Saturday, September 15, 2018

Dollarization in Argentina?

So I have no insider knowledge on what the Argentinean government plans to do. And the White House is a mess; they don't have any knowledge on what they plan to do. But Larry Kudlow, the Director of the National Economic Council, said that the Treasury is deeply involved in a plan to dollarize the Argentinean economy (Guillermo Calvo, an influential conservative economist, has also spoken in favor of dollarization; see here in Spanish).
He supports a Currency Board to solve the run on the currency, and the long-term external problems. That worked well in the 1990s, he said, without a hint of irony. The notion is that the problem, again difficult to believe this type of stuff is still around, is a fiscal problem. So, no fiscal deficits, no printing of money, no inflation, and no depreciation of the currency as the proportion of pesos to dollars increases. The logic of full employment (neoclassical theory), monetarism (Quantity Theory of Money), and a version of Purchasing Power Parity for the determination of exchange rates. It is all very simplistic.

Of course Macri's government promised to do a fiscal adjustment, and to block the central bank to lend to the treasury. But the real problem is external. There is a long-run problem of sustainability of the current account (as I noted earlier). But the real problem now, in the short-run, is the lack of reserves and the forthcoming obligations in dollars (not in pesos). My take on currency crises as being related to external problems here (and the paper here; note that this is about the long-term or fundamental causes, not necessarily the short-run crisis like the one in course now).

I should also say that the fiscal problems that exist have been caused by the government, and not only have nothing to do with the external crisis, they are instrumental, in some sense, in promoting the austerity cuts that allow for the reduction in social spending. As I noted even before the Macri governments started in 2015 (when I wrote it, but published in January 2016)*:
"the coming larger fiscal deficits will most likely be used to try to cut social welfare expenditures, which increased significantly during the administration of the outgoing president Cristina Fernández and her predecessor (and husband) Néstor Kirchner. It would not be surprising if Macri tries to privatize social security once again, something that Menem accomplished in the 1990s, and which had to be reversed in the 2000s as a result of the private system’s complete failure to provide a decent retirement for seniors."
And that is essentially what dollarization would be there to do. Tie the government's hands and help promote an even more brutal fiscal adjustment than the one the IMF (that, yes, has changed a lot, has it not?) can help impose. Why go to the US Treasury, you ask; because it can provide enough dollars to guarantee the stabilization of the currency, and perhaps some lower inflation (by stoping the pass-through to domestic prices), giving Macri or a right wing candidate a fighting chance next year in the presidential elections.

However, dollarization would not solve the long-term current account problems, it will intensify them in fact, and a new collapse like the one from 2001-02 would be inevitable. Argentinean elites, you might think, keep committing the same mistake over and over again. But there again, from their perspective this is fine. The crisis only hits the poor (and the middle classes that are still somehow afraid about the devil of populism). Macri complains about the Kirchner legacy (three years into his government), but dollarization would be truly a terrible legacy. Oh well.

PS: The government has denied plans to dollarize. There again he said in 2015 he would not devalue the currency.

* I also predicted the contraction and the devaluation, which Macri firmly denied back then.

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