With Javier Milei’s recent victory in Argentina’s presidential election, everyone is talking about the prospect of dollarization there.
Enter a curious piece in the Wall Street Journal. I find the Journal’s straight economics reporting of late to be of higher quality than that found in the Financial Times or the Economist, but this piece is an exception.
Here’s what it says about why dollarization won’t work in Argentina.
Yet choosing the wrong conversion rate can be fatal. Also, the dollars needed to swap for all peso holdings are likely north of $9 billion, Capital Economics estimated in August, based on the black-market rate for the peso. Borrowing this money when the country can’t pay back the hard currency it already owes seems unfeasible.
“Not enough dollars” is a bad reason to claim dollarization won’t work. Currency units are an arbitrary numeraire. All Argentina needs to do is set a conversion rate of pesos to dollars that would fail to exhaust the supply of dollars on hand.
Now, perhaps the real problem, then, is not that Argentina doesn’t have enough dollars, but that given the number of dollars it does have, it would need to depreciate the peso “too much” to make the conversion work.
But the piece tries to make the opposite point, that the peso is too strong and needs to be depreciated:
The off-the-charts fertility of the Pampas region brings in dollars, but that pushes the peso too high for the less-efficient manufacturing sector. A dependency on exports of soybeans, corn and wheat then makes the economy vulnerable to volatile global prices and droughts. These torpedoed the balance of payments back in 2018 and again this year.
You can’t have it both ways.
The piece then goes on to editorialize that Argentina needs “export-led industrial policy” for economic revival:
Exploiting the Vaca Muerta shale formation may help, but Argentina ultimately needs to close the productivity gap through the kind of export-led industrial policies that have worked in South Korea and Vietnam. Populist recipes have failed to deliver these, and so will Milei’s.
First of all, Hong Kong and Singapore had much higher growth rates than South Korea and Vietnam without “industrial policies.”
Secondly, who’s to say that Milei’s policies won’t deliver productivity growth? That remains to be seen.
Finally, no one doubts that Argentina has had terrible macroeconomic policies. It’s an odd argument against fixing those to point to yet more issues the country faces.
Dollarization may not be the first-best solution for Argentina, though it’s hard to imagine it will be worse than hyperinflation, and this odd piece of “reporting” in the Wall Street Journal badly fumbles the case against it.