Javier Milei’s victory by a large margin and with an explicitly liberal message gives him the wind at his back to implement a paradigm shift. Since inflation is the main problem plaguing Argentina’s economy—it’s running at 142.7% a year, according to official figures—it’s only fitting that the Milea government starts with one of its main proposals: dollarization.

The main criticism of this proposal should be well known to us Ecuadorians, which is “no dollar for dollarization”. Those of my generation or younger may not remember that this is exactly what the various opponents of dollarization in Ecuador were saying in unison. Yet somehow dollars were never in short supply because even though the Central Bank of Ecuador (BCE) didn’t seem to have enough, Ecuadorians and foreigners did. What happened was that the Ecuadorians fled to the safe haven of another currency – the dollar – and in other financial systems where the use of said currency was allowed.

But with the very announcement of dollarization on January 9, 2000, Ecuadorians returned to depositing their dollars into the system, even just 9 months after the deposit freeze in March 1999. Between January and December 2000, Ecuador’s total deposits increased by $733 million, while the total amount of international reserves in December 1999 amounted to only 872 million dollars. Furthermore, while in 1999 deposits represented only about 15% of GDP, by the end of 2000 they had risen to 19.1% of GDP.

Deposits continued to grow in the following decades. At the end of 2022, deposits reached 37.9% of GDP. By way of comparison, Argentina’s deposits reached a paltry 22.5 percent of GDP at the end of last year.

How can we explain that Ecuadorians have so quickly restored confidence in the national financial system that until recently failed them? By ending the sucre, the ECB’s ability to serve as a lender of last resort to bail out private banks was eliminated. That is, the moral hazard or perverse incentive that encouraged banks to make hasty or obviously irresponsible decisions was eliminated. At the same time, they were encouraged to behave more conservatively, as they have done since then, for example, by keeping bank reserves well above the legal reserve. On the other hand, the possibility of manipulating the value of the money that Ecuadorians use to save and carry out their transactions has been eliminated, so that they no longer risk liquidating their savings by depositing them in the national system. In other words, the contagion channel between public finances and the private financial system has been broken.

As for Argentina, all these phenomena would not have to be different. Leliqis, which are paid obligations of its central bank, are in fact an obligation that the Argentine state must meet with or without dollarization, with or without a central bank.

Finally, dollarization is nothing more than the recognition of the popular will reflected on the street: Argentines are rushing to get rid of pesos in exchange for dollars. (OR)