Dollarization that Milei proposes for Argentina has precedents in Latin America

Javier Mileithe ultraliberal who will be president of Argentina Since December 10, imagine a country where the official currency is the dollar and without a central bank, as a way to ward off chronic inflation.

There are several Latin American countries that have officially or de facto turned to the dollar, some in search of solving hyperinflationary phenomena – or almost -, and in all cases with the hope of achieving economic and financial stability that they did not provide. their coins.

Ecuador

Ecuador, with 17 million inhabitants, adopted the dollar in March 2000 in search of leaving behind a deep banking crisis that brought losses of US$5 billion and left thousands of people bankrupt. The rise in prices threatened to turn into hyperinflation.

Operationally, the change from the sucre to the dollar came after a bank holiday added to a temporary freeze of 50% of deposits, in a context of financial crisis.

With this mechanism, Ecuador achieved low inflation levels, even with periods of deflation. For 2023, annual inflation is expected at 3.10%.

For ordinary Ecuadorians, the impact has been uneven. Josefina Arboleda, 70, told AFP that dollarization “life was ruined because everything became more expensive”.

“Prices multiplied from one day to the next and we lost track of the value of money. (…) Experts say that it served to stop inflation and stabilize the economy, but there is poverty in the country, everything is going up. I miss the sucre“, he pointed.

The Savior

El Salvador, with 6.3 million inhabitants, exchanged the colón for the dollar on January 1, 2001. The government of Francisco Flores (1999-2004) sought to make the country more attractive for foreign investment and reduce the risk of devaluation.

“Dollarization has had its adverse effects. It increased the cost of living. When the dollar entered, the prices of goods and services skyrocketed and those who continue to pay for this situation are the poorest. We do not have monetary policy, since we depend on what the United States does with that currency”, remarked the independent economist César Villalona.

In 2021, El Salvador also admitted bitcoin as legal tender.

Inflation in that Central American country was 7.32% in 2022, and for 2023 it is expected to be 3.3%.

“Now what people always complain about is that with colones they bought more, they felt that money was more abundant and with the dollar they bought less“Mirna Hernández, 53, a fruit and vegetable merchant in San Salvador, told AFP.

Panama

Panama is the Latin American country where the dollar has been circulating as official currency for the longest time, on par with the balboa, the local currency.

The North American banknote has been used since 1904, shortly after the country became independent from Colombia and approached the United States with the construction of the Panama Canal, under Panamanian control only since 1999.

Only cash coins and not banknotes are minted for the balboa, and the public sector uses this currency only for accounting purposes.

Panama, with 4.2 million inhabitants, registers inflation levels below 3% annually.

Venezuela

Venezuela has had informal dollarization since the end of 2018, when the government relaxed the strict exchange controls as an escape valve from the acute crisis.

By then this country of 28 million inhabitants was going through its first year of hyperinflation, with a shortage of the local currency, the bolivar.

“There are a set of general factors that had to do with de facto dollarization. Structurally, it was high inflation, but there were also other drivers such as the electricity crisis situation.”, recalled economic analyst Henkel García, from Albusdata. Without electricity, card payment points stopped working and given the shortage of bolivars in cash, the dollar was the natural alternative.

The sharp loss of value of the bolivar made large volumes of cash necessary to pay for goods and services.

Four years later, the country emerged from hyperinflation, but continues with one of the highest rates in the world. Until September, interannual inflation was 317%, according to the Central Bank.

Paradoxically, the greenback, symbol of “American imperialism” and considered a “enemy of the revolution”, has become the currency of “increased circulation”, according to economists.

“Bimonetary” economies

In some Latin American countries, the dollar is used to purchase goods and services, rentals are contracted in dollars, and bank accounts can be opened in the US currency and dollars can be withdrawn directly from ATMs.

Peru or Uruguay – where the prices of durable goods such as real estate, vehicles or appliances are set in dollars – are two examples.