Monday, October 15, 2018
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Tha dollar loses its luster
Armando Chávez
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So far, adopting the US currency hasn’t been the answer for Latin American economies.

Worn out by bouts of hyperinflation and economic instability, some Latin American politicians and economists have pinned their hopes on the US dollar as though it were a magic wand to ward off economic disaster. Officially or unofficially, the dollar has already taken hold in several countries. People make purchases in dollars or put their savings in dollar-denominated accounts fearing that a political or economic disruption could cause a sudden devaluation of the national currency.

Some advocates fight for currencies to be pegged to the dollar, as the Argentine peso was during the 1990s, when one-to-one parity was established — a scheme that broke down early this year (LP, Jan. 14, 2002).

Whether or not to switch to the dollar has launched debates and become a campaign issue in various countries. The discussion has political and social overtones related to links with the United States, regional economic integration processes and even popular psychology. Passions reached a height in Ecuador in January 2000, when then-President Jamil Mahuad (1998-2000) announced that dollarization was the only solution to the country’s economic problems. Protests by indigenous groups supported by mid-level military officers forced him out of office (LP, Jan. 24, 2000).

Nevertheless, the protesters’ efforts to distance the country from the dollar and install a people’s government made little headway. Days later, when Gustavo Noboa — Mahuad’s vice president — took the oath of office, he pledged to follow through on his predecessor’s plan (LP, March 13, 2000). President-elect Lucio Gutiérrez, a former Army colonel who supported the 2000 protests and was a member of the group that briefly claimed power, has promised business leaders that he will not do away with the dollar.

According to Alfredo Eric Calcagno, an economist and consultant to the intergovernmental Latin American Economic System, the only possible benefit of a switch to the dollar is that it could help keep exchange rates steady during periods of hyperinflation — although that would not solve underlying economic problems and could cause new ones.

While prices have been relatively stable in Ecuador since the 1999 financial crisis, Carlos Cortez, director of the government’s Statistics and Census Institute, addmited last October that consumer spending power is still limited. The cost of basic necessities for a family is about US$346 a month, $125 more than the minimum wage. And dollarization has not helped reduce the 60-percent poverty rate.

The currency change in Ecuador also failed to solve problems of inflation and unemployment, and the economic growth recorded in the country over the past two years has been the result of an increase in production "despite dollarization, not because of it," Calcagno says. The Ecuadoran economy grew by 2.8 percent in 2000 and 5 percent last year. Inflation, which stood at 91 percent in 2000, dropped to 22 percent last year and is expected to average 10 percent this year. About 9 percent of the work force is unemployed.

According to Ecuadoran economist Alberto Acosta, distribution of wealth in the country has also become more inequitable. The wealthiest 20 percent of the population receives 49.7 percent of the income, while the poorest 20 percent receives only 5.4 percent, according to the UN Economic Commission for Latin America and the Caribbean (ECLAC).

El Salvador made the dollar its official currency last year. Although interest rates dropped, the move did not trigger economic reactivation (LP, May 6, 2002). The country’s economy grew by only 1.9 precent in 2000 and 1.5 percent last year.

Calcagno, a former ECLAC official, has warned in various books and articles of the perils of dollarization, including the loss of government control over use of monetary policy to control the economy or mitigate the effects of recession or other problems.

Use of the US dollar is particularly problematic, because US productivity is higher than that of Latin American countries. "The results of the difference in productivity are recessive readjustment and unemployment," Calcagno adds.

National sovereignty is also a factor in the debate, because once out of the government’s hands, monetary policy is at the mercy of the market and economic forces that "don’t defend the interests of the people, but those of the international financial system," he says.

According to Calcagno, stabilizing Latin American economies would require an increase in production and consumption and more equitable distribution of wealth. Since the 1970s, however, "the financial sector has displaced production as the basis of the economy in Latin America in general and Argentina in particular," he adds. Argentina is suffering the effects of that model. The country was unable to develop an economy that would result in the accumulation of capital and more equitable distribution of income.

Critics of dollarization say that it leaves countries open to external shocks, results in lower interest rates because reserves are in the US financial system, and keeps central banks from acting as lenders of last resort when a crisis hits. Calcagno also sees dollarization as a US effort to extend its hegemony as it negotiates the Free Trade Area of the Americas (FTAA), a single trading bloc extending from Canada to Tierra del Fuego, scheduled to take effect in late 2005 or early 2006 (LP, Dec. 2, 2002).

"The FTAA would get a huge boost if the United States imposed its currency on the participating countries," Calcagno says. Such a move would create closer financial ties with the United States, simplify transfers and eliminate the risk of devaluation, making investment more attractive. But dollarized economies depend on external capital flows. "The United States provides or controls most of these flows, so it has direct influence on internal economic policy," Calcagno says.

Nominal parity with the dollar is also fraught with peril. Economist Julio Gambina, director of the Institute of Cooperation in Buenos Aires, points out that Argentina’s decade-long romance with the dollar ended with four years of recession, violent protests, 19 million of the country’s 36 million residents below the poverty line, 70 percent of the country’s children living in poverty, and more than 40 percent of the work force unemployed or underemployed (LP, Sept. 23, 2002).

According to Gambina, dollarization and parity schemes have benefited Argentina’s large financial interests but have failed to lower the cost of credit and stimulate local production.

Gambina is concerned that the myth of the US dollar as a cure for Latin America’s economic ills has taken root in the region and says the issue should be debated publicly. "The real solution for developing countries is autonomous, sovereign production, where the people’s needs take precedence," he says. "And that won’t be solved by dollarization or convertibility."



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