Will Argentina Devalue Its Peso?

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Abstract

In the early 2000s, the economic situation in Argentine could be discussed as unstable, and two approaches were proposed to contribute to the economic growth. Thus, devaluation of peso and dollarization were examined as two opposite variants to improve the country’s economy.

Focusing on the advantages and disadvantages of both the processes, it is possible to speak about the concentration on dollarization as the next step after devaluation in order to use the benefits of the processes and avoid the weaknesses and threats.

Introduction

During the early 2000s, the unstable economic situation in Argentine led to the discussion of the ways to change or improve the situation in relation to forming the barriers for the external economic shocks as crises and regarding the changing the approaches to the country’s currency. Thus, the first discussions of the possibilities of the peso devaluation were observed with references to the likely dollarization.

From this point, the peso devaluation and possible dollarization were considered as the alternatives to change the economic situation in the country for better, contributing to the economic growth and accentuated stability.

That is why, it is important to focus on the discussion of advantages and disadvantages of the currency devaluation and dollarization in order to conclude about the most appropriate approach to improve the Argentinean economy.

The Pros and Cons of Argentine Peso Devaluation

The advantages of choosing the scenario of devaluing peso are the opportunities for increasing the Argentinean competitiveness regarding the export/import relations, the openness to more trade perspectives, the reduced levels of unemployment within the country, and the general rise in the economic development.

Nevertheless, the peso devaluation can result in the unequal redistribution of wealth among the debtors and creditors as the participants of the economic relations and negative effects on banks in relation to the distribution and control of the bank capital and associated liabilities as well as on many private companies (Figure 1, Figure 2).

Figure 1

Dollar-denominated argentine liabilities

(“Case Studies” 231).

Figure 2

Private-sector impact of peso devaluation

(“Case Studies” 232).

The Likelihood that Argentine Will Devalue Its Peso

In spite of the obvious advantages of devaluing peso, the costs of the process are also significant and threatening in relation to the further effective development of the Argentinean economy. That is why, the devaluation of peso can be connected with the other alternative procedures such as dollarization in order to achieve the most intensive economic growth and to respond to the country’s needs.

Such negative consequences of devaluation as the pressure on the Argentinean banks and their capitals along with the equity reduction and intensified devaluation in the future cannot be discussed as desirable with references to the discussed economic situation in the country (“Case Studies” 231).

The Pros and Cons of Dollarization

The alternative scenario for improving the economic situation in Argentine is the focus on dollarization in order to contribute to the country’s exchange rate stability and the general economic progress. From this point, the perspective of dollarization has a lot of advantages for the Argentinean economy.

Thus, the Argentinean peso can be discussed as not credible in comparison with the other currencies, and dollarization can change the situation for better with the focus on the dollar’s credibility. Much attention is paid to the possibilities of intensifying the economic development within the country with the help of the effective dollarization.

Moreover, it is possible to rely on the interest rates which can become lower, and this situation can contribute to the overall economic situation in Argentine. Nevertheless, there can also be negative consequences of dollarization which are the loss of seignorage and the usage of dollarization as the ‘lender of last resort’.

These two consequences are too threatening to the economy of Argentine that is why it is impossible to state strictly about the effects of dollarization on the country’s financial and economic spheres.

The Likely Consequences of Peso Devaluation for the Mega Project

Devaluation of peso is characterized by the negative impact on private companies, as a result, devaluation can be discussed as negative for the Mega project.

Moreover, any negative changes in unemployment rates can lead to decreasing the factual and economic activities of the company. In spite of all the benefits of devaluation, the Argentinean economy can become more vulnerable, and the Mega project can be influenced by these processes intensively.

The Effects of Dollarization on the Mega Project

Dollarization can be more contributing to the development of the Mega project because the focus on the credible and strong currency can lead to the effective economic and trade relations with the international partners, and this sphere is important for the Mega project.

Furthermore, if dollarization is the logical step after devaluation of peso, this situation is advantageous for the Mega project because of emphasizing the economic perspectives of the discussed changes. The new currency regime can also open new prospects for the development of private organizations in Argentine.

From this point, relying on dollarization, the leaders of the Mega project can gain more benefits and profits from the economic situation in the country. The actions of the currency board can be considered as supportive in relation to dollarization as the best approach to change the economic situation in the country.

This factor is also important from the point of the Mega project’s leaders because they should adapt to the changes in the economic and financial environments quickly in order to contribute to the company’s intensive progress.

The Alternatives to Stimulate Argentina’s Economic Growth Independent of Exchange Rate Policy

To avoid the negative consequences of choosing the ineffective variant of the exchange rate policy, it is possible to refer to the alternatives initiated by the government in order to stimulate the Argentinean economic growth without references to the significant dependence on the effects of devaluation of peso or dollarization.

Such economic approaches as devaluation or dollarization are too painful for the countries’ economic progress because of changing the principles and standards associated with the country’s currency.

That is why, it is important to focus on such methods as the decrease of the budget deficit and encouragement of developing the private economy sector, the decrease of interest rates and decrease in international debts. Furthermore, it is also necessary to focus on stabilization of the political situation in Argentine to affect the economy and financial spheres positively.

Conclusion

The exchange rate policies such as devaluation and dollarization influence the economy of the country significantly. It is almost impossible to state strictly about the advantages of this or that approach because they also have a lot of disadvantages. However, focusing on the perspectives and potentials, it is possible to make dollarization the next step of devaluation of peso if the alternatives are not appropriate for the situation.

Works Cited

Case Studies. n.d. Web.

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