Transcript Dollarization: Pro and Con

The Dollarization of Latin
America: Beneficial or
Detrimental to Economic Growth
Iris Ceballos
Wei-Han Chang
Ryan Higashihara
Keren Nahum
Adriana Montes
Michael Pham
What is Dollarization?
• Official: Foreign country adopts the dollar
as their national currency
– Eliminates old currency in favor of the dollar
• Unofficial: Foreigners hold bank deposits in
dollars to avoid high rates of inflation.
Advantages
• Avoids currency and balance of payments
crises
• Strengthens financial institutions, lowering
possibility of inflation
– Creates positive sentiment toward investment
• Closer integration with global and U.S.
economies
– Lower transaction costs and assured stability of
prices
Disadvantages
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Loss of control over monetary policy
Loss of profits from seignorage
Loss of national identity
Loss of lender last resort
Arguments for:
• Ecuador’s positive reaction:
– Drop in inflation rates
• 60% to 23% in 2001
• 16% in January of 2002
• Expectations of single digit rates by 2003
Arguments for:
• Ecuador cont.
– GDP growth of 5.4% in 2001: highest in Latin
America
– Increase in purchasing power
– Increased stability and confidence in financial
institutions
• Standard and Poor’s upgrading of bonds from
negative to stable
Arguments Against:
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Ecuador
Lack of history
Dependency on the United States
Rich gets richer and the poor are SOL
Not a quick solution for their long-term
economic problems
Arguments Against:
• Argentina would have been in a worse stage
if they went to full dollarization
• Panama: stop of cash flow
Conclusion: Pro
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LOWER inflation
LOWER transaction costs
Higher CONFIDENCE for investors
INCREASED purchasing power
DISCIPLINE for irresponsible countries
Conclusion: Con