How Crazy Do You Have to Be to Support Dollarization?

Javier Milei, the frontrunner in the Argentine presidential elections, has officially tapped Emilio Ocampo to head Argentina’s central bank (BCRA). Ocampo and I co-authored the now-famous dollarization proposal that Milei has been championing. If Milei is elected, Ocampo will be the next (and hopefully final) president of BCRA. 

Under Milei’s presidency and Ocampo’s leadership at the BCRA, Argentina will shut down its central bank and adopt the dollar. Many economists in Argentina oppose the dollarization plan. In fact, their opposition is so strong that they would have one believe only an economist who stumbled into his degree by accident could advocate for such a monetary reform. Is this the case? Certainly not. Several reputable economists have explicitly endorsed the idea of dollarization, some specifically for Argentina.

Perhaps the first person to recommend dollarization for Argentina was none other than Milton Friedman. This might seem odd. After all, Friedman was a champion of flexible exchange rates. In fact, some Argentine critics of dollarization have referenced Friedman to support their opposition. 

Although Friedman advocated flexible exchange rates for advanced economies, he saw benefits for developed countries. This is what Friedman had to say about dollarization and Argentina during a congressional hearing in 1973:

The whole reason why it is an advantage for a developing country to tie to a major country is that historically speaking the internal policies of developing countries have been very bad. US policy has been bad, but their policies have been far worse. There are no gyrations in American monetary policy which can hold a candle to the gyrations which have occurred in Argentinian domestic monetary policy. So the whole reason why tying to a major currency would be an advantage to Argentina is precisely that it would prevent them from following bad domestic policies. They would have less of an adjustment problem simply because our policy will prove to be more stable than theirs.

It is worth noting that in 1973, the US and Argentina had inflation rates of 8.9 percent and 43.8 percent, respectively. As of August 2023, the yearly inflation rates for the US and Argentina are 3.7 percent and 124.2 percent, respectively. For some economists, Friedman’s thoughts should not count because they are a “little old.” This dismissal is as poor as it is blind to more recent statements by other reputable economists.

University of Chicago economists are not the only ones who endorse dollarization for some emerging economies. At a 2000 IMF annual meeting seminar, MIT’s Rüdiger Dornbusch “essentially recommended that every emerging market economy either adopt a currency board or directly use a strong currency like the US dollar, thus ‘outsourcing’ monetary policy and gaining credibility and stability automatically.”

Argentine-born economist Guillermo Calvo states that, for some emerging economies (such as Argentina), “dollarization becomes an attractive monetary regime when account is taken of recent financial turmoil in such economies. The case is further strengthened by these economies’ penchant for acquiring dollar debts.”

By resolving the mismatch between the currency in which the emerging country collects revenues and the currency in which it satisfies its debt obligations, Calvo notes, dollarization can eliminate an important source of financial instability.

Even more recently, in 2018, John Cochrane endorsed the idea of dollarization for Argentina: “[…] dollarize. Just get it over with. What possible benefit is Argentina getting from clever central bank currency manipulation, if you want a dark word, or management, if you want a good one?”

Like many dollarization advocates, Cochrane recognizes that there are other imbalances that dollarization does not solve by itself, such as a significant fiscal deficit. This situation is not to imply, however, that dollarization must be a bad idea.

The dollarization debate is not won by counting how many economists support either position. Nor is it won by dismissal. It is simply not the case that no serious economist would recommend Argentina dollarize. In fact, dollarization proponents are in good company.

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