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Argentina's President-elect Javier Milei has a plan to fight inflation: dollarization

MICHEL MARTIN, HOST:

The U.S. has been dealing with high inflation for several years now, but it is nothing compared to what Argentina is facing. Inflation there is in the triple digits. Prices have been going up at an annual rate of 142%. Argentina's president-elect has a pretty drastic plan to fight high inflation. He wants to get rid of Argentina's currency completely and replace the Argentine peso with the U.S. dollar. NPR's David Gura is with us now to explain more about this. David, good morning.

DAVID GURA, BYLINE: Hey, Michel.

MARTIN: This is quite fascinating to me. So why is Argentina's president-elect advocating for this?

GURA: Well, Javier Milei is a libertarian and an economist, Michel, who campaigned on some pretty far-out proposals. He said he wants to get rid of Argentina's central bank. Milei plans to make deep cuts to the government and to government spending. This is a point he drove home at rallies by wielding a chainsaw. And Milei wants to dollarize the economy. He wants Argentina to adopt the U.S. dollar as its official currency, as you said. The country's economy is in a shambles in large part because of that hyperinflation you mentioned. As you said, the U.S. has had high inflation, but it's come down recently. It's now just north of 3%. The annualized rate of inflation in Argentina is more than 40 times that. So people there are hurting. Almost half the population is living in poverty, and Argentina owes billions of dollars, Michel, to the International Monetary Fund.

MARTIN: Would Argentina give something up by doing this?

GURA: Absolutely. It would give up a substantial amount of control over its economy. Argentina would lose a lot of autonomy. That's according to Martha Cruz Zuniga. She's the chair of the economics department at the Catholic University of America.

MARTHA CRUZ ZUNIGA: Losing monetary policy. And that is like losing one of your two arms.

GURA: It would be like losing one of your arms, she says, because Argentina would suddenly find it difficult to accomplish some very basic tasks. Michel, many countries use their currencies to manage their economies, and Argentina would be pretty powerless as the U.S. dollar gets stronger and weaker. It's not like the Fed Reserve, the U.S. central bank, would make decisions with Argentina in mind. That's just not how this would work. It's also likely Argentina would become less competitive worldwide. With dollarization, prices would go up. So would salaries. So the goods and services Argentina exports would become more expensive.

MARTIN: I think many people may forget about this, but has - that dollarization has actually been tried elsewhere. So how has it worked in practice elsewhere?

GURA: Yeah. We've seen it in Panama. It dollarized its economy in 1904. And Ecuador got rid of its currency, called the sucre, in 2000. You know, back then, Ecuador was also facing sky-high inflation. That country set an exchange rate, and everybody traded in their money. The country had a lot of dollars in its reserves, and it used those to buy back all the sucres. And we did see inflation in Ecuador tick down to single digits. And today it's a little higher than 2.3%, according to the IMF. Now, Michel, I do want to note - Ecuador and Panama, these are much smaller economies. Argentina's economy, despite all the difficulties it's faced over the last three decades or so, is the third-largest economy in Latin America, right behind Brazil and Mexico.

MARTIN: So I think you're telling us that Argentina's size would be a big challenge. How so?

GURA: There are a lot of doubts Argentina could pull this off, especially at this scale. That makes it even tougher and riskier. It would take a lot of time, again, because Argentina's economy is so large. And a country has to dollarize carefully because credibility is so crucial. You don't want to cause panic domestically or in global markets. That would make dollarization in Argentina very difficult. But Scott McKinney, who's an economics professor at Hobart and William Smith, says there's an even bigger issue at play here. Right now Argentina is lacking something really fundamental.

SCOTT MCKINNEY: To dollarize, you need to have the dollars, and Argentina does not have the dollars.

GURA: You've got to have dollars to dollarize. And because this country, Michel, is in so much debt to the IMF, other organizations, McKinney says he just doesn't think it would be easy for Argentina at this point in time to borrow even more money to do this.

MARTIN: That is NPR's David Gura. David, thank you.

GURA: Thank you.

(SOUNDBITE OF DICTAPHONE'S "THE CONVERSATION") Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Michel Martin is the weekend host of All Things Considered, where she draws on her deep reporting and interviewing experience to dig in to the week's news. Outside the studio, she has also hosted "Michel Martin: Going There," an ambitious live event series in collaboration with Member Stations.
David Gura
Based in New York, David Gura is a correspondent on NPR's business desk. His stories are broadcast on NPR's newsmagazines, All Things Considered, Morning Edition and Weekend Edition, and he regularly guest hosts 1A, a co-production of NPR and WAMU.
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