Dollarization $ in emerging economies

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Dollarization in emerging economies
Negative?
Positive?

• AV

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Steps towards dollarization

• First if the there is inflation, people start
  saving in dollars
• Second, country dollarizes economy

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Ecuador
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of US savings in developing countries
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saving going up
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Currency risk before and after dolarization in
Ecuador and El Salvador
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Inflation before and after dollarization in
Ecuador and El Salvador
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Inflation before and after dollarization in
Ecuador and El Salvador
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Ecuador macroeconomic and socioeconomic
indicators before and after dollarization
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El Salvador macroeconomic and socioeconomic
indicators before and after dollarization
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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

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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 dont have access to loans
• 3-No change for poor people who are used to make
  small purchases.

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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
  

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Cost Benefit Analysis

• Net Benefits Economic 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)

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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