Arnold Kling

Sachs on Argentina: Dollarize

Arnold Kling, Great Questions of Economics
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Jeff Sachs says that the solution for Argentina is dollarization.

The correct approach to solving Argentina's problems in 2001, and now, would have been to end speculation over devaluation. I favored the approach of "dollarization", or replacing the Peso by the US dollar and thereby ending the fear of a future change of the exchange rate. Instead, the government closed down the banking system, so that depositors could no longer convert their pesos into dollars!

I believe that the conventional wisdom among economists is quite the opposite. That is, Argentina's attempt to peg its peso to the dollar caused problems. As neighboring currencies fell in value, Argentina's exports became uncompetitive.

Conventional wisdom is to focus on Argentina's budget and trade deficits. Sachs' view is that the key is to restore confidence in the banking system.

Discussion Question. Is Argentina's problem illiquidity (a temporary inability to repay its debts) or insolvency (it took on too much debt relative to its capacity)? How does your answer to this question affect whether or not you agree with Sachs?

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