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Ricardo Hausmann, Harvard economist: “Dollarization works with a social pact and with people fed up with inflation” - Infobae
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www.infobae.com
February 1, 2024
The Venezuelan expert spoke with Infobae about dollarization, Milei's management and the general economic situation of the country
By Mariano Zalazar
Ricardo Hausmann, director of the Center for International Development at Harvard University
The debate over dollarization had lost some strength since the end of Javier Milei 's presidential campaign , but the idea gained strength in recent days and the Government itself assured that the goal of eliminating the Argentine peso is close.
Yesterday, the President himself assured that : “At the market exchange rate we are one shot away from dollarizing . ”
Ricardo Hausmann , former Minister of Planning of pre-Chavista Venezuela, former chief economist of the Inter-American Development Bank, director of the “Growth Lab” of the Center for International Development at Harvard University and renowned defender of dollarization, He spoke with Infobae about the Argentine reality and the policies implemented by the President of the Nation, Javier Milei .
—How are the contexts of Ecuador when it dollarized and the current one of Argentina similar?
—Dollarization works when there is a social pact that supports it, because people are tired of the failure of the previous monetary system and are fed up with inflation, devaluations, maxi devaluations, the blue , all these types of tricks that come from the past . Now, in general, and in the Argentine case in particular, all these high inflation problems have a fiscal origin.
Dollarization per se does not solve the fiscal problem, unless there is a strong social agreement, in which everyone is willing to take the necessary fiscal measures to sustain dollarization.
— Given the Argentine social context, is it possible to reach a social pact strong enough for dollarization to take place?
—There was no such social pact prior to dollarization in Ecuador. That social pact arose from the success of dollarization. When the measure was taken it was very controversial, but when inflation dropped to single digits very quickly and interest rates fell, the situation changed. In Ecuador, interest rates were around 300% and dropped to 15% only with the announcement of dollarization, without implementing it yet. The economic changes are very profound and clear, the social pact changes as people see the performance of the economy.
—What do you think of the “currency competition” system, in which other currencies can operate in addition to the dollar and the peso, as Milei proposes?
—It is irrelevant, because there is a super liquid market in all those currencies, there is exchange risk coverage and so on. So it doesn't matter one or the other. But countries that have a highly dollarized banking system, where a very significant percentage of the deposits and credits of the national banking system are in dollars, and they also have their own currency, are more complicated.
Milei proposes a free currency market in Argentina (Reuters)
I have worked in Kazakhstan , in Azerbaijan , in many countries that have deposits in dollars and deposits in national currency. They have free convertibility between them and a floating rate. Those systems tend to be incredibly unstable monetarily, even in countries that don't have fiscal problems of any kind.
These dual systems with their own currency do not work as well. In the Peruvian case, to make it work they had to introduce many restrictions on the banks, very high reserve requirements for deposits in dollars and restrictions on the granting of credits in dollars. They had to have a fairly controlled banking system so that it didn't become a big headache.
—Dollarization prevents politicians from issuing excessively but not from taking on excessive debt. If Argentina has a fiscal deficit, are the advantages of dollarizing lost?
— Argentina is in a very complicated situation to dollarize now, because one of the conditions of dollarization is that you can buy the monetary liabilities of the Central Bank. I don't think that's happening right now. In the case of Ecuador, it was a given, because the exchange rate went from something like 3,500 escudos per dollar to 25,000 escudos per dollar in the year before dollarization. So, many of the monetary liabilities were liquefied. I think the situation in Argentina is more compromised. The consensus is that the short-term conditions are not in place to dollarize today, but we must anticipate that Argentines have much more money abroad than the money they have in Argentina.
The question to ask is, what rules of a monetary or banking system would make Argentines a little more confident in leaving their money in the country? I'm not talking about attracting foreign direct investment from abroad, I'm simply talking about the Argentine portfolio. That money is much larger than any of the country's monetary aggregates.
—What should change in Argentina so that it can be dollarized?
—Obviously things become much easier if the country does not have a deficit. That is one of the great priorities of the Government. If there is no fiscal pressure, both on monetary accounts and financial pressure to borrow, that makes everything else much easier to handle.
Now, a valid question to ask is, if I have already solved the fiscal problem, why dollarize? That is, to dollarize I have to solve the fiscal problem, but if the fiscal problem were resolved, I would not have to dollarize.
For the expert, the first step to dollarize is to achieve fiscal balance (Andina)
I say that dollarization is often the way to cement the fiscal pact. This is what will force us to make the necessary sacrifices to sustain the fiscal pact. This is what happened in Ecuador.
—What worries you about dollarization in Argentina?
—There are two things that worry me about dollarization in Argentina. The first is that Argentina is an incredibly closed economy. The more closed the economy, the more the real exchange rate has to move for any shock that comes.
Even dollarizing, the real exchange rate has to move. The real exchange rate is how much things cost in Argentina in dollars compared to how much they would cost in the rest of the world. If the country receives an adverse shock and has to depreciate the real exchange rate, there would have to be deflation in Argentina. This deflation is facilitated if salaries fall in dollars.
Second point: Argentina is an economy very little connected to the American economy. Argentina is more of a competitor to the United States - in the soybean market, for example - than a complement. American monetary policy is not going to be responding, it is not going to be in sync with events in Argentina.
We already saw that when in 98 or 99 the dollar strengthened a lot and the Brazilian Real depreciated. Argentina at that time was exporting to Brazil and Europe. With convertibility it lost a lot of competitiveness in those markets.
—What do you think about Javier Milei and the measures implemented in his first two months in office?
—The policies, both fiscal and economic liberalization, that you are taking seem very sensible to me. The government of Mauricio Macri tried to make a gradual fiscal adjustment, thinking that the market would support while that adjustment was made. The markets did not support and at a certain point they said enough was enough.
What is being done now makes sense, given that gradualism did not work that time, and that in Alberto Fernández 's period things only got worse. It makes sense to try a more shock fiscal adjustment.
Hausmann was critical of the governments of Mauricio Macri and Alberto Fernández (Reuters)
I believe that a movement towards greater liberalization of markets is going to help supply to the economy react and investment to react, because more investment opportunities will open up in a more efficient economy. Both things seem brave to me, they seem bold to me and they seem to me to be going in the right direction.
—Why do you think Argentina reached the critical economic situation it is in?
— Argentina's basic problem is an unsustainable fiscal structure. As people saw that the fiscal deficit was not going to be resolved, the markets lost confidence, interest rates went to heaven. That created a vicious circle. Because people don't believe it, interest rates are high, but because interest rates are high, the country has to pay so much for the debt, that you have a gigantic deficit.
The way this is solved is with involuntary taxes. Inflation, for example, is an involuntary tax. Argentina has depended on two basic taxes, one is the inflation tax, and the other is financial repression. To have that financial repression, they need to have various exchange rates.
Bringing the fiscal accounts to a stable situation makes it possible to renounce inflation and financial repression. But for that you must have a tax structure that allows it.
—How do you think Argentina is carrying out the negotiations with the IMF?
—The International Monetary Fund never imagined that it would undergo so much reform and so much adjustment in such a short time. He was so surprised that he responded very positively.
—Is it economically viable to have so many such profound reform measures carried out at the same time?
—There is a metaphor that says that economic reforms are like surfing. They can be done only when there is a wave that allows it. And if the wave isn't there, you can't do anything. The truth is that crises of this type, when resolved healthily, are resolved with many reforms at the same time.
Source:
Ricardo Hausmann, economista de Harvard: “La dolarización funciona con un pacto social y con la gente harta de la inflación”
El experto dialogó con Infobae sobre dolarización, la gestión de Milei y la situación económica general del país
www.infobae.com
February 1, 2024
The Venezuelan expert spoke with Infobae about dollarization, Milei's management and the general economic situation of the country
By Mariano Zalazar
Ricardo Hausmann, director of the Center for International Development at Harvard University
The debate over dollarization had lost some strength since the end of Javier Milei 's presidential campaign , but the idea gained strength in recent days and the Government itself assured that the goal of eliminating the Argentine peso is close.
Yesterday, the President himself assured that : “At the market exchange rate we are one shot away from dollarizing . ”
Ricardo Hausmann , former Minister of Planning of pre-Chavista Venezuela, former chief economist of the Inter-American Development Bank, director of the “Growth Lab” of the Center for International Development at Harvard University and renowned defender of dollarization, He spoke with Infobae about the Argentine reality and the policies implemented by the President of the Nation, Javier Milei .
—How are the contexts of Ecuador when it dollarized and the current one of Argentina similar?
—Dollarization works when there is a social pact that supports it, because people are tired of the failure of the previous monetary system and are fed up with inflation, devaluations, maxi devaluations, the blue , all these types of tricks that come from the past . Now, in general, and in the Argentine case in particular, all these high inflation problems have a fiscal origin.
Dollarization per se does not solve the fiscal problem, unless there is a strong social agreement, in which everyone is willing to take the necessary fiscal measures to sustain dollarization.
— Given the Argentine social context, is it possible to reach a social pact strong enough for dollarization to take place?
—There was no such social pact prior to dollarization in Ecuador. That social pact arose from the success of dollarization. When the measure was taken it was very controversial, but when inflation dropped to single digits very quickly and interest rates fell, the situation changed. In Ecuador, interest rates were around 300% and dropped to 15% only with the announcement of dollarization, without implementing it yet. The economic changes are very profound and clear, the social pact changes as people see the performance of the economy.
—What do you think of the “currency competition” system, in which other currencies can operate in addition to the dollar and the peso, as Milei proposes?
—It is irrelevant, because there is a super liquid market in all those currencies, there is exchange risk coverage and so on. So it doesn't matter one or the other. But countries that have a highly dollarized banking system, where a very significant percentage of the deposits and credits of the national banking system are in dollars, and they also have their own currency, are more complicated.
Milei proposes a free currency market in Argentina (Reuters)
I have worked in Kazakhstan , in Azerbaijan , in many countries that have deposits in dollars and deposits in national currency. They have free convertibility between them and a floating rate. Those systems tend to be incredibly unstable monetarily, even in countries that don't have fiscal problems of any kind.
These dual systems with their own currency do not work as well. In the Peruvian case, to make it work they had to introduce many restrictions on the banks, very high reserve requirements for deposits in dollars and restrictions on the granting of credits in dollars. They had to have a fairly controlled banking system so that it didn't become a big headache.
—Dollarization prevents politicians from issuing excessively but not from taking on excessive debt. If Argentina has a fiscal deficit, are the advantages of dollarizing lost?
— Argentina is in a very complicated situation to dollarize now, because one of the conditions of dollarization is that you can buy the monetary liabilities of the Central Bank. I don't think that's happening right now. In the case of Ecuador, it was a given, because the exchange rate went from something like 3,500 escudos per dollar to 25,000 escudos per dollar in the year before dollarization. So, many of the monetary liabilities were liquefied. I think the situation in Argentina is more compromised. The consensus is that the short-term conditions are not in place to dollarize today, but we must anticipate that Argentines have much more money abroad than the money they have in Argentina.
The question to ask is, what rules of a monetary or banking system would make Argentines a little more confident in leaving their money in the country? I'm not talking about attracting foreign direct investment from abroad, I'm simply talking about the Argentine portfolio. That money is much larger than any of the country's monetary aggregates.
—What should change in Argentina so that it can be dollarized?
—Obviously things become much easier if the country does not have a deficit. That is one of the great priorities of the Government. If there is no fiscal pressure, both on monetary accounts and financial pressure to borrow, that makes everything else much easier to handle.
Now, a valid question to ask is, if I have already solved the fiscal problem, why dollarize? That is, to dollarize I have to solve the fiscal problem, but if the fiscal problem were resolved, I would not have to dollarize.
For the expert, the first step to dollarize is to achieve fiscal balance (Andina)
I say that dollarization is often the way to cement the fiscal pact. This is what will force us to make the necessary sacrifices to sustain the fiscal pact. This is what happened in Ecuador.
—What worries you about dollarization in Argentina?
—There are two things that worry me about dollarization in Argentina. The first is that Argentina is an incredibly closed economy. The more closed the economy, the more the real exchange rate has to move for any shock that comes.
Even dollarizing, the real exchange rate has to move. The real exchange rate is how much things cost in Argentina in dollars compared to how much they would cost in the rest of the world. If the country receives an adverse shock and has to depreciate the real exchange rate, there would have to be deflation in Argentina. This deflation is facilitated if salaries fall in dollars.
Second point: Argentina is an economy very little connected to the American economy. Argentina is more of a competitor to the United States - in the soybean market, for example - than a complement. American monetary policy is not going to be responding, it is not going to be in sync with events in Argentina.
We already saw that when in 98 or 99 the dollar strengthened a lot and the Brazilian Real depreciated. Argentina at that time was exporting to Brazil and Europe. With convertibility it lost a lot of competitiveness in those markets.
—What do you think about Javier Milei and the measures implemented in his first two months in office?
—The policies, both fiscal and economic liberalization, that you are taking seem very sensible to me. The government of Mauricio Macri tried to make a gradual fiscal adjustment, thinking that the market would support while that adjustment was made. The markets did not support and at a certain point they said enough was enough.
What is being done now makes sense, given that gradualism did not work that time, and that in Alberto Fernández 's period things only got worse. It makes sense to try a more shock fiscal adjustment.
Hausmann was critical of the governments of Mauricio Macri and Alberto Fernández (Reuters)
I believe that a movement towards greater liberalization of markets is going to help supply to the economy react and investment to react, because more investment opportunities will open up in a more efficient economy. Both things seem brave to me, they seem bold to me and they seem to me to be going in the right direction.
—Why do you think Argentina reached the critical economic situation it is in?
— Argentina's basic problem is an unsustainable fiscal structure. As people saw that the fiscal deficit was not going to be resolved, the markets lost confidence, interest rates went to heaven. That created a vicious circle. Because people don't believe it, interest rates are high, but because interest rates are high, the country has to pay so much for the debt, that you have a gigantic deficit.
The way this is solved is with involuntary taxes. Inflation, for example, is an involuntary tax. Argentina has depended on two basic taxes, one is the inflation tax, and the other is financial repression. To have that financial repression, they need to have various exchange rates.
Bringing the fiscal accounts to a stable situation makes it possible to renounce inflation and financial repression. But for that you must have a tax structure that allows it.
—How do you think Argentina is carrying out the negotiations with the IMF?
—The International Monetary Fund never imagined that it would undergo so much reform and so much adjustment in such a short time. He was so surprised that he responded very positively.
—Is it economically viable to have so many such profound reform measures carried out at the same time?
—There is a metaphor that says that economic reforms are like surfing. They can be done only when there is a wave that allows it. And if the wave isn't there, you can't do anything. The truth is that crises of this type, when resolved healthily, are resolved with many reforms at the same time.
