Dollarizing Argentina’s economy would cause spiraling inflation, recurrent recessions, and high unemployment without solving the country’s underlying economic problems, according to a letter signed by 170 prominent economists and circulated on Sunday.
The letter tackles presidential frontrunner Javier Milei’s signature policy of abolishing Argentina’s central bank and the peso in favor of the U.S. dollar. It bears the signatures of renowned economists, professors and former government ministers, including Miguel Ángel Broda, Eduardo Levy Yeyati, Martín Rapetti, Hernán Lacunza, Marina Dal Poggetto, and Andrés López.
“We the undersigned […] believe that a formal attempt to dollarize would be a misguided attempt to face the complex challenges that the Argentine economy must manage,” the economists wrote. They do not mention Milei by name, although they do mention that the issue is a campaign proposal.
They recognize that the prospect of Argentina having a stable currency “has surely generated hope among broad sectors of the population who have been punished by the continued erosion of the purchasing power of their income,” but add that evidence abroad and the domestic situation mean dollarizing is “far from a panacea”.
Argentina, the finance specialists argue, doesn’t have the dollars it needs to recover its monetary base and back bank deposits. Current proposals to solve this acute reserve scarcity involve “absurd” increases to public debt.
“The only alternative, then, would be to dollarize at such an elevated exchange rate that it would provoke additional spiraling of inflation as a consequence of the collapse in real demand for money that would presumably be triggered by the mere announcement of plans to proceed in this direction,” the letter reads.
“Causing a (hyper)inflationary episode does not appear to be an auspicious start to ‘stabilizing’ the economy.”
On Sunday afternoon, Milei responded on X (formerly Twitter). “170 failed economists who’ve been defeated in the fight against inflation both in the classroom and in the facts, have come to condemn a solution to the monetary scam,” he wrote, accusing them of hypocrisy for opposing dollarization while allegedly saving in dollars and earning foreign income.
He prefaced his post with “I Maccabees 3:19”, a biblical verse that reads “It’s not the size of the army that brings victory in battle, because strength comes from heaven.”
Milei said in a presentation on Wednesday that he would dollarize at the blue chip swap rate, also known as contado con liqui or CCL dollar, which is the implicit exchange rate that arises from investors buying shares, bonds and financial instruments in pesos and selling them in dollars on the international market. The CCL dollar rate was 731.5 at the time of writing.
The economists warn that if Argentina were to dollarize, its use of the U.S. currency could bring Argentina’s inflation into step with its northern neighbor — but this would take away the flexibility the country needs to respond to shocks, triggering periods of recession and high unemployment. They compare this to the convertibility period of the 1990s, when the peso was pegged to the dollar one-to-one, and the difficulties the US had with the gold standard.
They also point out that adopting the dollar has not prevented defaults in other Latin American nations. “Monetary alchemy is not an adequate substitute for a firm commitment to inter-temporal balance of the public accounts,” they wrote.
“In effect, the scheme is based on the fantasy that with the possibility of monetary financing eliminated, the government will be obliged to immediately balance its budget, something which is belied by both our own past experience and, for instance, the case of Ecuador, which has already had a couple of episodes of default since it adopted the dollar as its currency.”
Finally, the letter’s authors state that once an economy has been dollarized, it is extremely difficult and expensive to leave the system. “More so even than in the case of leaving convertibility, the potential elimination of the dollar as standard and accounting unit in favor of the reintroduction of the peso would imply the breakdown of the whole contractual structure of the economy,” they write.
“This would bring about great costs, something which no democratically elected government would facilitate, even if that monetary regime were not convenient for macroeconomic functioning.”
They end by arguing that Argentina’s economic difficulties are the result of neglecting macroeconomic balance and “blithely squandering terms-of-trade bonanzas and favorable external financing conditions,” a situation from which other countries in the region have managed to recover.
Dollarization, they warn, is “a mirage that must be avoided”.