Argentina’s economy is dependent on the US dollar. Can Javier Milei change the situation?

On Tuesday, Marcelo Capobianco was inspecting the veal carcass he had just hung on a hook in his small butcher shop outside Buenos Aires, when he admitted that the top-quality beef was unlikely to earn him anything.

That’s because since his preferred candidate, Javier Milei, had won the presidency of Argentina two days earlier, the cost of meat had risen by 5%, while the retail value of the Argentine peso had fallen by 12%, damaging power of its customers’ purchases.

Mr. Capobianco said he had already raised prices so many times in recent months that he was reluctant to pass the costs on to customers again. “It’s already proving difficult to sell at these prices,” he said.

In his shop there were signs of the spiraling economic crisis and 140% inflation that has shocked Argentina and catapulted Milei, a self-described “anarcho-capitalist” libertarian who wants to replace the peso with the American dollar, to the highest office of Argentina.

There was the price wall written in chalk to allow for frequent increases; the counter where every morning it streams the day’s prices to customers who watch it on Facebook; and the sandwich board she recently used to advertise a dollar cut of beef, with Milei’s campaign slogan scrawled next to it: “Long live freedom!”

It was an ironic demonstration, Capobianco said, that “we already live in adollarized economy.”

Not yet.

Milei, 53, an economist and former television pundit, has made “dollarization” the centerpiece of his radical plan to save Argentina’s economy, which also includes closing the central bank and dramatically reducing the size of the government.

However, after years of high inflation and a 93% collapse in the value of the Argentine peso since the pandemic began three years ago, Argentina’s already topsy-turvy economy has evolved to rely even more on U.S. dollars to function day by day. after day. day day.

Argentinians buy houses and cars with stacks of $100 bills. News sites track in real time the “blue dollar,” a black market exchange rate for dollars that is technically illegal for Argentines to use, but which almost everyone does anyway.

And after Argentines convert their pesos into dollars, many hide them under floorboards, in old clothes or locked in rented safes in underground vaults.

Because their paychecks disintegrate in value the moment they receive them, Argentines who can save money usually choose American cash.

As a result, approximately 10% of all US currency in circulation is located in Argentina, according to some estimates, or about $200 billion, more than in any other country outside the United States. That’s an average of about $4,400 in cash for each Argentine, compared to $3,100 for each American.

The dollar has long been a benchmark in Argentina, with its movement against the peso serving as a benchmark for the country’s economic health for decades. It has also long been the preferred way to pay for large items. This includes the transfer of Diego Maradona, the country’s soccer superstar, to an Argentine club in 1981.

As a result, for many Argentines, the US dollar has become a symbol of security. So when Milei made it a symbol of his campaign, it proved to be an effective political strategy.

At his rallies, dollars rained down with his face on them, and his supporters passed him inflated $100 bills that he raised above his head like a trophy.

Now Milei will be sworn in as president next month, and he may soon find that his promises will be much harder to keep than to make.

Economists have warned thatdollarizing Argentina’s economy will be a challenge because doing so requires the country to have a large sum of dollars from the start. And while many Argentines have dollars hidden under their mattresses, the Argentine government has virtually none.

“Dollarization will not be possible, at least in the immediate future,” said Santiago Bulat, an Argentine economist. He also pointed out that other countries that havedollarized, including Ecuador and El Salvador, still have difficulty improving their economies.

“Ecuador isdollarized, yes, in a very critical situation,” he added. “But now they depend on US monetary policies. They have defaulted twice in 20 years.”

Economists say using the dollar as the official currency deprives countries of important monetary tools, such as interest rates, to try to control inflation or ease economic downturns. Some economists have said that switching to the dollar often forces countries to cut the value of their currency, leading to an effective pay cut for the nation’s workers.

On the campaign trail, Milei said that if an outside investor — he didn’t suggest specific names — was willing to lend Argentina tens of billions of dollars, it could dallealize quickly. Otherwise, according to him, it would be a matter of “financial engineering” and would simply take more time.

What do you say to economists who doubt thatdollarization is possible or even necessary? “They’re raw” he told the Economist in the month of September. “It’s like trying to discuss Pontryagin’s maximum principle with people who can’t even do addition on an abacus.” (Pontryagin’s maximum principle is a complicated mathematical theory.)

What all Argentines agree on is that the current economic situation is unsustainable.

The crisis has its roots in years of government economic mismanagement, including excessive spending, large deficits, protectionist trade policies, complicated currency controls, $44 billion in international debt and an overreliance on printing more pesos to pay government bills.

Annual inflation has been in triple digits for months, more than two-fifths of Argentines are poor and hunger and homelessness are on the rise.

The government estimates that many workers have received an average 92% raise over the past year – a figure that seems surprising when you take into account the fact that prices have risen even faster.

But half of Argentina’s workforce operates in the so-called informal economy – a list that includes Uber drivers, street vendors, nannies and freelance workers – and their wages have increased very little.

Jonathan Araya, 30, a supermarket worker in Buenos Aires, said he recently took a second job as a waiter because his expenses have increased so quickly. However, he tries to set aside money every month to buy 200 dollars in US dollars, but the collapse in the value of the peso has made this more difficult.

In April 2020, at the beginning of the pandemic, 1 dollar bought 80 pesos at the “blue dollar” rate. A year ago, 1 dollar bought 300 pesos.

On Tuesday, as Argentine markets opened for the first time since Milei’s victory, the value of the peso fell to an all-time low. That day, 1 dollar was worth 1,075 pesos.

“You constantly raise money quickly to buy dollars,” Mr. Araya said, “because the next day, they get devalued again.”

On Tuesday, Mr. Capobianco was in his butcher’s shop greeting customers he was seeing for the first time since the election.

“Did we vote well?” Mr. Capobianco, 53, told one of his regular customers, Isabel Michelitsch, 75.

“We voted well,” he responded, taking out a horn in the blue and white colors of the Argentine flag that he used to celebrate Mr. Mieli’s victory.

Ms Michelitsch said Argentina’s economic quagmire has made her her family’s “minister of the economy”, leaving her constantly searching for a deal. She was carrying three large cobs of corn that she had bought for 1,000 pesos, or less than $1, at a store around the corner.

Capobianco said his business’ difficulties were driven by the weakness of the peso. A drought across much of Argentina had destroyed the pastures that usually fed the animals that supplied his shop, so producers instead used animal feed, which is priced in dollars.

“That automatically makes the product more expensive,” he said, “and that’s what you then pass on to people.”

The truck carrying many of his products also broke down, and replacement parts were priced in dollars, which is a cost his supplier will pass on to him.

“It was a pretty traumatic situation,” Capobianco said, adding that he almost closed his shop this year. But now, with Milei about to assume power, he hopes a solution will be reached, even if getting there could prove painful.

“There is a new air,” he said. “But we know that difficult months await us.”