It’s inevitable that, in our desperate situation, some consider a desperate solution, especially if the solution is easy to sell. In the middle of hyperinflation, and in a country where it’s ever more common to quote prices in dollars, nothing looks as sexy as dollarization.
Even if it doesn’t make sense.
“Do you want to earn in dollars?”
In Venezuela, who doesn’t?
Selling dollarization is now the task of Henri Falcón’s top economics guy, Francisco Rodríguez, who is in the midst of a press tour. We’re talking about the same Francisco Rodríguez, Chief Economist of Torino Capital, who advises bondholders owed billions by the Venezuelan government.
I’m not going to relitigate the dollarization debate; I already wrote about it and my views haven’t changed. Furthermore, Rodríguez isn’t engaging in a debate about its pros and cons in the long term; he’s mostly talking up its benefits in the very short term. It’s all about Year 1 of a hypothetical Falcón presidency.
Let’s focus on Year 1 then.
Rodríguez accepts that dollarization on its own doesn’t work. You need other reforms, which I’ll call A, B and C. These reforms would be part of any successful stabilization that doesn’t include dollarization, which begs the question, if you always need to do A, B and C, why dollarize if you don’t need to?
To answer that, Rodríguez is focusing on three benefits. First, dollarization could bring down inflation fast; second, it could lend much-needed credibility to a stabilization plan and, third, an economic adjustment with dollarization would be expansive, while one without it would be contractive.
Ecuador is not an outlier in South America. Whatever dollarization did for Ecuador against inflation, can be done without it.
He’s right on the inflation-stopping powers of dollarization, although it might not work very fast. The “immediate single-digit inflation” promise of dollarization promoters is actually uncertain. In Ecuador, during the first year of dollarization, inflation was 96% (it was 52% the year before, and 36% and 12% the next two years). It took them three years to reach single-digit inflation. More importantly, you can also stop high inflation without dollarization, as other countries in the region did. Bolivia and Perú have Ecuador beaten in this field.
Since then, and up to 2017, Ecuador’s accumulated inflation is 170%, and I’m being kind: that number doesn’t include the first 11 months and 3 weeks of dollarization in 2000, with its 96% (otherwise, it would be 430%). Between 2001 and 2017, several non-dollarized countries, like Bolivia (127%), Chile (169%), Colombia (127%), and Peru (75%), beat Ecuador in inflation. Brazil and Paraguay are a bit above, and only Argentina, Uruguay and Venezuela surpass 200%. Ecuador is not an outlier in South America. Whatever dollarization did for Ecuador against inflation, can be done without it.
The second benefit mentioned by Rodríguez is that the dollarization straight-jacket would lend credibility to a stabilization program, and would signal the government is serious about changing course. I believe the credibility problem is so massive that dollarization would help very little, to the point where the sacrifices aren’t worth it.
Dollarization is not a “perfectly credible monetary policy”, as Rodríguez said recently. You still need A, B and C, remember? Being credible in A, B and C (things like keeping spending under control) is what matters the most. Without that you fail, dollarized or not.
Furthermore, it won’t matter if we enshrine dollarization in the Constitution through a referendum, or if President Falcón tattoos a dollar in his forehead. A Falcón presidency would exist under the threat that chavismo (radically opposed to dollarization) will return quickly. What’s more, according to Rodríguez, Falcón could negotiate a cohabitation with chavismo, which is a bit of realpolitik that’ll damage Falcón’s credibility: is he really different from chavismo? Is he serious about reform?
And if you believe chavismo will behave responsibly and commit to keeping dollarization, I have a cryptocurrency to sell you. It’s backed by unicorns.
A Falcón presidency would exist under the threat that chavismo (radically opposed to dollarization) will return quickly.
The chavismo threat means that, after dollarization, the reasonable thing to do for Venezuelans would be to take their money out of the country immediately — better get those dollars out before Falcón changes his mind, or he’s replaced, especially if dollarization is carried out with very little dollars (a scenario floated by Rodríguez).
We arrive then to the part Rodríguez hasn’t mentioned, because it would be terrible publicity: after a dollarization with poor credibility, the government will most likely have to impose capital controls, to prevent people taking their money out of the country in a rush (and to protect banks). Greece imposed capital controls in 2015 that are still in place, and let’s remember Argentina’s infamous corralito.
These controls won’t need to be as strict as today’s exchange controls, but it’s important to mention it, and let go of the fantasy that dollarization would mean an immediate lift of capital controls.
Something that would help with credibility is unrelated to dollarization. We need a huge pot of money — tens of billions of dollars —, and the cheapest (and likely only) source for that is the IMF. In past years, Rodríguez was notoriously reluctant to agree to it (and I asked him about it), but he’s fully on board now. Having money, and the backing of the IMF, would help with credibility, and it’s needed even without dollarization.
On Rodríguez’ third point, I have to agree with him. But not with the Francisco Rodríguez of the last couple of weeks, but the Francisco Rodríguez that wrote in October 2017 that an adjustment could be expansive. The most important factor to achieve that, he wrote, would be getting a pot of money large enough. And he didn’t mention dollarization back then.
Dollarization means giving up on valuable policy tools for something that either we don’t need, or won’t actually change the odds significantly. Just think, why are we to do this?