The rapid rise of presidential candidate Javier Milei could have something to do with his theatrical nonsense, or with the growing determination of Argentines to get rid of the national currency and seek refuge in the dollar. Milei is different in many ways, but above all because he is the only presidential candidate who proposes the formal dollarization of the Argentine economy.

The “formal” part is worth clarifying. Argentinians have long been dollarized for large transactions and in terms of their savings. This is a widespread phenomenon in much of Latin America and is known as “spontaneous dollarization.” Economist Nicolás Cachanosky points out that a large part of the money deposited in the national financial system is transactional, that is, the minimum required to pay salaries, suppliers and other obligations. The rest is out of the country or in what is known here as the “Mattress Bank”.

The latest estimates show that Argentines have between $246,946 and $261,795 million in dollars and investments outside the national financial system, both estimates exceeding 50% of GDP. This reflects the distrust of Argentines in their currency and financial system.

Argentines need to dollarize because the political class has failed to provide an essential public service: a hard currency. Money has three functions: (1) store of value, (2) unit of account, and (3) medium of exchange. Today, for important transactions – from houses to electrical appliances and business transactions – Argentines think and negotiate in dollars.

(…) the political class failed to provide an essential public service: hard currency.

Almost four years ago I wrote an article entitled “Argentina must be dollarized”. On the day that article was published, the “blue dollar” — which is the black market rate (read for free) — was 54 pesos to the dollar. At the time of writing, it stands at 462. Since then, the economy’s structural problems have worsened, and now dollarization would cost more, but less, than continuing down the same path.

Critics of dollarization often say that Argentina would be left without the possibility of conducting its own monetary policy, but this is not a disadvantage but one of the main advantages of dollarization. As we Ecuadorians well know, dollarization does not protect against the destruction caused by populist governments, but it significantly limits the damage by closing the door to the monetization of fiscal deficits. It is not that Correísmo is less destructive than Kirchnerism, but that Correa faced a great brake on his power: the dollar in the hands of the people. So, after a decade of populism, Ecuador managed to grow more than Argentina, which, while not a great merit, is undoubtedly better than a decade of stagflation.

It is difficult to find a bigger shock to confidence and credibility in the financial system than the announcement of formal dollarization. When Ecuador was experiencing a deposit surge in the late 1990s, the mere announcement of the policy in January 2000 led to an immediate increase in deposits, even as banks offered negative real interest rates. (OR)