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OPINION AND ANALYSIS | 17-05-2023 09:24

Juan Pablo Spinetto: Argentina’s problem is economic malpractice, not the peso

Dollarisation won’t bring much-needed stability to South America’s second-largest economy.

Javier Milei, the libertarian candidate for president who has become a political sensation in Argentina, has a characteristically radical proposal for addressing the country’s runaway inflation, which reached almost 110 percent last month: Argentina should ditch its ever-shrinking peso and replace it with the US dollar.

The proposal may be tempting — and there is the example of Ecuador, which made the dollar legal tender in 2000 and achieved price stability — but the option is neither feasible nor desirable for South America’s second-largest economy.  There are far more effective (and, frankly, more straightforward) ways to bring economic stability to Argentina.

Argentina’s US$641-billion economy is already partially dollarised, but replacing the peso with the US currency would require significant international reserves that the country currently doesn’t have and is unlikely to get. So there would be need to be a huge devaluation to make up for the dollar shortage. Dollarisation would also leave the country vulnerable to swings in the dollar’s value at a time when its predominance is being questioned.

Then there are the political constraints. Argentina’s presidential election is in October, and even if Milei wins, his group is unlikely to have the congressional control and political support needed to pass such a reform. A recent poll also showed most Argentines oppose having the dollar as the national currency, even if they use it for many large day-to-day transactions.

Finally, there is a strategic reason. Dollarisation will fail, as currency convertibility did during the 1990s, if authorities don’t tackle Argentina’s underlying problem: policy malpractice.

Unlike its emerging-market peers, Argentina has mostly been implementing a set of unorthodox policy tools over the past few decades that not only didn’t tackle inflation but worsened it. It has financed persistent budget balances by printing money, faked inflation stats, granted ballooning energy subsidies, ordered byzantine price controls, and forced monetary authorities to implement negative real interest rates. And remember, Argentina is one of the most-closed of Latin America’s big economies, with recurrent debt problems and tight capital controls.

Against this backdrop, it would be a surprise if Argentina didn’t have one of the highest inflation rates in the world.

Under the administration of President Alberto Fernández, that preference for unorthodoxy translated into the lack of any policy anchor to control inflation, something he famously summarised in a 2020 interview: “Frankly, I don’t believe in economic plans.” Vice-President Cristina Fernández de Kirchner went further, recently saying: “It’s clear the fiscal deficit is not the cause of inflation.”

That may be correct occasionally for nations with good credit ratings. But it certainly isn’t true for a country that has defaulted on its international debt three times already this century.

Yes, Argentina has been terribly unlucky, suffering two huge droughts in just five years that cost the economy many billions in lost exports. But with climate change, such events can no longer be considered so unusual. If anything, they make the need for macroeconomic stability even more urgent.

And for that, Argentina need only look at its neighbours for guidance.

In the past three decades, Latin America has made great strides in taming inflation, one of its main economic worries in the 20th century. From Brazil to Paraguay to Mexico, most of the region’s countries have implemented similar policies, focused on inflation targeting, fiscal prudence, smart debt management and a degree of autonomy (if not full independence) for central bank authorities. These policies were successfully adopted and sustained by governments of both the right and left.

The value of this approach is clear from how smoothly these countries went through the double shock of the post-pandemic inflation spike and the fast increase in interest rates by the US Federal Reserve. Latin American central banks reacted quickly, boosting borrowing costs earlier than most. Despite some political noise, they are already seeing inflation rates slowly returning to target without the financial turbulence common in other periods of history.

There is no reason Argentina cannot do the same. Brazil, which suffered hyperinflation at the same time as Argentina did three decades ago, now has a sound currency and the lowest inflation rates among the region’s largest economies.

Of course, the main obstacle in Argentina has always been political. Whoever is the country’s next leader will need not only to set the right policy, but also accumulate enough political capital to sustain it. Maybe the next president can appeal to Argentines’ competitive spirit: If our frenemy Brazil can achieve to long-lasting economic stability, the president can say, then so can we.

 

* Juan Pablo Spinetto writes for Bloomberg.

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by Juan Pablo Spinetto, Bloomberg

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