How the Argentine economy would change with dollarization, explained in five graphs

These are some of the lessons that can be learned from three countries with experience of a dollar-based economy if Argentina, Latin America’s third-largest economy, chooses to adopt the currency as legal tender

javier milei economía argentina
A $100 bill with the face of Javier Milei during a protest in Buenos Aires (Argentina) in 2023.Tomas Cuesta (Getty Images)

Argentina’s President Javier Milei has put the prospect of dollarizing his country’s economy back on the table. The Argentine mint would stop issuing its national currency, and U.S. dollars would be adopted in a process that is already a reality in Panama, Ecuador, and El Salvador. The economies of these three countries could act as an example of the situation facing the South American country.

President Milei this week warned that fulfilling his star campaign promise will take “some time.” Still, the conditions for this to happen have continued to advance. First, there came a devaluation of the peso by more than 50%. Recently, in reaction to year-on-year inflation of 254.2%, bank deposits in pesos have decreased, further lowering the value of the peso versus the dollar. The cheaper the national currency, the easier a transition to the dollar would be. This has worried some who are expecting a second devaluation.

“Dollarization, in its many variants, is crucial to understanding the macroeconomy of Latin America, as well as that of many developing countries,” wrote Eduardo Levy Yeyati, an economist and professor at Torcuato di Tella University, in a study published in 2021. “Although it is still an option for some extremely small and open economies, official dollarization has strong contraindications. Among them is its permanent nature, as illustrated by the case of El Salvador, as well as the latent debate on de-dollarization in Ecuador,” the text entitled Financial dollarization and de-dollarization in the new millennium reads.

Panama adopted the currency in 1904. Dollarization coincided with the announcement of the construction of the Panama Canal, which allows ships to cross the continent in the middle, without needing to sail around Cape Horn, and the move brought the country closer to the U.S. economy. When Ecuador adopted the dollar at the turn of the millennium, the country was facing an economic crisis that saw inflation rise to 95.5% in 2000. A year later, El Salvador made the same decision to contain the risk of devaluation.

In the case of Argentina, data from the International Monetary Fund indicate that the average price index is 2,788, while dollarized countries have an index that barely reaches 130.

However, when it comes to Gross Domestic Product (GDP) per capita — a broad measure of the income of a country’s population — Panama and Argentina remain at the top of the four countries.

Currency exchange in Argentina faces different obstacles. JPMorgan strategist Michael Cembalest explained in a report published in January: “Convertibility into another currency is generally only viable in places with some combination of the following: (a) high levels of productivity, flexibility, and business dynamism to allow the economy to absorb internal and external shocks; (b) lenders such as the European Central Bank and the European Commission; and/or (c) significant commodity-related foreign exchange reserves to defend the monetary peg when necessary. Argentina does not have any of these attributes.”

Furthermore, the large difference in the size of the population that exists between the four countries is also noticeable. The countries that have already dollarized did so with fewer than 13 million inhabitants, while Argentina currently has more than 46 million.

Among these populations, unemployment is recorded in the following ways:

Regarding the debt that countries currently have, Argentina is not one of those that has the worst GDP–external debt ratio in the Americas. That prize goes to the United States and Canada.

“Dollarization would give way to de-dollarization in a fairly short period,” stated Cembalest. “Argentina would need significant foreign exchange reserves and much higher savings rates to even try. But even if these objectives were met, dollarization would still fail after being implemented,” the specialist added.

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