Marcos Falcone
On May 15, the Cato Institute hosted a policy forum titled “Has the Time Come for Dollarization in the Americas?” featuring John Cochrane (Hoover Institution), David Malpass (former World Bank president), and Emilio Ocampo (UCEMA, Argentina). If you missed it, you can watch it here. The conversation covered a lot of ground, including how dollarization would benefit the United States, but it also focused on the monetary challenges facing Argentina under Javier Milei and Venezuela following Nicholas Maduro’s capture.
All three panelists ended up in a similar place: The case for dollarization is not about imposing the dollar, but about respecting the choice that Latin Americans have made and make on a daily basis when they use the dollar over their local currencies. Making dollarization official is about having a stable currency that enables higher growth and lower interest rates, and that stops rampant inflation and thus the silent, forced transfer of wealth from ordinary citizens to their governments.
The standard argument against dollarization goes like this: Countries need the ability to adjust their exchange rate in response to external shocks. If the price of copper falls, Chile can devalue and soften the blow—if it has dollarized, it has to absorb the shock through lower wages, which is more painful. The problem is that it assumes the central bank in question will behave like, say, the Swiss National Bank, responding to shocks in a competent and politically independent way. This assumption has not been a good description for Venezuela’s central bank over the last 25 years and has almost never been a good description of any Argentine central bank. In countries that have experienced chronic inflation or multiple episodes of hyperinflation, the relevant question is not, “Can we fine-tune monetary policy?” Instead, it is, “Can we credibly commit to not destroying our currency the next time a politician needs to finance a deficit?”
In the Americas, dollarization is best understood as a credible commitment to monetary stability. In that sense, as Cochrane put it, “dollarizing is burning the ships. Once you’ve dollarized, you can’t go back.” The value of the reform lies precisely in its irreversibility. A currency peg or a currency board can be broken—as Argentina demonstrated in August 2001, when Congress passed a law guaranteeing bank deposits as private contracts and the government violated it less than six months later, bringing the currency board to an end. But dollarization is the one mechanism that is genuinely difficult to undo in a democracy, because doing so means taking dollars out of people’s wallets and handing them something called the peso or bolívar instead. No politician who wants to be reelected does that.
In Argentina, the current disinflation process, which has taken yearly inflation from 211 percent to just over 32 percent, is not over and still leaves the question of what happens after Milei. Emilio Ocampo made the point that, in the end, Argentina’s problem is not fiscal, but institutional. In a country where the government has persistently violated its own laws without consequence, no constitutional amendments, guarantees of central bank independence, or IMF programs can be credible. The only mechanism that works in a democracy is one that voters themselves will defend. And Argentine voters, it turns out, have already made their choice: they hold at least $300 billion in dollars, while the entire formal peso supply amounts to roughly $80–90 billion. “This is not about imposing a currency,” Ocampo said. “It’s about freedom. It’s about freedom to use those dollars anywhere you want.”
Some argue that there are certain preconditions that countries need to achieve before dollarizing their economy. Here, the comparison with Ecuador is instructive. As Ocampo explained, Ecuador dollarized in 2000 under conditions that were, by any measure, worse than Argentina’s today: an unpopular president, a country in sovereign default, deposits frozen in the banking system, and the IMF actively opposed to the move. Yet the dollar has now outlasted every constitution Ecuador has had since 1830. Over the past two decades, inflation in Ecuador has disappeared, the country’s private credit as a share of GDP stands at roughly 60 percent, and Ecuadorians can get 20-year mortgage loans. Neither Argentines nor Venezuelans can.
Ocampo added that every year Argentina delays dollarization is a year of forgone growth—GDP is expected to grow by 3.5 percent in 2026, well below what a dollarized economy growing from a low base should be able to achieve. The reason growth is constrained, even with fiscal discipline, is uncertainty. Investors who might otherwise bring capital into Argentina hedge against the possibility that the peso will be debased by some future Peronist government. As Malpass put it, “the existence of the peso is a huge gigantic cost to Argentina.”
The panelists at the forum agreed that the path forward need not be complicated. Ecuador and El Salvador took different routes to dollarization—one announced a hard deadline for converting sucres, the other dollarized the banking system while leaving the nominal currency in circulation. There is no single template. What matters is the direction of travel and the credibility of the commitment.
The monetary base in Argentina is approximately $20 billion, and the country is now running consistent fiscal surpluses, which means that the arithmetic of dollarization is not the obstacle. As Malpass said: “The minute Argentina said it was going to stop imposing the peso, dollars would flood in.… There would be much more than [$20 billion] that would want to come to Argentina if they said that they would allow it to go back out if it wanted to.” And he added, “The world is stacked in favor of local currencies. The elite in the country benefit from it. The central bankers benefit from it. The IMF benefits from it from a staff level. And so the decision point has to be Milei saying ‘I want to fulfill my campaign promise.’”
The United States has a direct stake in dollarization as well. A dollarized Argentina would eliminate the currency-driven devaluations that periodically distort trade between the two countries, including in politically sensitive agricultural sectors. A dollarized Venezuela would be in a better position to develop its resources, which would strengthen its ties to the US economy. There is also the straightforward network benefit: every country that adopts the dollar expands the reach of the world’s reserve currency at a moment when that status is being challenged. Supporting dollarization in Latin America costs Washington nothing and could return a great deal.
The window for dollarization in Argentina and Venezuela is still open. In some respects, the conditions are better than they have ever been, and the cost of not acting is measured in inflation and missed growth. If the U.S. is looking to support freedom, development, and stability in the Americas, dollarization is an obvious place to start.