I'm just back from Ecuador, where dollarization seems to have been a qualified success.
First, some background. Ecuador has a political system that is, if you can believe it, actually worse than the DR's (and I got my first whiff of teargas to prove it). It's institutions are so weak that no elaborate schemes are necessary for high ranking government officials to steal public funds. As one former president of the country did, you just walk into the Central Bank and take it - a la Sadam Hussein.
It is said that the cost of dollarization is that countries' governments lose control over monetary policy -- i.e. the ability to adjust to short term shocks in the economy by tightening or loosening the money supply. This is, however, to be weighed against the benefit -- that countries' corrupt, irresponsible, conniving governments lose control over monetary policy. In other words, if you have a corrupt government that manipulates currency in various schemes for personal and political gain, the benefit of losing control outweighs the cost. In addition, I understand that, to some extent, loss of monetary policy can be offset with effective management of fiscal policy.
It is also said that the success of dollarization would largely be based on the level of commercial contacts with the United States and other dollarized countries. I note that, in this regard, the Dominican Republic probably exceeds Ecuador. Though Ecuador exports more to the US, the DR's economy is more thoroughly tied to the US through tourism, remittances and geography.
It also takes no great political or popular will to dollarize. A weak president of Ecuador who only lasted 6 months in office did it with the help of the US Treasury and a reformist Ecuadorian Central Bank board, essentially while nobody was looking. Once the process started, it just rolled on.
The experience of the Ecuadorians was at first mixed. There was no reduction in inflation. There was "rounding up" of costs. There was a drop in real income. However, after about a year, the advantages of monetary stability took hold. Wages adjusted. Prices stabilized. Ecuador now has amongst the lowest inflation in Latin America.
Today, even with its ongoing legendary political instability continuing, the Ecuadorian economy continues to grow, almost immune to the governmental tribulations.
Mondongo wrote not too long ago that he saw Leonel Fernandez' economic policies (artificially inflating the Peso, rebuilding reserves - all at tremendous cost to the economy) as being designed to create an environment whereby the DR government can borrow more money. I put this forward: Given the visit of Deputy Treasury Secretary Taylor to the DR last Summer to promote dollarization, isn't Fernandez really creating a situation where the DR can be easily dollarized? With the artificially inflated Peso, wouldn't the DR actually enjoy short term relief, and not shock, from dollarization?
First, some background. Ecuador has a political system that is, if you can believe it, actually worse than the DR's (and I got my first whiff of teargas to prove it). It's institutions are so weak that no elaborate schemes are necessary for high ranking government officials to steal public funds. As one former president of the country did, you just walk into the Central Bank and take it - a la Sadam Hussein.
It is said that the cost of dollarization is that countries' governments lose control over monetary policy -- i.e. the ability to adjust to short term shocks in the economy by tightening or loosening the money supply. This is, however, to be weighed against the benefit -- that countries' corrupt, irresponsible, conniving governments lose control over monetary policy. In other words, if you have a corrupt government that manipulates currency in various schemes for personal and political gain, the benefit of losing control outweighs the cost. In addition, I understand that, to some extent, loss of monetary policy can be offset with effective management of fiscal policy.
It is also said that the success of dollarization would largely be based on the level of commercial contacts with the United States and other dollarized countries. I note that, in this regard, the Dominican Republic probably exceeds Ecuador. Though Ecuador exports more to the US, the DR's economy is more thoroughly tied to the US through tourism, remittances and geography.
It also takes no great political or popular will to dollarize. A weak president of Ecuador who only lasted 6 months in office did it with the help of the US Treasury and a reformist Ecuadorian Central Bank board, essentially while nobody was looking. Once the process started, it just rolled on.
The experience of the Ecuadorians was at first mixed. There was no reduction in inflation. There was "rounding up" of costs. There was a drop in real income. However, after about a year, the advantages of monetary stability took hold. Wages adjusted. Prices stabilized. Ecuador now has amongst the lowest inflation in Latin America.
Today, even with its ongoing legendary political instability continuing, the Ecuadorian economy continues to grow, almost immune to the governmental tribulations.
Mondongo wrote not too long ago that he saw Leonel Fernandez' economic policies (artificially inflating the Peso, rebuilding reserves - all at tremendous cost to the economy) as being designed to create an environment whereby the DR government can borrow more money. I put this forward: Given the visit of Deputy Treasury Secretary Taylor to the DR last Summer to promote dollarization, isn't Fernandez really creating a situation where the DR can be easily dollarized? With the artificially inflated Peso, wouldn't the DR actually enjoy short term relief, and not shock, from dollarization?
