Dollarization won't be the 'magical' solution to Argentina's roaring inflation problem, Nobel economist Paul Krugman says

Infusing the dollar into Argentina's economy won't be enough to solve the country's deep-seated economic problems, top economist Paul Krugman says.

• Dollarization isn't the solution to Argentina's roaring inflation, Paul Krugman said.
• The top economist pointed to Argentina's new president, who wants to ditch the peso for the greenback. 
• But adopting the US dollar alone won't solve the country's budget deficits, he added.

Argentina can't run away from its glaring inflation problem simply by swapping its currency for the US dollar, according to top economist Paul Krugman.

The Nobel laureate pointed to Argentina's newly elected President Javier Milei, who has pushed to replace Argentina's peso with the US dollar. That move is intended to rein in the country's 143% inflation rate.

Argentina's peso, meanwhile, has been one of the world's worst-performing currencies in 2023, with its black market exchange rate falling to a record low this year.

But simply switching from pesos to dollars won't be enough to solve Argentina's roaring inflation problem, Krugman warned.

"I don't pretend to understand what's currently happening in Argentine politics. But the fact that many people apparently believed that dollarization would solve Argentina's problems was just the latest example of the enduring power of magical monetary thinking," the economist in an op-ed for the New York Times on Tuesday. 

Argentina attempted to partially dollarize its economy before. In the early 1990s, the nation rolled out a law to exchange pesos to dollars at a 1-1 ratio. But that system soon collapsed, partly because it didn't solve the problem of budget deficits, Krugman said.

The dollar peg also raised the value of the peso, which made Argentine exports less attractive and deepened the country's recession, he added. 

Meanwhile, the use of dollars also prevented central bankers from using monetary policy to stimulate the economy. That likely exacerbated the nation's downturn, which steepened into an economic depression in the early 2000s. 

Argentina eventually got rid of its dollar peg in 2002. That doesn't mean using a new currency can't help bolster a struggling economy, but it needs to be backed with other major changes, Krugman said. He used the example of Brazil, which switched its cruziero with the real in the 1990s to lower inflation.

"Introducing a new currency can successfully curb inflation if accompanied by other policy reforms, although in that case it's unclear how much the currency mattered," Krugman added. 

Markets have been eyeing Argentina's dollarization ambitions over the last year, which run contrary to a group of nations that are attempting to de-dollarize their economies to.

That could eventually pose a threat to the greenback's influence over the world economy, some experts say, with the dollar potentially weakening over the following decades.