A SUMMARY OF KENNETH P. JAMESON’S DOLLARIZATION IN LATIN AMERICA: WAVE OF THE FUTURE OR FLIGHT TO THE PAST?

 

DOLLARIZATION IN LATIN AMERICA.

The Latin-American 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.

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 follows;

•    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.

POST-1973 EXPERIENCE.

During this period, the Latin American countries were affected in the following ways concerning the dollar;

•    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). 

DOLLARIZATION IN ECUADOR.

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.