Argentina, a nation familiar with economic instability, is at a crucial point once again in its fiscal history. With soaring inflation rates and the peso losing value, the idea of 'dollarisation' is gaining traction within economic circles. With the emergence of presidential frontrunner Javier Milei, Argentina may see real action in dollarisation. This will have significant economic impact on the nation, and while we are only in the beginning stages of this movement, it is pertinent to discuss what this means for Argentina in relation to the global economy .
Argentina is currently grappling with what has been characterised by monetarists as borderline hyperinflation, which peaked at a staggering 115%; as a result, the peso has lost its value. Many Argentinians are turning to the US dollar as a possible solution, as the public prefers saving their money, holding assets and carrying out transactions in US dollars for increased stability. Businesses have already widely accepted the US dollar as a form of currency, especially in busy or touristic cities.
Dollarisation offers the promise of stability in the face of high inflation. By adopting the US dollar as the official currency, Argentina hopes to establish a solid financial foundation, attracting foreign investments and restoring lost investor trust. This move could also enhance Argentina's ability to negotiate better trade deals and access international credit markets. This increase in consumer and producer confidence would provide much needed room for economic growth in the nation.
Javier Milei, the frontrunner libertarian candidate in the upcoming Argentinian elections
However, not everyone agrees with the idea of an absolute shift to the US dollar. Critics are worried about what this change will mean for how Argentina manages its monetary policy. They fear that giving up control over aspects of the economy like interest rates and the circulation of money could leave Argentina struggling to control their own system. But most significantly, the loss of the central bank's power to set the interest rate is a major concern, as it is a critical tool for managing economic growth and stability for any government and giving this up could make it difficult for Argentina to deal with domestic crises.
Additionally, this shift could affect low income earners and local businesses negatively. The US dollar typically has a higher value compared to the Argentine peso. When everyday goods and services are priced in dollars, it can become more costly for individuals earning their wages in pesos. This can particularly burden those with lower incomes as the exchange between dollars and pesos uncontrollably fluctuates. Thus while dollarisation has potential benefits, there are legitimate concerns about the potential downsides that need to be considered to certain demographics of the economy.
3000 pesos paid for some fruit in a local Argentine market
At the forefront of this debate is Javier Milei, a libertarian radical making changes to Argentina's political landscape. His vision advocates for a complete remodel of the current economic framework, including the abandonment of the central bank, privatisation of state-
run companies, and notably, the adoption of the US dollar. His libertarian beliefs, emphasising free-market principles, limited government intervention, and a strong focus on individual liberties, directly influence what plans he has for Argentina as he envisions a future where the nation operates on the principles of economic prosperity.
Milei's economic ideas include radical changes that could drastically shift Argentina's economic course. His proposed reforms, if implemented, aim to lead Argentina toward dollarisation. Milei earned 30 percent of the vote in the country’s compulsory open primaries and won over 16 of Argentina’s 24 provinces; he is currently looking like the favourite to win.
If Milei wins the elections and Argentina supports dollarisation, the potential for price stability and increased investment could pull Argentina out of its current economic crisis.
Argentina stands at a critical juncture, facing decisions that could reshape its economy. The potential shift towards dollarisation, led by Javier Milei, offers the promise of stability and growth. Yet, it also raises valid concerns regarding losing control over monetary policy. The outcome of the upcoming elections will critically determine Argentina's future.
It is also important to note that in the globalised world we live in, this move towards dollarisation could set a precedent for other nations facing economic volatility. The example set by Argentina might promote similar decisions to countries dealing with inflation and struggling to stabilise their local currencies. Thus, it is likely that in the future we could see a shift towards greater dollarisation.
Credits to photo: www.correiobraziliense.com.br
Credits to statistics for both the polls and inflation rates: www.reuters.com