On August 13th, 2023, right-wing populist presidential candidate Javier Milei shocked Argentina by winning 30% of the popular vote in the primary elections.[2] Milei believes that he is the only person who can save Argentina from its historically exponential, volatile inflation – and he wants to do so by getting rid of the Argentine Peso (hereinafter “ARS” or “peso”) and dollarizing the economy.[3]
Dollarizing, or dollarization, is the process of replacing a country’s currency with the United States Dollar (hereinafter “USD”).[4] The process of dollarization is dependent on a country’s constitutional limits and its access to dollar bills.[5] In Argentina, the president has the power to approve or enact a federal law, but such a law must begin in Congress.[6] Argentina’s history should lead one to err on the side of caution in its approach to dollarization and not attempt to pass such a law by presidential decree (the Argentine equivalent of an executive order).[7] As it stands, Milei would not have enough support in the Argentine Congress to dollarize by legislation.[8] Even if this legislation was feasible, it is uncertain how Argentina would have or get enough dollars to convert ARS to USD.[9]
Generally, foreign banks can obtain dollars “directly from the Federal Reserve . . . from Extended Custodial Inventories, . . . or . . . from commercial depository institutions.”[10] While these options themselves are already complicated, Argentina’s debt of over 375,000 million USD makes the options even more difficult to navigate.[11] With inflation and debt in mind, it seems that the only viable option for Argentina would be to negotiate with the United States and borrow dollars.[12] However, Argentina’s debt could be the United States’ deciding factor against such an agreement.[13]
Assuming the Argentine Congress would approve of dollarizing the economy and that Argentina obtained enough reserves, dollarization could ultimately erode its economic sovereignty.[14] Almost by definition, relying on a foreign nation’s currency creates dependency on that nation’s economic and political decisions.[15] The Argentine government would effectively cede its control over the printing, lending, and exchange rate of its operative currency to the United States.[16] Further, full conversion to the dollar could affect regional integration with nations that maintain their own currency or utilize floating exchange rates.[17] As one of the largest economies in Latin America, economic phenomena within Argentina through dollarization or otherwise could be detrimental to the whole region.[18]
Although the arguments for immediate dollarization are tempting to finally curb Argentina’s historically high inflation, they leave too much up to chance.[19] Three other Latin American nations have dollarized their economy and are frequently cited as ideal comparisons.[20] Still, these comparisons are inadequate to provide strong predictions because of the difference in population and ties to the United States.[21] Argentina is significantly less economically integrated with the United States than the three dollarized Latin American economies.[22] Additionally, the lack of physical dollars is still not resolved.[23] While it is possible that Argentine-owned U.S. dollars held in secret or outside of the country will make their way back post-dollarization, it is not certain.[24] The legislature must take into account current reserves, rather than the possible return of reserves, when considering dollarization.[25]
[1] Photo: Walter Bianchi, Jorge Otaola, & Lucinda Elliott, Argentines rush to dollar safety as election uncertainty looms, Reuters (Aug. 16, 2023, 5:39 PM), https://www.reuters.com/markets/argentines-rush-dollar-safety-election-uncertainty-looms-2023-08-16/. [2] See Cecilia Barría, Cuán factible es la dolarización de Argentina que propone Milei y cómo se compara con la de Ecuador, BBC (Aug. 15, 2023), https://www.bbc.com/mundo/articles/c1d7dm4j9p9o. (explaining the feasibility of dollarization in Argentina, the legal avenues, and practical matters in physically attaining U.S. dollars). Milei received more popular votes than Patricia Bullrich, the former Minister of Security, and Sergio Massa, the current Minister of Economy. Id. [3] See id. The author uses Ecuador as a comparable case study of another country that utilized dollarization as a method to control inflation. Id. Ecuador began the process of dollarization over 20 years ago. Id. [4]See Thomas C. Baxter, Jr., Dollarization and Its Impact on U.S. Law, 35 Int'l Law. 1427, 1427 (2001) (describing the possible implications on U.S. law from dollarization and viewing dollarization as a “change in a business condition”). The author draws attention to the fact that the U.S. Dollar is ultimately controlled by Congress and the Federal Reserve, which is outside the direct control of foreign nations who dollarize or attempt to dollarize their economies. Id. at 1427-28. [5]See generally id. at 1428 (describing the avenues to physically attain U.S. Dollars); see also Barría, supra note 2 (describing Milei’s plan to push legislation through Congress to dollarize the economy). For further discussion on access to USD, see Baxter, infra note 10 at 1428 and accompanying text. [6]See Arg. Const. art. 77; see generally Arg. Const. art. 78-84 (delineating the process of passing federal legislation); see also Barría, supra note 2. The President may propose legislation to Congress, which is what Milei says he plans to do if he wins the general election. Id. [7]See Clarín, Ahora, Menem quiere una ley para cambiar la moneda, Clarín (May 8, 1999, 11:00 PM, updated Feb. 24, 2017, 10:50 PM), https://www.clarin.com/economia/ahora-menem-quiere-ley-cambiar-moneda_0_r1m44F6xAtl.html (describing how former Argentine president Carlos Menem wanted to dollarize the economy by decree, then realized that such a change effectively required Congressional approval and a treaty or accord with the United States). [8]See Barría, supra note 2. Milei likely does not have enough votes of support in the legislature. Id. See also Maximilian Heath, Argentina election 2023: what you need to know (Oct. 16, 2023, 12:27 PM) https://www.reuters.com/world/americas/argentinas-presidential-election-who-are-candidates-what-is-stake-2023-10-13/. (explaining that almost half of the Lower House (similar to the United States House of Representatives) and less than half of the Upper House (similar to the United States Senate) will be decided in the upcoming general election). [9]See Barría, supra note 2. Milei says that he has already obtained enough U.S. Dollars to start converting the economy. Id. [10]See Baxter, supra note 4 at 1428. Baxter specifies that acquiring USD from the Federal Reserve entails “transporting the currency by courier across borders . . .” while the Extended Custodial Inventories are Federal Reserve vaults “operated . . . in foreign countries by private entities.” Id. After acquiring USD, Argentina would replace ARS in the local economy with USD. Id. [11]See El Cronista, La deuda creció 70.000 millones de dólares en la gestión de Alberto Fernández, El Cronista (last updated May 4, 2023), https://www.cronista.com/economia-politica/un-informe-internacional-advierte-por-la-deuda-publica-argentina-que-crecio-20-en-el-ultimo-ano/ (stating that Argentina’s debt had reached 392,000 million USD). [12]See Barría, supra note 2. [13]See generally El Cronista, supra note 11. [14]See generally Eduardo Borensztein & Andrew Berg, The Pros and Cons of Full Dollarization, IMF 1, 3-4 (Mar. 1, 2000), https://www.elibrary.imf.org/view/journals/001/2000/050/article-A001-en.xml (reviewing the pros and cons of completely dollarizing a nation’s economy). The authors list several potentially negative effects, including the loss of a national symbol, the loss of seignorage revenues, and the loss of autonomy and control over monetary and fiscal policy. Id. at 4. [15]See generally Baxter, supra note 4 at 1431 (asserting that “[s]ome basic principles of U.S. payments law will” inevitably follow to nations that dollarize). For further discussion on dependency on a foreign nation’s economic policy, see infra note 16 and accompanying text. [16]See Borensztein & Berg, supra note 14 at 4 (“a dollarizing country would be relinquishing any possibility of having an autonomous monetary and exchange rate policy . . . including the use of central bank credit to provide liquidity.”) But see Nicolás Cachanosky, Dollarization and the Lender of Last Resort, Am. Inst. Econ. Rsch. (Sept. 11, 2023), https://www.aier.org/article/dollarization-and-the-lender-of-last-resort/ (explaining that the often-cited “lender of last resort” function is not as critical in Argentina as it is in other countries, because, in times of economic crisis, citizens tend to demand foreign currencies, such as liquid USD, as opposed to liquid ARS). This is attributed to Argentina’s inflation. Id. [17]See Borensztein & Berg, supra note 14 at 25-29 (illustrating Argentina and Brazil’s partnership in Mercosur, the value of their currencies as compared to each other, and the effects of one nation dollarizing while the other has a floating exchange rate). The authors assert that “[t]he disparity of exchange rate systems leads to volatility in the bilateral real exchange rates of member countries that may be problematic both on political and economic grounds.” Id. at 25. [18]See generally id. at 29. At the time the article was published (2000), ARS was pegged to USD, so dollarization would not have had a significant impact. Id. at 29. See also Christopher Condon, What Is Dollarization, and Why Is Argentina Considering It? Wash. Post (Sept. 6, 2023, 2:55 PM) https://www.washingtonpost.com/business/2023/09/06/argentina-considers-dollarization-here-s-what-that-means/a6eb821c-4ce7-11ee-bfca-04e0ac43f9e4_story.html#:~:text=Argentina%20pegged%20the%20peso%20to,6. (explaining that the ARS to USD peg ended in 2002 during the presidency of Eduardo Duhalde; see also Banco Central do Brasil, Traveling to Brazil (Last visited Oct. 17, 2023) https://www.bcb.gov.br/en/financialstability/fxtravelbrazil#:~:text=Under%20the%20Brazilian%20floating%20exchange,agree%20the%20foreign%20exchange%20rate (stating that Brazil maintains a floating exchange rate). [19] For further discussion, see infra notes 20-24 and accompanying text. [20]See Gabriela Calderon de Burgos & Daniel Riesbeck, Argentina Should Dollarize, Pronto, Cato Inst. (July 27, 2023), https://www.cato.org/briefing-paper/argentina-should-dollarize-pronto (defending the argument that Argentina should dollarize). The authors refer to Ecuador, El Salvador, and Panama as comparable Latin American countries that have dollarized their economies. Id. [21]See Barría, supra note 2. [22]See id. [23]See generally id. See also Calderon de Burgos & Riesback, supra note 20 (stating that the dollar reserves held by the people and companies of Argentina will be returned to Argentina and be sufficient to dollarize the economy once the policy is announced). The authors cite the National Institute of Statistics and Census that estimated over 246 billion USD was held “in foreign bank accounts, safe deposit boxes, and mostly undeclared cash.” Id. But see Barría, supra note 2 (citing Sebastián Menescaldi, associate director of EcoGo, who states that the issue is that the Central Bank does not have enough dollars in reserves). [24]See Calderon de Burgos & Riesback, supra note 20; see also Condon, supra note 18 (explaining that the Argentine Central Bank would not only need enough USD to purchase circulating ARS, but also to cushion a run in the banks). Argentina’s net foreign reserves are currently estimated to be anywhere from negative 6.5 billion USD to negative 9.9 billion USD, which is “about $50 billion short of what might be necessary to consider dollarization.” Id. [25]But see id.; see Barría, supra note 2. [26]See Barría, supra note 2. [27]See id.
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