NCPA - National Center for Policy Analysis

What's Ahead On Dollarization In Latin America?

February 17, 2000

Wild currency fluctuations have been the bane of more than one Latin American economy -- not to mention their impact on the careers of those countries' political leaders. Last month, the president of Ecuador attempted to throw out its inflation-battered currency, the sucre, and substitute U.S. greenbacks. He was forced from office, but his successor still wants to dollarize.

Analysts say the move to dollarize economies in Latin America will continue to gain momentum.

  • Dollarization is gaining support particularly in El Salvador, Mexico and Costa Rica -- because it reduces trade and commerce uncertainties in emerging markets.
  • In 1989, Argentina tamed hyperinflation by adopting the currency board approach -- which involves pegging the exchange rate of the local currency to a strong reserve currency, such as the dollar.
  • Dollarization takes the currency board concept one step further by abolishing the local currency altogether and using dollars for all transactions.
  • The Clinton administration is taking a hands-off approach to dollarization, leaving the decision up to each country considering it.

But several Republicans in Congress believe the U.S. should actively cooperate with emerging nations that which to make the currency switch. Sen. Connie Mack (R-Fla.), chairman of the Joint Economic Committee, believes dollarization would benefit the U.S. in a number of ways.

"It would help workers and businesses by stabilizing export markets and getting these markets to grow more quickly," Mack said recently. "It would help investors by reducing the need to hedge against currency risk when investing in emerging markets. And it would help taxpayers by reducing the need to bail out countries due to sudden economic problems."

Source: Ines Capdevila, "Dollar Is Enticing South of the Border," Washington Times, February 17, 2000.

 

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