Central Idea

Argentina faces over 100% inflation and widespread poverty, prompting public support for Milei’s unique economic policies.
This has prompted the newly elected Javier Milei replacing the peso with the dollar, abolishing the Central Bank, and cutting government spending.

Concept of Dollarization

Dollarization is the process by which a country adopts a foreign currency in addition to or instead of its national currency.
Here are 2 types of dollarization:

Full Dollarization: This occurs when a country adopts a foreign currency (such as the US dollar) as its sole legal tender. In this scenario, the foreign currency completely replaces the domestic currency for all financial transactions.
Partial Dollarization: In this case, the foreign currency is used alongside the national currency. It often happens unofficially, where residents hold a significant portion of their assets or conduct a large number of their transactions in the foreign currency.

Hyperinflation Solution: Dollarization could break the cycle of rising prices and money supply, as the dollar is not easily manipulated for political gains.
Growth Potential: By using dollars, economies might focus on exports and attract foreign investment, benefiting from the dollar’s stability.

Loss of Monetary Policy Control: Adopting the dollar means losing the ability to control the money supply through domestic monetary policy.
Dependence on Export Promotion: Economies must rely solely on export promotion for economic stability, as currency depreciation is no longer an option.

Economic Turnaround: Ecuador, after adopting the dollar, saw significant improvements in GDP growth, poverty reduction, and inflation control.
Oil and Gas Reserves: Ecuador’s success was partly due to its natural resources, which helped maintain a steady dollar inflow.
Beyond Dollarization: Ecuador’s economic prosperity was also due to effective fiscal policies and government interventions in the oil sector.
Social Spending: Increased social spending played a crucial role in translating economic gains into societal benefits.

Euro Adoption in Greece: Greece’s adoption of the euro initially spurred growth but later limited its fiscal and monetary policy options.
Austerity Measures: The Eurozone crisis forced Greece into austerity, highlighting the risks of adopting an external currency without policy autonomy.

Not a Panacea: Dollarization, while potentially stabilizing, is not a standalone solution and requires complementary domestic policies.
Argentina’s Uncertain Future: With Milei’s intent to slash government spending and abolish the Central Bank, Argentina’s economic future under his administration remains uncertain.