The Dollarizing of Argentina's Economy

Paper Summary:

This paper is an in-depth analysis of the "dollarizing" of Argentina's economy. It describes the affects of the Convertibility Plan aimed at ending the soaring inflation in the late 80s and reorganizing the national economy. The plan replaced the Argentine peso with the U.S. dollar in the hope of eliminating the peso-dollar exchange-rate risk, lowering interest rates and stimulating economic growth. The author gives a brief overview of the economy of Argentina and its history and describes the continuous protests and national strike since 1996. The paper also looks at the "social costs" of the economic success in Argentina.

From the Paper:

"The "dollarizing" of Argentina's economy was the product of the genius of Domingo Cavallo, finance minister of former President Carlos Saul Menem, under a Convertibility Plan aimed at putting the country's chillingly soaring inflation in the late 80s to a sudden stop (Mark Falcoff) and then saving and re-ordering the economy as a whole. No more Argentinean money to be printed than there were dollars in circulation a radical measure, which worked. But it also created more trouble by raising prices above those of the United States and resulted in slow capital inflows and high unemployment rate (17% in 1997) and the consequent overthrow of President Menem after 10 years of rule.
The Convertibility Plan replaced the Argentine peso with the US dollar in the hope of eliminating the peso-dollar exchange-rate risk, lowering interest rates and stimulating economic growth (Hanke & Schuler 1999) The one-on-one rate (1 Argentine peso to US$1) induced currency stability and helped achieve free-market reforms and high growth, but this streak of genius "proved to be more a manipulation than miracle, because it came the price of selling off national industries, services and resources (Looksmart)." These resources included airlines, telephones, railroads, subways, roads, even the control of the petroleum industry. The Plan stabilized the currency all right, but eventually damaged export trade "by shoring up the peso" (Looksmart) "

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