Dollarization not helping El Salvador
The Los Angeles Times looks at El Salvador's economy in an article titled Many Salvadorans find dollar a curse, not a cure. Although I think the article's suggestion that dollarization immediately had an inflationary impact lacks solid evidence (the premise is that store owners "rounded up" when switching prices from colons to dollars and cents), the overview of how El Salvador's economy has fared in the years since El Salvador abandoned its own currency for the dollar is useful reading:
Dollarization, advocates say, preserves workers' earnings and savings against the monetary mischief of their governments. The move lowers inflation and interest rates, reduces transactional costs with other dollarized nations and encourages fiscal discipline by preventing treasuries from printing money to finance spending.
But dollarization isn't a panacea for troubled economies, nor is it a one-size-fits-all strategy. The use of dollars doesn't automatically make a country more attractive to investors or guarantee its entrepreneurs an edge in the global economy. It doesn't absolve governments of the hard work necessary to ensure that their nations are competitive.
Critics of El Salvador's currency change say it's a prime example of how dollarization's costs can outweigh its benefits if policymakers don't follow through with other measures to strengthen the economy.
"The poorer you are, the worse it is," said Silvia Borzutzky, a professor of political science and international relations at Carnegie Mellon University who has studied El Salvador's dollarization.
"The policy has had extremely negative effects on the lowest-income groups without doing much to help the overall economy." (more)