Author: MANUEL BERMEJO FONTANET
Dollarization of Argentina from an economic perspective
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Abstract
After fifty years of five currency changes, an accumulated devaluation of thirteen zeros, three defaults, and a hyperinflationary period, the ultraliberal economist and presidential candidate Javier Milei has focused his attention on dollarization as a central piece of his electoral proposals. This paper addresses, from a purely economic perspective, the evaluation of the feasibility of this measure and its possible consequences. After defining the concept of dollarization, the study analyzes the Argentine monetary experiment known as “Ley de Convertibilidad”, which shared some similarities with dollarization. Subsequently, through numerical estimations based on logical reasoning, the different possibilities of exchange rates are explored, a fundamental aspect for the viability of the proposal. The focus then shifts to the exploration of the advantages and disadvantages of possible dollarization, to end with an analysis of the results of dollarization in Ecuador, a case close to Argentina. Finally, conclusions will be drawn.
1. WHAT IS DOLLARIZATION?
Dollarization is the process by which a country, other than the United States, adopts the US dollar as its official currency. In this case, the dollar is used as the unit of account, medium of exchange, and store of value. As a result, the national currency disappears and transactions, purchases, and savings are conducted in dollars. However, in many instances, the term “dollarization” is also used to refer to cases where residents of a state hold a significant portion of their assets in dollars, even if it is not the official currency. (Ariadna Anderson, 2016)
In Latin America, the US dollar is the main gravitational center, although most countries in this region have not officially adopted the dollar as their currency. This is where the main difference arises, dividing this process into two types: de jure dollarization and de facto dollarization. De jure dollarization refers to the case where a foreign currency is recognized as legal tender, which means that this foreign currency is
legally used for all three functions of money.
On the other hand, de facto dollarization represents the situation where a foreign currency is used alongside the national currency, but without having an equivalent legal status. Countries that are transitioning towards de facto dollarization are referred to as “bimonetary economies.” This is the case in Argentina, where the population uses the Argentine peso to pay taxes and daily expenses, while the dollar, although legally restricted, is used for more important functions such as store of value or property
acquisition. According to Friedrich Hayek in his book “The Denationalization of Money,” under this scheme, Gresham’s Law operates, which states that the currency of higher quality1 tends to drive out the currency of lower quality.
2. LEY DE CONVERTIBILIDAD: A first experiment similar to dollarization.
The hyperinflation2 episodes of 1989 and 1990 were the last straw for Argentina, after decades of chronic inflation and devaluation following the creation of the Central Bank (Cachanosky & Ravier, 2014). From 1970 to 1985, Argentina changed its currency up to four times, with a total devaluation of nine zeros3 between them.
In 1989, with the “Ley de Convertibilidad” and a package of deregulatory reforms, the government of Carlos Saúl Menem opted for a fixed exchange rate regime, inspired by the experience of Hong Kong in the 1980s. It was finally established in 1991, with a fixed parity between the Argentine peso and the US dollar, where 1 US dollar was equivalent to 1 Argentine peso.
This law stated that each peso had to be backed by a dollar. In this way, monetary authorities could not issue any additional peso unless there was an additional dollar in the reserves of the Central Bank. For many economists, this monetary regime essentially established a limit on the government’s ability to issue its own currency. In fact, many directly relate it to the gold standard, as indirectly it also ended up limiting
the currency issuance by governments around the world (Iván C. Carrino).
The relationship between convertibility and possible dollarization in Argentina is clear; both are monetary policies that involve a direct link between the local currency and the US dollar. Furthermore, both eliminate the central bank’s ability to issue and devalue the currency.
The “Ley de Convertibilidad” quickly and efficiently fulfilled its main mission: reducing inflation.
Table 1: Evolution of Argentine annual inflation (consumer prices) from 1989 to 2001.
YEAR | ANNUAL INFLATION (Consumer Prices) |
2001 | -1,07% |
2000 | -0,94% |
1999 | -1,17% |
1998 | 0,92% |
1997 | 0,53% |
1996 | 0,16% |
1995 | 3,38% |
1994 | 4,18% |
1993 | 10,61% |
1992 | 24,90% |
1991 | 171,67% |
1990 | 2.313,96% |
1989 | 3.079,81% |
Table 1 |
As can be seen in Table 1, in the same year the “Ley de Convertibilidad” was implemented, inflation already decreased drastically. By 1996, the government had successfully ended inflation. In fact,
inflation levels even reached figures that are considered unhealthy for an economy.
The negative data corresponds to the economic crisis that began in 1998, which is also partly attributable to the Convertibility Law. I will further elaborate on this in the next paragraph.
The main imbalance that triggered the subsequent crisis was that fixing the exchange rate parity to the dollar required the supply and demand of foreign currency in the foreign exchange market to always be equal. Any imbalance between supply and demand would result in changes in the exchange rate. Therefore, the significant increase in imports, along with debt interest payments and a growing accumulation of external assets, necessitated the search for new forms of foreign currency financing.
As a result, this law constantly relied on the inflow of dollars through public sector borrowing to stay afloat. This led to a considerable increase in external public debt, which rose from USD 52.7 billion in 1991 to USD 87.9 billion in 2001.
Various financial crises worldwide, such as Mexico in 1994, the Asian countries in 1997, and Russia in 1998, caused a disruption in external financing. This forced the government to seek assistance from the International Monetary Fund for a bailout. From that point on, a prolonged decline in maintaining the fixed exchange rate began. Drastic adjustments in public spending were implemented, debt was restructured, and restrictions were imposed on cash withdrawals from banks [the “corralito“4].
Finally, the “Ley de Convertibilidad” collapsed in late 2001, leading to a violent devaluation that reached 280% by mid-2002, triggering the largest crisis in Argentina’s history.
3. THE EXCHANGE RATE
The question that arises in this section is possibly the one that concerns the population and economists the most: What would be the chosen conversion rate in Argentina’s dollarization?5 (Adrián Ravier, 2023)
An excessively high exchange rate would result in a profound impoverishment of the population, drastically reducing wages and purchasing power. One of the most common objections raised against the idea of dollarization is related to this issue. To carry out the proposal, the exchange rate at which all the pesos in circulation would be exchanged for the dollars that would begin to circulate would have to be extremely high. It would not be possible to do it at the official exchange rate ($AR 240) or the current market exchange rate6 ($AR 490 per USD). It would have to be done at an exchange rate of around $AR 13,000 MILL per USD. If this were the inevitable scenario for dollarizing the economy, an average private sector salary, which currently hovers around $500 monthly, would drop to $18 per month, resulting in an unprecedented impoverishment of the Argentine population.
The calculation that these economists use to reach this result involves dividing the liabilities in the national currency by the BCRA’s7 dollar assets. On the liability side of the BCRA, we would find the monetary base (M0) and short-term interest-bearing debt (debt securities issued by the BCRA with the aim of reducing the amount of money in circulation). On the asset side, we would find the dollar reserves, from which we need to subtract some items that make part of those reserves not actually available to the
BCRA. Thus, out of the approximately $35,000 MILL in reserves, we would need to subtract around $11,000 MILL that is part of the deposits that the Argentine population holds in commercial banks, $20,000 MILL corresponding to the debt the BCRA owes to the Central Bank of China through the famous “Chinese swap“8 and other minor debts that the BCRA has with other international organizations. This possible BCRA economic balance can be visualized in Table 2.
Table 2: First possible BCRA economic balance.

Therefore, the available net reserves in dollars would amount to $1,410 MILL, and on the other hand, the liability would be $18,800 MILL. The calculation of the operation would be as follows:
Liability in pesos / available asset in dollars = $18.8 / $1.41 = $13.3 per USD
Economists who are more inclined towards dollarization argue that this calculation omits some fundamental variables that would radically change the result of the equation. Emilio Ocampo and Nicolas Cachanosky, in their study “Dollarization: A Solution for Argentina,” argue that when calculating the amount of available dollars, one should not only consider the net reserves of the Central Bank, but also other assets in the Central Bank’s portfolio that can be converted into dollars to help rescue the
circulating pesos and short-term peso-denominated debt held by the Central Bank.
On the asset side, we would find the net reserves in dollars, but also the so-called “Adelantos Transitorios” from the National Government, foreign law bonds, domestic law bonds, and finally, the so-called “Letras Intransferibles” from the National Government. These four concepts represent debt that the National Government owes to the Central Bank. They are liabilities for the National Government while they are assets for the Central Bank. At some point in time, some of these debts have shorter terms, others have longer terms, the National Treasury must repay this debt to the Central Bank.
However, we should not consider these bonds at their nominal value, i.e., the value at which they were issued. Assuming that the Central Bank sells these bonds in the secondary debt market, it would have to sell them at the market price, which would likely be around 25% of their nominal value (it is understood that 25% is the standard value of dollar bonds in financial markets).
Thus, the value of these assets for the Central Bank would be around $33,000 MILL. If we add to this result the value of the net reserves in dollars ($1.41 B), we would reach a total amount of $34,500 MILL. This possible BCRA economic balance can be visualized in table 3.
Table 3: Second possible BCRA economic balance

The calculation of the operation would then be as follows:
Liability in pesos / Asset in dollars = $AR 18,800 MILL / $34,500 MILL = $AR 546
An exchange rate of $AR 546 per USD should not have a significant impact on the purchasing power of the population, as the market exchange rate is already in very similar figures ($AR 490 per USD).
The main criticism of this exchange rate calculation lies in the valuation of the National Treasury debt that the Central Bank would sell in the secondary debt market. By releasing all these bonds into the market, the Central Bank would be increasing the supply of debt bonds already in circulation, so it is logical to think that the price of these bonds would decrease and be significantly below 25% of their nominal value. Unless an international organization offered to buy part or all these bonds, the market would not be able to absorb this supply shock. A more realistic result, according to the FUNDAR Foundation, would be around 15%. Thus, the result for the asset in dollars would be $1,140 MILL + $7,500 MILL + $11,160 MILL = $19,800 MILL.
Therefore, the exchange rate would be very different:
Liability in pesos / Asset in dollars = $AR 18,800 MILL / $19,800 MILL = $AR 949
AN ALTERNATIVE PROCESS
Another way to dollarize the economy recently mentioned by Argentine economists and politicians is at the market exchange rate. In this case, the Central Bank would need to acquire the necessary dollar reserves to replace the monetary base in pesos at an exchange rate of $AR 490. In this scenario, the $AR 18.8 BILL of monetary base in pesos would be divided by the $AR 490 exchange rate.
The calculation and result of the operation would be as follows:
$AR 18.8 BILL / $AR 490 = $ 38,300 MILL
If we compare this value with the $34,500 representing the Central Bank’s asset in dollars, we see that there would be a difference of $3,800 MILL to cover.
For a shortfall of $3,800 MILL, there is no reason to dismiss dollarization at the market exchange rate. There are at least 3 ways to obtain this missing amount of USD:
- Sale of other assets by the National Government, such as state-owned enterprises. The money obtained from the privatization of state-owned enterprises would be exchanged for dollars.
- Creation of a specific fund derived from tax collection, gradually accumulating the $3,800 MILL.
- Borrowing an additional $3,800 MILL from the market. Considering that Argentina’s budgetary debt in 2022 was $276,000 MILL, an additional debt of $3,800 MILL would not have a significant impact on the fiscal deficit of the Argentine state.
4. ADVANTAGES AND DISADAVANTAGES OF DOLLARIZING ARGENTINA
Advantages:
Monetary stability
Dollarizing the Argentine economy would involve adopting a stable currency like the US dollar. Low interest rates and low and stable levels of monetary issuance are characteristic of the dollar. Having this stability would likely lead to improvements in other macroeconomic indicators. The monetary regime of the Convertibility Law, previously discussed in the article, is the best example of this:
- Eradication of high levels of inflation and devaluation.
- Annual GDP growth of 5.4% until 1998.
- Increase of around 25% in per capita income.
- Increase in exports by 122% and imports by 146% (according to INDEC data).
Enhancement of international trade
With the adoption of a stable currency like the U.S. dollar and the consequent elimination of exchange rate fluctuations, dollarization would reduce the risk associated with changes in the value of the Argentine peso. Investors would be relieved of concerns about potential losses due to devaluations or depreciations. This, in turn, could lower financing costs by reducing the risk premium9. According to the interest rate
parity condition, which states that asset returns should be equal across countries when considering the exchange rate, the reduction in the risk premium could be associated with a decrease in the domestic interest rate.
A lower domestic interest rate could have a positive impact on GDP potential. By decreasing interest rates, investment in productive projects is stimulated, which can increase productive capacity and long-term economic growth potential.
Reduction of uncertainty
All of this would lead to a decrease in uncertainty. With the Argentine peso, there are few incentives to invest in the Argentine economy, whether in the private sector or through the purchase of government bonds. Having a stable currency without the risk of devaluations or exchange rate fluctuations would provide predictability and, therefore, security for domestic and foreign investment. The decrease in uncertainty or the increase in credibility would have a positive impact on both the private sector, with
greater investment, especially foreign investment, and on the state itself, with a likely restructuring of its external debt.
Disadvantages:
Loss of seignorance
With dollarization, the BCRA, and by extension the government, foregoes the future seigniorage profits derived from the issuance of new currency to meet the demand for money. Seigniorage profits are generated by the difference between the cost of producing money and its nominal value (Martin Klein & Manfred J. M. Neumann, 1990).
In the case of Argentina, which experiences high levels of currency issuance, these seigniorage profits serve as a significant source of financing for the government. In fact, according to the National Institute of Statistics and Census (INDEC), seigniorage generates approximately 0.2% of the annual GDP.
Inappropriate resource allocation
Dollarization could lead to misalignments in resource allocation in relation to the level of development of the dollarized country. This is because the United States and Argentina are at different stages of development, particularly with regards to the slower productivity growth in the Argentine economy. This disparity in productivity growth requires changes in relative prices and the allocation of resources between tradable and non-tradable goods, in order to ensure that resources are efficiently directed towards the most productive and competitive sectors (Eric Calcagno, 2001).
Inappropriate monetary policies
Difficulties in implementing proactive monetary policies are already present with fixed exchange rates under conditions of capital mobility, as stipulated in the trilemma of international finance, also known as the “impossible trinity” or the Mundell-Fleming trilemma. The trilemma determines that there is always a potential conflict between the commitment to a fixed exchange rate and sovereign monetary policy when capital flows freely into a country.
Figure 1: The impossible trinity

Dollarization further complicates the coexistence of these three variables that make up the trilemma, as it is particularly problematic when the national economy is not deeply correlated with the economy of the adopted currency country. This is the argument of the “optimal currency area” also developed by Robert Mundell: “In other words, the country that adopts the dollar not only loses the possibility of implementing
countercyclical monetary policies but may also be exposed to inappropriate monetary policies from another nation.“
Without a lender of last resort
The active policies of the Central Bank play a crucial role not only in shaping economic policy but also in preventing financial and banking crises (Eric Calcagno, 2001). In situations of bank runs, central banks typically act as the ultimate backstop to ensure the stability of the financial system. However, in the case of a fully dollarized economy, the central bank loses the ability to issue money, which means that in a scenario of lack of confidence in banks, it would not be able to fully support the payment system or fully
guarantee bank deposits.
An example of the repercussions of a financial crisis in Argentina was observed during the “Tequila”10 crisis, where a bank run occurred not so much out of fear of devaluation but due to concerns about the lack of liquidity and solvency of banks. At that time, the risk of a systemic banking crisis was avoided through the intervention of funds from the Banco de la Nación and subsequently the BCRA.
Persistence of Macroeconomic imbalances
Dollarization would not solve the majority of Argentina’s macroeconomic imbalances. While dollarization would prevent the printing of money, it would not impose restrictions on government spending, tax increases, or bond issuance. Additionally, dollarization would not address the underlying problem behind Argentina’s ongoing decline: productivity. As Nobel laureate Paul Krugman once stated, “Productivity isn’t
everything, but, in the long run, it is almost everything.” The productivity issue in Argentina stems from two interrelated roots: lack of competition due to protectionism and government inefficiencies transferred to the private sector. None of these issues would be resolved simply by dollarizing the economy.
5. DOLLARIZATION IN ECUADOR
Before dollarization, Ecuador faced a series of economic challenges and financial crises similar to those experienced by Argentina before the Convertibility Plan and in the present day. During the 1980s and 1990s, the country suffered from high levels of inflation, monetary instability, and inefficient fiscal management. These problems were exacerbated by the lack of confidence in the local currency, the sucre, and its frequent devaluations, which reached 25,000 sucres per dollar by the late 1990s. (Ana Anderson, 2016)
Finally, on January 9, 2000, the National Assembly of Ecuador approved dollarization. After 23 years, it can be determined that this measure has resolved monetary issues (inflation and devaluation) and has slightly increased wealth redistribution, but it has also exacerbated the country’s main structural problems: volatility in exports and vulnerability to external shocks. Furthermore, dollarization has created what could be a new obstacle to the long-term development of the country: absolute dependence on the United States.
Firstly, it should be mentioned that the substitution of the sucre with the dollar occurred at a much higher exchange rate than the real exchange rate that existed in the country prior to dollarization. Specifically, the exchange rate became 125,000 sucres per USD, which meant a drastic impoverishment, at least in the short term, for the Ecuadorian population. This impoverishment materialized primarily in a sharp decrease in wages and a multiplication of the cost of living, resulting from an inadequate allocation of relative prices in dollars.
Regarding inflation, it already decreased by 58.4% in the first year. By 2004, inflation had reached 2.7%, a reasonable level for a developing economy.
Figure 2: Evolution of Ecuador inflation (consumer prices, annual%) from 2000 to 2022.

As mentioned in the previous section, some of the common benefits of dollarization include reducing inflation levels, lowering transaction costs, and generating greater economic openness and transparency that boosts international trade compared to other monetary regimes. However, in the case of Ecuador, this has not yielded the expected results and has instead increased export volatility. There have been sharp fluctuations in export levels with significant variation between peaks and troughs, as it can be
visualized in figure 3.
Figure 3: Evolution of Ecuador exports of goods and services (% of GDP) from 2000 to 2021.

The levels of inequality in Ecuador are still concerning, but the trend is positive. It appears that inequality has decreased steadily over time. The wealth distribution among the poorest 20% of the population has increased from 3.3% in 2000 to 4.6%11 in 2021.
Furthermore, as can be seen in figure 4, since the dollarization the Gini index has decreased by approximately 10 points.
Figure 4: Evolution of Ecuador Gini Index from 2000 to 202112.

Finally, it is important to highlight that the loss of functions of the Central Bank of Ecuador has had a significantly negative impact, particularly in terms of increasing the vulnerability of the national economy to international shocks. This has occurred for two reasons: a lack of monetary policies to address international economic crises and the implementation of monetary measures from the United States that are inadequate for the economic cycle of the Ecuadorian economy.
6. CONCLUSION
Based on the analysis conducted in the various approaches of the study, it can be concluded that dollarization alone does not constitute an optimal solution to the economic challenges facing the Argentine economy. While it is true that this measure could address immediate problems related to currency stability, historical evidence has shown that it does not effectively tackle the structural issues of the economy.
Previous experiences with the Convertibility Law in Argentina and other cases, such as dollarization in Ecuador, have demonstrated that the mere adoption of the dollar does not guarantee sustainable long-term economic improvement. In the absence of complementary structural reforms, dollarization would result in the perpetuation of macroeconomic imbalances and increased vulnerability to economic crises.
However, it is important to highlight that if the proposal for dollarization is accompanied by structural reforms in the economy, such as significant reduction in public spending and privatization of state-owned enterprises, it could offer an optimal solution to the country’s economic situation. These austerity measures could contribute to improving efficiency, competitiveness, and productivity, that the Argentine economy would need once dollarized. Nevertheless, it is crucial to consider that dollarization would also entail disadvantages, especially in the short term, such as the likely initial impoverishment of the population, inadequate resource allocation, or the impact of inappropriate monetary policies, among other potential issues.
7. SPECIFICS
- The specific distinction made by Gresham is between “good” and “bad” money. According to this law, in the described situation, consumers prefer to save the good money and not use it as a medium of exchange. ↩︎
- In 1989, hyperinflation reached 5,206%, and in 1990, it was 3,079% ↩︎
- This implies a conversion rate of 1 to 1,000,000,000. ↩︎
- The corralito was lifted in 2002, but its impact was significant on Argentina’s economy and social sentiment. ↩︎
- All the calculations are based on May 2023 BCRA data. ↩︎
- In the case of Argentina, when we refer to the market exchange rate, we are referring to the “blue” or “parallel” exchange rate, which is the rate that circulates in the black market and is commonly used among the population. ↩︎
- BCRA: Central Bank of the Argentine Republic ↩︎
- The Central Bank of the Argentine Republic and the Central Bank of China agreed in 2014 on a swap for an amount of 70 billion yuan (equivalent to approximately $11,000 MILL) which was renewed in 2017 for another 60 billion yuan (USD 9,000 MILL). ↩︎
- The “risk premium” or “premium of risk” is added to the risk-free interest rate to reflect the level of risk associated with a specific financial asset, country, or company. Risk Premium = Asset Return Rate – Risk-Free Return Rate. ↩︎
- The Tequila crisis in Mexico in 1994 had a contagion effect on several countries in Latin America, including Argentina. Although the crisis itself was not the direct cause of the banking crisis in Argentina, it had a significant impact on investor confidence and financial stability in the region. ↩︎
- Data from Wealth held by 20% poorest – Ecuador World Bank Indicator ↩︎
- The Gini Index is a statistical measure used to assess inequality in the distribution of income or wealth within a population. The closer the Gini Index value is to 0, the higher the equality in the distribution, while a value closer to 1 indicates greater inequality. ↩︎
8. REFERENCES
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- Basualdo, E. (2002). “Los intentos de dolarización en la Argentina”. Nueva Sociedad, https://www.nuso.org/articulo/los-intentos-de-dolarizacion-en-la-argentina/
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- Batalla Arroyo, R. E., Logroño Marazita, E. X., & Camacho Dillon, F. R. (2021). “Análisis del proceso de dolarización y su futuro en Ecuador”. http://www.dspace.uce.edu.ec/handle/25000/24936