarization necessitates the government to make the difficult financial decision to stop providing monetary financing.
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