This Sunday Argentina will hold the Simultaneous and Mandatory Open Primaries (PASO), the process in which the candidates for the presidency will be defined. According to polls, most Argentines consider inflation to be the main problem of the economy. This is understandable considering that the annual inflation rate reached 115.6%.

Patacon in our future

In a recent study published by the Cato Institute, my colleague Daniel Raisbeck and I explained why Argentina should dollarize now and went into more detail than this column allows for objections to the move.

The most popular argument is that there are not enough dollars to dollarize the economy. Behind this argument lies the belief that dollarization depends on a certain level of liquid assets accumulated in international reserves. All this reminds me of numerous experts and politicians in our country who have been warning for years that dollarization is “falling” and that it should be “defended”.

dollar

What kind of demand (for us) these years?

Behind the Argentine nosopuedistas and the supposed defenders of dollarization in Ecuador, what we have is essentially confusion about the role of reserves in a dollarized economy. As economist Manuel Hinds explains, “in a non-dollarized economy there are two currencies, one that is used internationally (in the case of Ecuador, the dollar) and the other that is used domestically (the sucre that existed when Ecuador was not dollarized)”.

(…) we have… confusion about the role of reserves in a dollarized economy.

To illustrate, Hinds suggests the analogy of a casino where you exchange your dollars for game chips, hoping to exchange the chips for dollars before you walk out. A casino cashier has to make sure he saves enough dollars to change chips. This is the role of the central bank in non-dollarized countries, with one important difference: if the teller does not have enough dollars to change the tokens, the police can charge him with fraud, while the central bank simply devalues ​​the tokens to Let the dollars come to you. The latter sounds very similar to the “Ecuadorization” explained by candidate Andrés Arauz in April.

What is happening with the primary elections in Argentina?

In the work plans, it was established that it protects dollarization, but the idea of ​​​​equatorization, which came up before knowing that we are going to the elections, is causing a debate

In a dollarized economy, on the other hand, there is only one currency and it is like walking into a casino where the machines accept dollars directly. You don’t have to go through the counter exchanging your dollars for tokens, i.e. you don’t depend on the teller (central bank). The value of the local currency is no longer defined by the national central bank, but by the international markets in terms of its value in euros or yen. Hinds adds: “That value doesn’t change if Ecuador has or doesn’t have reserves. Dollar prices and dollar contracts are still the same, here and in China, even though Ecuador has no reserves”.

For this reason, Argentina does not need to have as many reserves as some economists say. This is also the reason that despite the dismal record of the Argentine (and Ecuadorian) political class, dollarization does not require restrictive policies to keep the dollar in the economy. The system works because it depends solely on the confidence people have in the currency of their choice in relation to the actual alternatives available. (OR)