Sunday, February 03, 2013

Still debating dollarization

Our friends at Voices on the Border have a new blog post about El Salvador's dollarization, which is still controversial twelve years after the country abandoned its own currency for the US dollar.   The most recent discussions center around remarks by the president of El Salvador's Central Reserve Bank:
Bank President Acevedo made his most recent statements (reported by Active Transparency) following the release of a government study on dollarization, which reached some rather negative conclusions. The report found that many key economic indicators, including exports and GDP fell, while inflation and interest rates rose. Dollarization has failed to shield the economy from downturns and instead made El Salvador more susceptible to instabilities in the U.S. economy, as witnessed during the 2009 recession. The Economista published an article yesterday reaching very much the same conclusions. 
In his statements this month, Acevedo said dollarization was “badly designed, improvised and lacking consultation,” and that El Salvador’s fiscal performance with dollarization was the worst in sixty years. He also said the performance was so poor that even proponents of dollarization could not ignore its negative impacts. Even in his most recent comments, however, Acevedo stressed that the Funes administration is not considering de-dollarization and that doing so would cause more economic hard and instability. One of his fears is that Salvadorans would make a run on the banks, withdrawing dollars before they were converted to Colones or another currency.
Read more here.  

The most difficult part of the dollarization discussion is knowing how to determine cause and effect.   El Salvador's economy has been moribund for many years, and the country certainly suffered greatly with the world economic downturn.   But how much should be attributed to dollarization and the subsequent loss of control of fiscal policy, and how much should be attributed to such things as the security situation, the lack of investment in the country's schools and public services, and the impact of free trade agreements and global competition?   I don't think we know how much things would have been different if El Salvador still used the Colon.   What we do know, is that the country can no longer go back.



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