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  • Kevin Isaac

The Effect of Dollarization on the Argentine Economy

Updated: Feb 28

By Kevin Isaac



In an ever-changing world of political reformations the Argentine economy has hit the global spotlight due to its recent political reformations. On November 19th 2023, Argentine voting polls closed in favor of right-wing libertarian leader, President Javier Mieli. With a campaign run on disruptive policies such as cutting spending and drastic tax reformations, the President has been a pivotal point of discussion all across the globe. However, one question lingers in the minds of speculators: How will President Mieli curb the galloping inflation plaguing the Argentine economy, the highest ever in the last three decades?. The newly elected President has suggested a controversial solution, the dollarization of the Argentine economy. Amidst the turbulent economy, the President's dollarization solution acts as a ripple of hope for some, but a point of speculation for others. Once ranked amongst the top 10 richest countries by GDP, Argentina now finds itself submerged in economic burden, battling rising costs of living and heightened poverty rates[1]. This work aims to explore the possible effects of the disruptive dollarization solution proposed by the President.

Argentina’s Path to Dollarization

Dollarization is defined as “the process of[2]replacing the country's domestic currency with the United States Dollar. Argentina has engaged in a prolonged dilemma regarding the adoption of dollarization. Following over a decade and a half of raging inflation, between 1975 and 1990, the Argentine Currency board had proposed a Convertibility plan, where the Argentine peso was set to a fixed exchange rate against the American Dollar, leading to a harsh restriction on the monetary tools given to the central bank, limiting its power to increase money supply.[3] Enacted in 1991, economic prosperity was quick to follow, with an average growth rate of around 6% per year until 1997. However, despite the years of prosperity, adverse effects such as income inequality and an increase in unemployment persisted. Furthermore, with an inclination to privatize and liberate the economy, fiscal deficits and consistent borrowing were used to finance expenditure, thus, the Argentine government was forced to seek measures to finance its budget deficit. However, with the inability/unwillingness to implement improved tax reformations and strict restrictions on monetary policy measures, the government was forced to raise public debt through debt instruments.

In January 1999, Argentina had announced it was considering adopting the American Dollar as the exclusive medium of exchange, however the plan failed to materialize due to economic resistance.[4] The battle with implementing the dollarization strategy as a tool to mitigate galloping inflation resurfaced in March of 2022, when the proposal reached the American Congress, nonetheless, the proposal did not translate into the economy. Argentina has been in a constant battle with decreasing consumer confidence in the strength of its domestic currency, decreasing from already low 39 points to 35, just in the year 2023.[5] Nevertheless, with the groundbreaking appointment of President Javier Meili, the resurgence of dollarization seems inevitable.

Exploring Dollarization's Possible Impact on Argentina

As globalization becomes a transformative piece of the economic landscape, dollarization has become a popular remedy for countries facing economic hardship. Approximately eleven independent countries recognize the United States Dollar as their official currency. Amongst these countries, a common catalyst was observed; high, volatile inflation rates and non-controllable interest rates. Such countries cite two primary motivations behind their decision to dollarize. Firstly, dollarized economies have a lower inflation rate, due to the unlikelihood of monetary policy mismanagement in the economy. Secondly, dollarized countries are believed to have a faster growth rate, than their non-dollarized counterparts, quoting two main channels. Primarily, as dollarization leads to lower interest rates, costs of borrowing for investment reduces, causing higher investment amounts, and faster growth. Secondly, the eradication of interest rate volatility, incentivizes international investment, leading to increased economic growth.[6] In the case of Argentina, stable interest rates can act as a great incentive for Foreign Direct/Institutional investment into the country, increasing consumer confidence, thus boosting economic growth.

One such example is in the case of Ecuador, where in 2000, the country had forgone their domestic currency, with the intention to replace it with the American Dollar. A country fraught with numerous economic crises, sourced from various reasons, had finally found a ripple of hope. Post full-scale adoption of the dollar, the country was successful in external debt restructuring, the process of renegotiating the debt obligations; decreasing the external debt ratio to fall from 106% to 98%. The external debt ratio of a country is defined as a metric to measure the size of the external debt of a country, in relation to its Gross Domestic Product (GDP), expressed as a percentage.[7] Furthermore, the country has also mitigated its vulnerability to currency devaluation, creating a more stable environment for foreign investment. However, despite the positive effects of the adoption of the US dollar, the adoption also faces some drawbacks. Ecuador has now exposed its vulnerability to external shocks, due to its dependency on outsourced financing and oil.

Furthermore, the country also faces a problem of restraint, due to the lack of liberty to enact economic policy as a reaction to financial and economic shocks.[8] Such a limitation can be best exhibited in the case of Panama, a country that had adopted the dollar as its legal tender along with its countries liberation from Columbia. However, as political tensions between the Panamanian and American governments had risen in the year 1987, eleven percent of domestic deposits were withdrawn, citing a decrease in consumer confidence. In the context of banking, high consumer confidence results in an increase in deposits as there is confidence in the financial institutions to secure consumer funds. Hence, a decrease in domestic deposits indicates the possibility of external shocks playing a major role in the financial stability of the country.

Numerous parallels can be drawn to the Argentine economy, where President Javier Milei has expressed his interest to “liberate capital flow” (Foreign direct investment, foreign policy investment, and debt), all of which can be channeled through the adopting of the American Dollar. Capital Flow is defined as the “transactions of financial assets between international entities”[9]. Thus, liberating cash flows would allow the loosely regulated inflow of investment into the Argentine economy. However, in the case of Argentina, one of the significant losses in adopting dollarization would be the loss of seigniorage, contributing to 0.8% of the country's GDP.[10] Seigniorage is defined as the monetary “difference between the value of the currency, and the cost of production.” [11] Furthermore, as seen in Argentine history, efforts to shift from the Peso have led to drastic deflationary pressure and high percentages of income disparity amongst the population, primarily due to the friction/hardship related to such a substantial transition, for the economic stakeholders.


In conclusion, the implementation of dollarization in the Argentine economy holds an endless possibility of opportunity for the Argentine economy. However, this opportunity comes with a large possibility for drawbacks in the economy. Furthermore, President Javier Mieli has recognized the possible challenges transitioning between the Peso to the Dollar, explicitly mentioning its possible drawbacks in the short run. Nevertheless, the economist turned President believes in the long-run sustainability and efficiency of the transition, thus strongly pushing for its adoption into the economy. Ultimately, the decision to dollarize holds both merit and demerits and can act as a viable solution to achieve low inflation and stability in the economy, however the decision to achieve short-term stability, should be followed by general reformation to achieve long-term economic growth.



  1.  g1rdt00. 1q001hlf.P65. Accessed 17 Feb. 2024.

  2. Dictionary, Cambridge. “Dollarization.” English Meaning - Cambridge Dictionary, Accessed 17 Feb. 2024.

  3. The Role of the IMF in Argentina, 1991-2002, Issues Paper/Terms of Reference for an Evaluation by the Independent Evaluation Office (IEO), July 2003. Accessed 17 Feb. 2024.

  4. g1rdt00. 1q001hlf.P65. Accessed 17 Feb. 2024

  5. “Argentina Consumer Confidence Index (CCI).” CEICdata.Com, 8 Feb. 2024, Accessed 17 Feb. 2024.

  6. Sebastian Edwards; I. Igal Magendzo (2003). Dollarization and economic performance: What do we really know?. , 8(4), 351–363.         doi:10.1002/ijfe.217     

  7. Union of India. External Debt. Accessed 24 Feb. 2024.


  9. CFI. “Capital Flows.” Corporate Finance Institute, Accessed 24 Feb. 2024.

  10. Accessed 17 Feb. 2024.

  11. The Economic Times: Business News, Personal Finance, Financial News, India Stock Market Investing, Economy News, SENSEX, NIFTY, NSE, BSE Live, IPO News. Accessed 17 Feb. 2024. Featured image credits: REUTERS/Cristina Sille/File Photo

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