March 1, 2024

Lukmaan IAS

A Blog for IAS Examination

DOLLARISATION OF ECONOMY

image_printPrint

TAG: GS 2: INTERNATIONAL RELATIONS, GS 3: ECONOMY

THE CONTEXT: Javier Milei, the recent winner of Argentina’s presidential election, has drawn attention for his unconventional policies, one of them being the plan to replace the country’s currency of peso with the dollar.

Argentina’s Recent Election and Dollarisation Proposals:

  • Context of Argentina’s Election:
    • Javier Milei, the recent winner in Argentina’s presidential election, has gained attention due to his unorthodox policies, including proposing the replacement of the peso with the dollar.
  • Economic Challenges in Argentina:
    • Argentina grapples with high inflation exceeding 100%, significant poverty levels, and a weakened purchasing power affecting its citizens.
  • Milei’s Policy Stand:
    • Milei’s campaign promises included dollarisation, elimination of the Central Bank, and considerable government spending cuts.
  • Adjustment in Approach:
    • Post-election, Milei appears to backtrack on immediate dollarisation and currency control relaxation due to Argentina’s limited dollar reserves.

The Pros and Cons of Dollarisation:

  • Benefits of Dollarisation:
    • Dollarisation can potentially curb hyperinflation by disconnecting rising prices from increased money supply controlled by political interests.
    • It may encourage economic growth by necessitating export focus and foreign capital inflows into a stable currency environment.
  • Drawbacks of Dollarisation:
    • Economies lose policy leverage with limited control over money supply.
    • Currency depreciation for export advantages becomes unavailable.
    • Critics highlight the challenges of losing monetary policy control and the potential constraints on boosting exports.

Ecuador’s Experience with Dollarisation:

  • Successful Outcomes of Dollarisation:
    • Ecuador, after adopting the dollar, showcased substantial economic growth, poverty reduction, and improved inequality metrics.
    • Notable achievements included reduced inflation rates, GDP growth, and lowered foreign debt ratios.
  • Role of Other Factors in Success:
    • Ecuador’s natural resource reserves, particularly oil and gas, played a significant role in economic progress during the commodity boom.
    • Government policies under Rafael Correa expanded state intervention, increased social spending, and altered fiscal policies, impacting economic growth.

Complexity of Economic Prosperity:

  • Role of Active Fiscal Policy:
    • Ecuador’s economic prosperity wasn’t solely due to dollarisation but involved active fiscal policy, especially during rising oil prices, resulting in substantial social spending.
  • Challenges and Lessons from Greece:
    • Greece’s Euro adoption led to growth but constrained policy options during the Eurozone crisis, leading to austerity measures imposed by external institutions like the IMF and ECB.
  • Evaluation of Dollarisation:
    • Dollarisation isn’t a cure-all but can succeed with strategic domestic policy.
    • However, overreliance on external currency without independent policy may lead to limitations similar to Greece’s experience.

Argentina’s Prospective Scenario:

  • Milei’s Approach and Concerns:
    • Milei’s intent to abolish the Central Bank and slash government spending raises concerns about limited policy space and potential austerity measures.
  • Awaiting Economic Outcomes:
    • Argentina faces a potential shift in economic policy under Milei’s leadership, with the public watching the impact of such macroeconomic decisions on their lives.

SOURCE: https://www.thehindu.com/business/Economy/can-dollarisation-save-an-economy-explained/article67580968.ece/amp/

Spread the Word