Understanding Javier Milei and dollarisation, his radical policy to save Argentina’s economy

Understanding Javier Milei and dollarisation, his radical policy to save Argentina’s economy

Subject: Economy

Section: External sector   

In the news:

• The self-proclaimed “libertarian” and “anarcho-capitalist” Javier Milei has become the President-elect of Argentina, one of the world’s biggest economies which has been grappling with high inflation of more than 100%.
• Milei wants to disband Argentina’s currency and central bank, adopt the US dollar as its currency and open trade unilaterally.

Libertarian and Anarcho-capitalist:

• A person of this thought believes that the government has either little or no role in the functioning of a country and an economy.
• Libertarianism:
  • Libertarianism is a political philosophy that gives primacy to individual liberty over everything else. A libertarian believes that individuals have certain God-given rights — such as the right to life and liberty, freedom of speech, right to property, freedom of worship, moral autonomy etc. — and seeks to define the powers of a government in this context.
  • The purpose of government, according to liberals, is to protect these and other individual rights, and in general, liberals have contended that government power should be limited to that which is necessary to accomplish this task.
• Anarcho-Capitalism:
  • The term was coined by Murray Rothbard, a leading figure in the American libertarian movement from the 1950s until his death in 1995.
  • It seems to take the libertarian view to what would appear like an extreme. Anarcho-capitalism is a political philosophy that advocates the voluntary exchange of goods and services in a society broadly regulated by the market rather than by the state.
• A Libertarian and Anarcho-Capitalist society:
  • It would be a society where even law & order as well as justice delivery is privatised.
  • In such a society, the government has no monopoly on police like it has at present. Almost every sector of the economy is run on free market principles with the belief that people, as consumers, will choose the best option among the available ones and that demand for better quality goods and services (say policing) will incentivise entrepreneurs to come up with the most efficient solutions.

High inflation in Argentina:

• Argentina’s inflation rate is anywhere between 110% to 150%. It means the domestic currency is fast losing its value.
• Reason: The pandemic, Russia-Ukraine Conflict and excess government spending on welfare programmes.
• The size of the Argentine economy (GDP) and per capita income have stagnated over the past decade.
• Consequences: Fall of domestic economic activities, trade suffering and sharp worsening of country’s exchange rate.

Milei’s solution: Dollarisation:

• One solution he proposed is to severely cut government spending.
• And, another is to disband the domestic currency (Argentinian Peso) and the central bank and shift to the US dollar as the official currency. This is called Dollarisation. The basic idea behind Milei’s plan to dollarise is two-fold:
  • To bring price stability to the economy in a quick manner.
  • To ensure that the government and the central bank are in no position to influence monetary policy.

Why Dollarisation may fail?

• Just because there isn’t a central bank to print money doesn’t necessarily mean that governments will not spend beyond their means.
• For a country’s system to shift to dollars, its banks and its government should have the dollars to begin with. If they don’t have the dollars then how can the economy shift to dollars?
  • Argentina’s government needs $40 billion to make the shift. It is also reported that at present Argentina is struggling to pay back the IMF’s debt of $44 billion.

Why Dollarisation may work?

• Latin America’s three fully dollarized countries—Panama, Ecuador, and El Salvador—have had the region’s lowest inflation levels during the past 20 years or so.
• Argentina’s central bank’s total liabilities stand at around 18.8 trillion pesos.
• Central bank liabilities refer to all the money it prints; its assets are things like gold and hard currencies (such as US dollars).
• If these liabilities are exchanged at the free market rate of 470 pesos to a dollar, Argentina will have the $40 billion it needs.

Source: Indian Express, The Hindu