Dollarization $ in emerging economies

AV

Positive? Negative?

Steps towards dollarization

• First if the there is inflation, people start saving in dollars

• Second, country dollarizes economy

Ecuador

% of US $ savings in developing countries

$ saving going up

Currency risk before and after dolarization in Ecuador and El Salvador

Inflation before and after dollarization in Ecuador and El Salvador

Inflation before and after dollarization in Ecuador and El Salvador

Ecuador macroeconomic and socioeconomic indicators before and after dollarization

El Salvador macroeconomic and socioeconomic indicators before and after

dollarization

Economic costs according to Cohen

Economic

1-loss of monetary policy, entirely dependant on other countries economy

2-No seigniorage (capacity to create money)

3-No more lending as last minute result.

Political

1-loss of identity. Loss of patrimony

2-insurance policy against risk

3-National currency independence is imperative when governments face the possibility of external dependence or threat

Consequences of dollarization on El Salvador according

to Towers and Borzutky.

• The authors point out that El Salvador was not facing a crisis and most of the dollarization process was because of political pressures of ARENA, the main party.

• After the process no economical growth in El Salvador

• The poor the most affected• 1-Not a solid understanding of exchange rate• 2- Poor don’t have access to loans• 3-No change for poor people who are used to make small

purchases.

Discussion

• Positive effects on economy, and especially helpful after or during an economic crisis. Visible

• Hard (from the data I gathered) to estimate exactly the political effects (symbolic loss, possibility of invasion, seigniorage)

• Hard to estimate the psychological effects or the effects of not enough change in a small purchase

Cost Benefit Analysis

• Net Benefits = Net Benefits = Economic Benefits - Political, Economic and Sociological CostsEconomic Benefits - Political, Economic and Sociological Costs

• Economic Benefits lower inflation, financial integration-no transaction cost, more economic growth

• Economic Costs

• Political Costs • Political (symbolic loss + insurance against risk + loss of currency independence)

• Sociological Cost (lack of orientation on poor people + unfavorable small purchases)

•

Conclusions

• More studies or more time to see the effects on both countries.

• Look in to a way to estimate political or socioeconomic costs and calibrate it against economic benefits and costs