"Is Dollarization Needed in South America? Helps Curb Inflation and Boost Growth" - CATO Institute

It has been argued that South American countries notorious for hyperinflation need to adopt the US dollar as their legal tender, since having a stable currency would enable higher growth and lower interest rates.

If a competent and independent central bank can function properly, it is naturally preferable to retain monetary sovereignty and respond to external economic shocks by adjusting the exchange rate. However, this has not been the case for South American countries.

The CATO Institute, a US libertarian think tank, made this point in an article published on May 19 (local time) titled “Free Choice in Currency, or the Case for Dollarization in the Americas.”

The article notes that, while Argentinians hold at least $300 billion in US dollars, the total official supply of pesos is only about $80 billion to $90 billion, and that Ecuador already adopted the US dollar as its legal tender in 2000.

It is noted that Ecuador and El Salvador took different paths in adopting the US dollar. Ecuador announced a clear deadline for the transition from the sucre, while El Salvador dollarized its banking system while leaving the nominal currency in circulation.

The following is a summary of the key points.

On May 15, the CATO Institute held a policy forum titled “Is It Time for Dollarization in the Americas?” The panel included John Cochrane, a fellow at the Hoover Institution; David Malpass, former President of the World Bank; and Emilio Ocampo, professor at the Center for Macroeconomic Research at UCEMA in Argentina. The discussion was wide-ranging, including what benefits dollarization could bring to the United States, but also focused on the monetary problems facing Argentina under Javier Milei’s government and Venezuela after the ousting of Nicolas Maduro.

The three panelists ultimately reached similar conclusions. The logic for dollarization is not about forcing the dollar upon people, but about respecting the daily choice Latin Americans have made to use the dollar over their own currencies. Formalizing dollarization means having a stable currency that enables higher growth and lower interest rates. It also means stopping runaway inflation and preventing the silent and forced transfer of wealth from ordinary citizens to the government.

The standard argument against dollarization is that a country needs the ability to adjust the exchange rate in response to external shocks. For example, if copper prices fall, Chile can devalue its currency to cushion the impact. However, with dollarization, the country would have to absorb the shock through lower wages, which is argued to be more painful. The problem with this argument is that it assumes the central bank in question will respond to shocks competently and independently, like the Swiss National Bank. This assumption has not fit the Venezuelan central bank over the past 25 years, nor has it fit any Argentine central bank. In countries that have suffered chronic inflation or repeated hyperinflation, the important question is not “Can we finely tune monetary policy?” Rather, it is “Can we credibly promise not to destroy our currency the next time a politician wants to cover a fiscal deficit?”

In the Americas, adopting the US dollar should be understood as a credible commitment to monetary stability. As Cochrane put it, “Dollarization is the act of burning the ships. Once you have adopted the dollar, you cannot go back.” The value of the reform lies precisely in its irreversibility. Fixed exchange rate regimes or currency boards can be broken. But dollarization is the only truly difficult-to-reverse mechanism in a democracy. To reverse it, you would have to take dollars out of people’s wallets and replace them with pesos or bolivars. No politician seeking re-election would do that.

The ongoing disinflation process in Argentina has brought annual inflation down from 211% to just over 32%, but it is not over yet. Questions also remain about what will happen after Milei. Emilio Ocampo pointed out that Argentina’s problem is ultimately not fiscal, but institutional. In a country where the government has repeatedly violated its own laws with impunity, no constitutional amendment, central bank independence guarantee, or IMF program can be trusted. In a democracy, the only mechanism that works is the one voters themselves are willing to uphold. And it seems Argentine voters have already made their choice. They hold at least $300 billion in US dollars, while the total official supply of pesos is only about $80 billion to $90 billion. Ocampo said, “This is not about forcing a currency,” adding, “It is about freedom. It is about the freedom to use those dollars wherever you want.”

Some argue that there are certain prerequisites a country must meet before adopting the US dollar. Here, the comparison with Ecuador is instructive. As Ocampo explained, in 2000, Ecuador adopted the dollar under conditions that were, by any measure, worse than those in Argentina today: an unpopular president, a sovereign default, frozen deposits in the banking system, and strong opposition from the IMF. Even so, the dollar has lasted longer than any constitution Ecuador has had since 1830. Over the past 20 years, inflation has disappeared in Ecuador, private credit as a percentage of GDP has reached about 60%, and Ecuadorians can get 20-year mortgages. Argentinians and Venezuelans cannot do the same.

Ocampo added that every year Argentina delays dollarization is a year of lost growth. The GDP growth rate for 2026 is projected to be 3.5%, which is much lower than what a dollarized economy with a low base should be able to achieve. The reason growth is limited despite fiscal discipline is uncertainty. Investors who might bring capital to Argentina hedge against the risk that a future Peronist government might devalue the peso. As Malpass said, “The very existence of the peso is a huge cost to Argentina.”

The forum panelists agreed that the way forward does not have to be complicated. Ecuador and El Salvador took different routes to dollarization. One country announced a clear deadline for the transition from the sucre, while the other dollarized its banking system while keeping the nominal currency in circulation. There is no single formula. What matters is the direction and credibility of the commitment.

The United States also has a direct interest in dollarization. If Argentina dollarizes, currency-driven devaluations that periodically distort trade—especially in politically sensitive agricultural sectors—would disappear. If Venezuela dollarizes, it would be in a better position to develop its resources, strengthening its ties to the US economy. There is also a clear network effect: every country that adopts the dollar extends the reach of the world’s reserve currency—just as that status is being challenged. Supporting dollarization in Latin America could bring Washington significant benefits at little cost.

The window for dollarization in Argentina and Venezuela is still open. In some respects, conditions are better than ever, and the cost of inaction will be measured in inflation and lost growth. If the United States wants to support freedom, development, and stability in the Americas, dollarization is an obvious starting point.

This content was produced with the assistance of AI translation services.