Commentary

Letters to the Editor: Argentina should follow Wolf’s advice to dollarise

From Professor Steve H. Hanke.

Sir, Martin Wolf’s diagnosis of Argentina (“Argentina on the road to ruin”, May 1) is right on the money. With regard to the exchange rate regime, he notes that “the best system for a country with Argentina’s economic characteristics is a disciplined float. But floating is for grown-ups.”

Mr Wolf has at last embraced the golden rule and concluded that “dollarisation may be the least bad option”. Amen.

Mr Wolf could have added that Argentina is not alone. In an essay in the January 2002 issue of the Annals of the American Academy of Political and Social Science, I compared the real monetary alternatives facing 132 countries. Of those, 61 failed to qualify as “grown-ups”. Indeed, they had long histories of monetary instability and no credible means to guarantee future stability. The best way forward for them is to abandon their domestic currencies and replace them with a stable foreign currency.

Incidentally, the markets in Buenos Aires did not hesitate to confirm Mr Wolf’s judgment about the benefits of dollarisation. On May 2, the Argentine central bank auctioned Dollars 58.8m in dollar-denominated 14-day bills. The annual yield was 40 per cent. This compared with the annual yield on peso-denominated 14-day bills of 107 per cent. If Argentina ever hopes to put its fiscal house in order, it will have to follow Mr Wolf’s advice and dollarise.

Steve H. Hanke is a professor of applied economics at the Johns Hopkins University in Baltimore, a Senior Fellow at the Cato Institute in Washington and chairman of the Friedberg Mercantile Group, Inc., in New York.