SUMMARY OF KENNETH P. JAMESON’S DOLLARIZATION I...
SUMMARY OF KENNETH P. JAMESON’S DOLLARIZATION IN LATIN AMERICA: WAVE OF THE
FUTURE OR FLIGHT TO THE PAST?
IN LATIN AMERICA.
economic policy in the 1990s was guided by Washington consensus, which
advocated for liberalization and free trade (Williamson 1990). However, the
agreement left out the issue of exchange rate management open, implying that
how the rate is set, is not significant as realization a competitive exchange
rate. As documented by Felix (1997/8), these had various implications on the
economies. The implications were, increased volatility in the exchange rates
which would have a detrimental effect on trade, investment, macroeconomic
policy and financial stability. The
orthodox economics proposed the use of either hard peg like dollarization or
floating of their currencies to provide solutions to these problems. (pg. 643).
Dollarization is the
formal adaptation dollar as the domestic currency. Panama was the first country
in the Latin America to dollarize. Dollarization of Panama achieved various
benefits which were; reduced inflation and provision of insulation against
external shock. However, it failed to stabilize the country’s GDP on the
increasing end, eliminate the volatility of interest rates and failed the exert
fiscal discipline in the financial sector (Pg. 645)
In Mexico, the gold
standard currency was working well until insurgent groups introduced 21
different currencies on circulation in 1913. However, after 1925 through to
1933, the country gained monetary stability. From 1933, it followed depositing
of foreign money (dollar) of up to 33% then in 1937 it fell to 6% after a
depression that interrupted the dollar flow in the country followed by a fixed
exchange rate. The experience over the years suggested that unofficial
dollarization may occur under the following circumstances;
• When there is sufficient presence of
dollars in the domestic economy.
• When the government gave a chance for
dollarized sector to be present in the national economy.
• When local economic instability has
negative implications for the well-being of the financial system the confidence
of the domestic economic actors.
In Cuba, the dollar was
allowed to circulate, and the use of Spanish or European currencies was banned
in the year 1914 (Wallich 1960). By 1931 there was 80% use of the dollar in the
country. El Salvador turned to using dollars in all their financial aspects.
Guatemala, on the other hand, allowed the use of any currency. The decision by
this two country was based on the assumption that dollar would eventually take
over and replace their domestic currency.
Some of the factors
that attributed to dollarization of the Latin American countries were as
• International financial institutions like
world bank and international monetary fund (IMF), provided a means to
dollar-denominated loans and helped in petrodollar recycling in the period
between 1973 and 1980.
• An increased economic instability that was
felt throughout the Latin American countries. It was due to governments efforts
of postponing reckoning for increasing oil prices.
• The dollar-denominated deposits rose by a
high percentage which resulted to states reducing exchange rates controls in
the 1970s. The move was a reversal of a
conscious policy that restricted the use of non-national currencies.
During this period, the
Latin American countries were affected in the following ways concerning the
• A concern for all governments was
generating revenue for the dollar where debts were to be paid.
• The governments had difficulties in
constraining the behavior of domestic economic actors who had known ways to
avoid policies regulating them (dollar sector).
On January 9, 2000, the
then president of Ecuador Jamil Mahuad made public the decision to dollarize
the currency of the country. For the period between 1973 to 1999, Ecuador
experienced the worst economic instability characterized by inflation 61%, a
decrease in the rate of investment by half, and unemployment increased by 3.3%,
therefore, leading to dollarization decision.
Other alternatives that
the government could have used to deal with the problem were; dismantle
Congress in a “Fuji coup” to execute a clear economic policy, use of
convertibility program like Argentina, and "sucretizing" financial
accounts. However, the president gave in to pressure by powerful interests,
located in the country’s main port, Guayaquil.
Dollarization did not
yield any different results from those of Panama although there was an
improvement in some economic aspects like unemployment decreased by10.4% in a
period of two years. The disquietude did not end. From the research, the future
of the Latin American countries does not seem different from their past. There
need to be better policies to protect the economies of the countries.
Dollarization would only yield the desired change, only if there were a change
in the nature of the dollar bloc.