Milei walks back on dollarisation. It’s unlikely to work anyway

Argentina's libertarian president-elect Javier Milei is going down the same road as other far-right leaders, such as Italy's Prime Minister Giorgia Meloni, who promised anti-migrant measures during election campaigns only to sidestep taking very harsh measures.

Milei, who wears an unruly mop of hair and whose swift rise to power surprised analysts, is learning that upending conventional economics is a battle he can't win with words.

One of his proposed radical economic measures is ending the use of the peso, the Argentinian currency, and replacing it with the US dollar in what's known as dollarisation.

But with barely a few days to go before he assumes office on December 10, he has distanced himself from people who were central to putting his radical economic plan into action.

Milei’s pick as the head of the central bank, Emilio Ocampo, has refused to take the job reportedly after the president-elect shifted towards conventional methods to fix the economy.

Ocampo, an economic history professor, is a strong proponent of dollarisation, which will handicap the Argentinian government from printing money to finance an ever-widening fiscal deficit. He was the main driving force behind Milei’s plan to introduce the greenback as Argentina’s currency and strip the country's central bank from its power to set interest rates.

While Milei made dollarisation a centrepiece of his election campaign, he has put the idea on hold, reported Bloomberg.

“We need to see whether the market situation allows a solution like the one Emilio proposes, and whether he is prepared to implement a plan which is not the one he had originally planned,” Milei said in a recent interview.

Milei is now considering the names of former Wall Street executives to head his economic team.

A terrible idea to begin with

Experts had been sceptical about dollarisation, which only a few small countries have implemented.

Dollarisation means that the greenback will become Argentina's official currency. Since Argentina can not print US dollars, it would have to depend on export income and foreign investments to meet domestic dollar requirements.

This also means the monetary policy - which helps set interest rates - will be decided by the US Fed and not by Argentina's central bank.

"One can argue that ending the ability of a central bank and monetary authority to monetise fiscal deficits will impose fiscal discipline on a country," says Mark Sobel, the US Chairman of the Official Monetary and Financial Institutions Forum.

"But that's not clear, and countries may come up with other ways to work around deficits or disregard sound operations. Moreover, dollarisation doesn't solve the problem - hard work does, and that means actually doing the work of fiscal consolidation," he tells TRT World.

Yet, there are those who say dollarisation can help lift Argentina from its current state of economic mess, which has pushed 4 out of 10 citizens into poverty. These proponents, which include organisations like the libertarian Cato Institute, point out that Argentines already use US dollars to quote rent and buy things at supermarkets.

For decades, Argentina, South America's second-largest economy, has been plagued by governments running out of funds. It has become the largest recipient of bailout loans from the International Monetary Fund (IMF).

Successive governments have relied on the central bank to print notes to plug the gap between how much money is spent and how much is collected as taxes. Milei and his backers say the excess supply of currency notes has fueled runaway inflation.

Panama and Ecuador are among the countries that have adopted dollarisation. But while it has helped tame prices, research shows it did not stop governments from overspending - a key reason why dollarisation is adopted in the first place - and exposes them to external shocks.

Besides dollarisation and eliminating Argentina's central bank, Milei also wants to cut back on public sector spending, reduce taxes and shut state-owned companies, which employ tens of thousands of people.

Something sinister

Argentina has already used a watered-down version of dollarisation in the 1990s when it pegged one peso to one American dollar.

That plan brought inflation down, but it had to be abandoned because a stronger dollar made Argentinian commodity exports uncompetitive in the international market, creating a trade deficit — the difference between export and import revenues.

That measure didn't restrain Buenos Aires's appetite for foreign currency loans from commercial lenders that were needed to bridge the trade deficit, Jayati Ghosh, a prominent developmental economist, tells TRT World.

"The poor were hit in that deflationary period (1990s) because they were losing jobs, they were not finding employment, they were getting less public services because of dollarisation.”

Ghosh was among dozens of economists who wrote an open letter on the eve of Argentina's November 19 election, advising voters to exercise caution as any drastic measure could add to their difficulties.

Milei's desire to reduce the size of government, public amenities and services — such as hospitals — by laying off government employees has roots in his infatuation with Margaret Thatcher, the former UK prime minister responsible for making privatisation a global catchphrase.

Ghosh says some of the most advanced countries have high public employment.

"If you look at Europe, it's pretty much the same in Germany and the same in Singapore, the so-called free market icon."

Argentina can deal with its financial woes by taxing the wealthy and large corporations, says Ghosh.