In recent months, there have been increasing calls for Argentina to adopt dollarization as a solution to its persistent economic woes. This renewed interest prompted me to delve deeper into how dollarization has played out in different countries. Ecuador’s successful transition to dollarization and Zimbabwe’s more complex experience provide compelling case studies on the potential benefits and challenges of such a monetary strategy.
the rise and fall of the zimbabwean dollar
Zimbabwe’s economic story is nothing short of dramatic. In the late 2000s, the country faced one of the most severe hyperinflation crises in history. By 2008, the inflation rate had reached an unfathomable 89.7 sextillion percent month-on-month. The Zimbabwean dollar (ZWD) became virtually worthless (just like a few of the NFTs I’d buy over a decade later), leading to economic paralysis and a complete loss of public confidence in the currency.
In an effort to stabilize the economy, Zimbabwe adopted a multi-currency system in 2009, predominantly using the US dollar (USD), South African rand (ZAR), and other foreign currencies. This move effectively dollarized the economy, curbing hyperinflation and restoring a semblance of economic stability. For several years, this strategy worked, with inflation rates dropping dramatically and economic activity resuming.
the zimbabwean dollar returns
Despite the initial success of dollarization, Zimbabwe faced significant challenges. Liquidity shortages were a persistent problem as the country struggled to maintain an adequate supply of foreign currency. Additionally, the government (obviously) had no control over monetary policy, limiting its ability to respond to domestic economic conditions effectively.
In June 2019, Zimbabwe reintroduced the Zimbabwean dollar (ZWL) as the sole legal tender, phasing out the multi-currency system. The government’s aim was to restore monetary sovereignty and address liquidity issues through a domestic currency. However, this move was met with skepticism, and inflation began to rise again, though not to the catastrophic levels seen previously. By March 2020, exacerbated by the COVID-19 pandemic, the government allowed the use of foreign currencies again, creating a de facto dual currency system.
ecuador: a successful transition
In contrast to Zimbabwe, Ecuador’s transition to dollarization in 2000 was relatively smooth and successful. Faced with a severe banking crisis, hyperinflation, and currency devaluation, Ecuador adopted the US dollar to stabilize its economy. The immediate effect was a significant reduction in inflation and a restoration of public confidence. Ecuador’s GDP growth returned to positive figures, and the country enjoyed greater economic stability.
dollarization success conditions
- Economic Stability: Dollarization can provide immediate stability by eliminating hyperinflation and restoring confidence. Adopting a stable foreign currency curbs inflation and creates a more predictable economic environment.
- Liquidity and Accessibility: A hybrid system, where both domestic and foreign currencies are used, can help address liquidity shortages. This approach allows for greater flexibility and can be a transitional step towards full dollarization or a stable domestic currency.
- Monetary Policy Control: While full dollarization removes the ability to conduct independent monetary policy, a hybrid system can offer a balance. Governments retain some control over domestic monetary policy while benefiting from the stability of a foreign currency.
- Public Confidence: The success of any currency strategy depends on public confidence. Full dollarization can quickly restore confidence by adopting a trusted foreign currency. However, reintroducing a domestic currency requires significant measures to ensure stability and gain public trust.
argentina’s considerations for dollarization
Argentina, with its recurrent economic crises and high inflation rates, stands as a prime candidate for considering dollarization. The Argentine peso has suffered significant devaluation, leading to a loss of public confidence. Informal dollarization is already occurring, with many transactions conducted in US dollars despite the official currency being the peso.
Argentina’s government faces a choice between full dollarization and a hybrid system. The former would provide immediate stability but at the cost of losing monetary policy control. A hybrid system could offer a more balanced approach, allowing the government to maintain some level of control while benefiting from the stability provided by the US dollar.
As countries like Argentina grapple with similar economic challenges, the lessons from Zimbabwe and Ecuador provide valuable insights into the potential paths forward.
A hybrid approach seems like a nice middle ground. Where countries like Cambodia (Cambodian riel), Lebanon (Lebanese pound), Myanmar (Burmese kyat), Vietnam (Vietnamese dong), and Peru (Peruvian sol) adopt the USD in addition to their native currencies, which allows for stability within trade and international investment but does constrain economic flexibility.
unpublished alpha 