Dollar or pain. Is dollarization the issue?
Dolarizar (o volver a la convertibilidad) sería reconocer todos nuestros fracasos y quemar las naves
Politics and Economics
In his famous play "Hamlet" (The Tragedy of Hamlet, Prince of Denmark, 1599-1601), William Shakespeare questions existence. In other words, what we are and what we do, and whether we should submit or fight, live or die. For Hamlet, "To be or not to be, that is the question". For Argentines today, dollarization is the issue. The exchange crisis of the first quarter, turned into an economic crisis, did not imply any novelty for the Argentines with some years, accustomed to go through these cycles of "Stop and Go". However, it was enough that Larry Kudlow, head of the National Economic Council of the United States, an organism that advises President Donald Trump, declares, not only that the only solution for Argentina is to opt for a new convertibility scheme for its economy but also that the government of the United States was working on it, so that an existential (monetary) psychopathy is unleashed on Argentina's capacity to govern itself or dollarize its economy and cede control of monetary policy. Casa Rosada quickly denied these versions, either because they are not thinking of dollarizing the economy or because the idea of dollarizing implies that the government is showing weakness at this time when new disbursements are being negotiated with the IMF to regain the confidence of the markets. But what would be the advantages and disadvantages of dollarizing the economy? And most importantly, what does a dollarized economy imply for Argentines? In the current context, one of the advantages of dollarizing the economy would be to put an end to exchange uncertainty and instability by eliminating the possibility, on the part of Argentina, of devaluing its currency, even though we would be associated with the exchange rate of the dollar worldwide. Given that the Argentine government would stop issuing its own currency (Peso), the indigenous inflation would be eliminated and only the inflation derived by the dollar would remain at the world level. Nor could the government correct its imbalances by liquefying liabilities through exchange rate changes, but would be obliged to maintain a macroeconomic and fiscal balance. In the debt market, the risk of Argentine bonds would decrease and with it, the interest rate that they yield would have to be lowered as investors become more confident. If so, the government could incur lower fiscal costs and an increase in investment could be expected that would translate into medium-term economic growth. However, dollarization alone does not eliminate the risks of future crises since many of the factors that could provoke them will be beyond our country's control. Specifically, Argentina would be subject to the variation of commodities (grains and agro-industrial exports) and capital movements between countries as a destination for investment. The decline in terms of trade (negative variations in world trade prices for our country) would produce a lower income of dollars and consequently a monetary contraction with falling economic activity and rising rates. On the other hand, by not being able to devalue and adjust prices to gain competitiveness, our neighbouring countries would be better prepared to face crises and compete in international markets. Our economy would be under strong cost pressure to maintain a surplus balance of payments to avoid incurring debt to finance imbalances. This last point is the most risky since it implies that our country should have fiscal discipline that we have never seen in the last 70 years. Even in the 1990s´con convertibility, the government increased foreign debt to finance its fiscal deficit by tightening the fixed exchange rate to the maximum until it exploded generating a costly social exit. But leaving aside the technical aspects, it is precisely about the social aspects that I would like to reflect on, to understand what are the implications for Argentines of a dollarization and why it would be the opposite of the initial position of this government. To dollarize (or, although it is not the same, to enter into convertibility) would imply impoverishing ourselves since we should do it at a high level of exchange rate so that our products are cheap enough to compete at a world level and generate external surplus. To date, converting the entire monetary base (exchanging pesos for dollars in reserves) would give an exchange rate of $87, that is, it would imply a devaluation greater than 100%. Some economists will say that our per capita income would fall, said in Creole, we would become twice as poor but in dollars! Low dollar wages and unemployment would be an inevitable consequence. Of course there is the possibility that we finance this process and can establish a lower initial exchange rate, but entering with a low exchange rate could generate a lack of competitiveness and greater problems for self-sustainability in the fiscal, a discussion that took place at the time around the exchange value adopted in the convertibility. In those conditions where social assistance would increase its demand, the state would be unable to give a nominal response (emit) and the exit from poverty and unemployment would only be possible if the country receives investments and really grows. For all that has been said previously, it seems impossible and contradictory to think that a government that since 2015 has maintained the decision not to move forward with a drastic adjustment to prevent poverty and unemployment levels from rising is now considering a dollarization that would imply the opposite. In addition, we would pay dearly for the decisions taken in the first years of management, since, as initially it was decided to maintain public spending financed with bond issues, the increase in external debt by approximately 150 billion dollars would not only bring no benefits but would leave us with a heavy maturity schedule that we will have to pay with a lot of sacrifice. But the present demands measures, and if the crisis finally leads the government down this path, it must take into account the high social cost to pay and not repeat the mistakes made in the past. The challenges of an economy tied to the dollar are enormous and its greatest benefit seems to be to allow us to restart a process of growth by means of a stabilization shock that reorders variables, reduces speculation and generates confidence. To dollarize (or return to convertibility) would be to recognize all our failures and burn the ships. It would not be the end of the world but it would be the beginning of a very different world.