The idea of ​​dollarization as a consequence of the deterioration of institutions

09/01/2024

Legal uncertainty presents a significant challenge to the implementation of structural reforms. In an environment where rules and regulations are uncertain or subject to abrupt changes, investors and economic actors may be reluctant and afraid to commit. This makes the application of monetary and other policies less credible than where monetary sovereignty underlies if what has the force of law in one administration can be erased with the elbow by the next. This lack of legal stability discourages investment and hinders the progress of reforms. Participants in the economy seek predictability and a clear regulatory framework to plan and make long-term decisions. A clear example is the issue of the choice between dollarization and monetary sovereignty, which in an affected economy can be complex. Dollarization could provide stability and combat inflation, but at the expense of losing control over monetary policy. On the other hand, maintaining monetary sovereignty offers flexibility, but it can be difficult to control inflation. The decision of one format or another will depend on the severity of the economic situation and the necessary structural measures. In the example of dollarization it can be a drastic but effective step in contexts of extreme crisis, while preserving monetary sovereignty implies addressing the underlying causes of the economic disease.

That is why, when looking for an anchor in monetary policies, the country finds itself in the dilemma of maintaining its monetary sovereignty or anchoring itself to an objective parameter where the politician in power cannot change the rules to his own convenience. We cannot deny that it was the modus operandi of the Argentine governments, regardless of their ideology, representativeness or democratic legitimacy for as long as we can remember. To deny this is, in my opinion, to try to confirm a biased ideological vision of reality. The ideal of finding a balance that combines immediate measures to stabilize the economy with long-term structural reforms could be the most effective strategy for a sick economy but not applicable in an environment of institutional distrust.

To address this problem, it is essential to strengthen the legal system and provide guarantees of stability in laws and regulations. Improving transparency, reducing corruption and strengthening the rule of law are critical steps in creating an enabling environment for structural reforms. Improving a country's institutional respect and legal strength typically involves a comprehensive approach. This could include legal reforms including a sensible constitutional reform in favor of the well-being of the citizen (and not to take advantage of power in all its forms like the appalling reform of 1994), the strengthening of institutions, civic education and promotion of transparency. Consulting experts and fostering national dialogue are also important steps in addressing these issues.

The challenge of implementing structural reforms in a country where lack of respect for institutions is common is considerable. Reforms require a foundation of solid institutions for their success and lack of institutional respect inexorably leads to resistance, corruption or even failure of the reforms. Trust in institutions is essential for reforms to be accepted and effective both internally and externally. When these institutions lack credibility, the population can show resistance and distrust, hindering the process of change.

To conclude, legal uncertainty can undermine reform efforts, making it crucial to establish a stable and reliable legal framework to promote economic growth and the success of structural reforms. It is crucial to address improving institutions alongside reforms, strengthening transparency, rule of law and accountability. Furthermore, involving civil society and seeking broad consensus can help overcome barriers associated with lack of respect for institutions. Structural reform in an environment without respect for institutions requires a comprehensive approach that addresses both economic aspects and institutional challenges to achieve sustainable results.

By Pablo Gabriel Miraglia