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Cry for Milei’s Argentina

With its GDP shrinking and inflation exceeding 140%, Argentina’s economic outlook appears bleak, and libertarian President-elect Javier Milei has promised to prevent the crisis from spiraling out of control. But his plan to dollarize the economy and forfeit monetary independence will most likely lead to disaster.

LONDON – Argentina’s President-elect Javier Milei, a libertarian economist and self-proclaimed “anarcho-capitalist,” has pledged to rejuvenate his country’s ailing domestic economy and tame runaway inflation. This is a daunting task, given Argentina’s dismal economic track record over the past few decades and history as a serial defaulter – the latest episode being the 2020 restructuring of $65 billion in sovereign debt.

With its GDP expected to shrink by 2.5% in 2023 and inflation running above 140%, Argentina’s economic outlook appears bleak. The peso has fallen to record lows against the US dollar, causing the gap between the official exchange rate and the black-market rate to exceed 150%, and the country is at risk of defaulting on its debt for the tenth time. As has been the case historically, addressing Argentina’s macroeconomic imbalances will require reducing public spending without exacerbating the economic crisis.

To that end, Milei has proposed dollarizing the Argentinian economy and establishing the greenback as the country’s sole legal tender. This approach is not entirely unprecedented. Previous attempts to introduce macroeconomic discipline included the currency board system, which pegged the peso one-to-one to the dollar for almost a decade, before collapsing in the early 2000s amid yet another debt crisis. Milei’s plan would scrap the peso altogether, based on the belief that shutting down the central bank’s “printing press” will effectively rein in public spending.