Wednesday, April 01, 2009

The Economy -- Dollarization -- its potential benefits

Over the next few weeks, I will be devoting a greater percentage of blog posts to economic topics. The economy and the world financial crisis pose large challenges to the incoming administration of Mauricio Funes and the FMLN. Funes made many promises in the election campaign, but economic realities may impinge on how many of those he can fulfill.

One unique factor about El Salvador's economy is dollarization. El Salvador abandoned its own currency at the beginning of this decade and only uses the US dollar now. An article from the Canadian paper the Globe and Mail makes the argument that dollarization has played an important role in promoting the stability and growth of the economy in El Salvador:

El Salvador has no domestic (“sovereign”) currency and, hence, no monetary policy of any kind. Almost alone in the world, El Salvador has no central bank. Lucky El Salvador. This tiny country has used the U.S. dollar as its official currency for eight years – and has avoided most of the problems experienced by poor countries that try to act like rich countries....

Why would a country freely abandon its sovereign currency? Why would a country voluntarily surrender its paper money, a symbol of nationhood? The answer is that El Salvador decided that its currency was too important to entrust to its own politicians, its own financiers, its own industrialists – and, indeed, its own people. One of the principal agents of dollarization was an economist named Manuel Hinds, who twice served as the country's minister of finance....

Mr. Hinds argues that central banks are apt, for poor and underdeveloped countries, to embody a Faustian deal that invites the deliberate corruption of currencies and incites either populist excesses at best, or mob violence at worst.

Back in October 2005, I wrote about some of the downsides of dollarization, which include ceding control of the country's destiny to the US Federal Reserve. As the US generates trillion dollar budget deficits for years to come to stimulate its economy, the spectre of inflation and a weak currency may be in the future for El Salvador. In the campaign, Funes indicated he would not reverse dollarization, although that had been a longstanding position of the FMLN. There is also ongoing talk of a new Central American currency among the countries in the region.

4 comments:

Anonymous said...

the unification of central america as a federalized block of micro-nation-states should be the best option for the region, with el salvador at its head and san salvador as its capital. free trade agreements as a block unit and a single currency and political laws should strengthen the ties of central america, although it may still be possible that if a central american common currency is created that it can run parallel to the US dollar in el salvador. or, like england and the european union, el salvador can retain the dollar while its neighbors all have a new currency all of their own, like the euro in continental europe and the pound in england.

Anonymous said...

http://www.youtube.com/watch?v=gDTHZdG9C7I

Or when in San Salavdor you can't drink rum and coca cola and work for the Yankee Dollar

Anonymous said...

San Salvador and El Salvador as heads? Please, I believe the last thing a series of underdeveloped states need is to lopside them together, not when there are severe problems with the legal-judiciary systems of them all. We wouldn't improve the region's development by doing a confederation when one country could easily bring down the other. As of right now, the only really developed country in the region is Costa Rica, as we stand there is massive immigration from neighboring nations (particularly Nicaragua) into that country. What would happen if all of a sudden we form a confederation? Nicaraguans and Hondurans would enmasse migrate to Costa Rica overtaxing that nation's capability to sustain the population. No, the region cannot enter such an association until laws are drafted and we have the necessary institutions WITH INTERNATIONAL-citizen supervision to guarantee that they are followed. As we stand, Central America is so infested by corruption that particular person x could buy judge y for z amount for z purpose,severely endangering the system. First Central America must address its disparities before they venture into complex things like full-integration of the country, and this imo, is something that the corresponding states should address at its pace not necessarily at the behest of foreign entities to serve THEIR particular needs.

Anonymous said...

Tim, although some people will disagree with me. Applying the dollar as our form of currency was a very smart thing to do, for the very same reasons you hightlighted in the article. Less responsibility avoids that mess you talked about corruption. On the other hand it also raises the assumption that EL Salvador is selling itself out to the US. You can hate me for saying this, but in my opinion I think ES should just join the Union or became part ot the US and get it over with. Some like what puerto rico is to the US. It is a tiny coutry who's population is high enough to produce high levels of growth with the aid of US guidelines. We would be in a better place if we did just that. This is a country that has untap potential. The question is would we be suceptible to global change, and will to give out our true identity.