What's New :
UPSC Interview Guidance Program. Register here...

Evaluating Dollarisation as an Economic Solution

  • Published
    28th Nov, 2023
Context

Javier Milei, Argentina's newly elected president, has proposed replacing the peso with the dollar as a potential solution to the country's economic woes. This unconventional move raises questions about the feasibility and consequences of dollarisation.

About

About Javier Milei's Economic Agenda

  • Milei, an "anarchocapitalist," campaigned on radical economic proposals, including dollarisation, eliminating the Central Bank, and slashing government spending.
    • Despite electoral support, Milei has begun backtracking on immediate implementation, citing dollarisation as a "mediumterm" goal, raising doubts about the practicality of such a shift.

Dollarisation refers to the adoption of a foreign currency, typically the United States Dollar (USD), as the official currency of a country, replacing or coexisting with the national currency. It entails using the foreign currency for transactions, pricing, and as a store of value.

Dollarisation as a Solution

  • Dollarisation can break the link between hyperinflation and rising money supply, curbing the influence of political interests on economic stability.
  • Positive effects include incentivizing exportfocused growth and providing stability for longterm economic planning.

Challenges and Potential Problems

  • Dollarisation limits policy leverage, especially in monetary policy, preventing countries from using depreciation to boost exports.
  • Critics argue that it may lead to a loss of control over economic tools, requiring a shift towards productivitydriven strategies during downturns.

Ecuador's Experience with Dollarisation

  • Ecuador's adoption of the dollar in 2000 resulted in economic growth, reduced poverty, and improved income equality.
  • However, success was not solely attributed to dollarisation; external factors like oil and gas reserves played a crucial role.

The Role of Policy in Economic Prosperity

  • Ecuador's fiscal policies, including increased government spending, played a vital role in sustaining economic growth.
  • While dollarisation tackled inflation, active fiscal policy was necessary for longterm success.

Dangers of Adopting an External Currency

  • The Greek example highlights the risks of adopting an external currency without independent policy tools, as seen during the Eurozone crisis.
  • Dollarisation, while beneficial, is not a guaranteed solution and requires careful domestic policy management.
GS Mains Classes GS Classes 2024 GS Classes 2024 UPSC Study Material

Verifying, please be patient.

Our Centers

DELHI (Karol Bagh)

GS SCORE, 1B, Second Floor, Pusa Road, Karol Bagh, New Delhi - 110005 (Beside Karol Bagh Metro Station Gate No. 8)

Get directions on Google Maps

BHUBANESWAR (Jaydev Vihar)

GS SCORE, Plot No.2298, Jaydev Vihar Square, Near HCG Day Care, BBSR - 751013

Get directions on Google Maps

LUCKNOW (Aliganj)

GS SCORE, 2nd Floor, B-33, Sangam Chauraha, Sector H, Aliganj, Lucknow, UP - 226024

Get directions on Google Maps

Enquire Now