NCPA - National Center for Policy Analysis

Dollarization Might Save Argentina

December 5, 2001

As has been widely reported, Argentina has become an economic basket case. Just this past weekend, the government imposed controls on bank withdrawals in order to stem a run on the banks. Economists say Argentina's only way out is either crippling devaluation or dollarization of its currency.

The International Monetary Fund expanded Argentina's standby loan agreement in August -- but the U.S. has put its foot down against any further assistance.

  • The passage of Argentina's peso convertibility law a decade ago rescued the country from years of inflation and trade protectionism, economists say.
  • It set up an effective currency board -- tying the Argentine peso to the dollar and leaving no possibility for the country's central bank to manipulate the peso.
  • Although the peso was stabilized and trade revived, the politicians in Buenos Aires never controlled public spending -- resulting in an accumulation of $132 billion in debt as the government borrowed more and more money.
  • Any solution now requires a restructuring of this debt, a reduction of the public deficit and a return to peso credibility.

Argentina wants still more international cash. But economists say at this late stage, only dollarization may be enough to restore peso confidence.

Source: Editorial, "Don't Cry for Argentina," Wall Street Journal, December 4, 2001.


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