Dollarization in El Salvador

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Dollarization in El Salvador

• William Gonzalez
• March 10, 2011

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Context

• General ideas of why dollarization is necessary
  for the growth of the economy in El Salvador
• Who benefit the most from the Dollarization
• The support of ANEP (National Association of
  Private Entrepreneur).
• The effect that it had over the citizens
• Is it going to help the nation at the long run?

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Growth of the economy

• By changing from colon to dollars, El Salvador is
  going to lower down interest rate
• Bringing new investments to the nation
• At the same time reducing the transaction cost of
  international trade
• More importantly dollarization is going to solve
  the problem of inflation.

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GDP Chart                                       
                                                  
                                                  
        
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Who benefit the most?

• By having low interest rate investor and business
  owners are encourage to barrow money to improve
  different aspects of their business such as
  technology to increase their profits.
• The problem with this is that more then 40 of
  the population of El Salvador works informal
  sector.

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• Bringing investors
• The problem with this is that essential services
  such as electricity and telephone are being
  privatize and their cost have increased while the
  minimum wages are decreasing
• Since 1999 the telephone service has increased
  around 37, Electricity 221 and the increase of
  33 in the last decade.
• Basic services take up to 41 of a minimum wage
  salary

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• Reducing transaction cost
• El Salvadors main trader partner was the United
  states before dollarization.
• The main contributor of foreign currency is not
  the trade between this two nations, but the
  remittances of Salvadorans living in the USA.
• The remittances form 15 of the GDP of El
  Salvador.

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• Inflation
• It is true that El Salvador had a problem with
  inflation, but it was one of the few nations that
  kept for the most part a stable rate between 8-10
  pesos per dollar.

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GDP Chart                                       
                                                  
                                                  
        
Inflation, Average consumer prices
Percent Change
year
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• president Francisco Flores made the announcement
  in January first of 2001 that dollarization was
  going to take place in El Salvador. It took two
  weeks for the lenitive branch to vote in favor of
  the notion and in the same month dollars were
  already in circulation.
• Many European countries took at least three years
  to educate their citizens about the new currency
  before taking place. While in El Salvador the
  change was over night.
• The main reason of the dollarization was because
  it was in the interest of ENAP who is the main
  support of the political party Arena.

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• In other words, ENAP provide financial support
  for the candidates of Arena in exchange for
  political favor to increase the revenues of
  business of ENAP members.
• It is necessary to point out that most members of
  Arena are members of the ENAP.
• As result, the most affect by the change of
  dollarization was the poor citizen
• As the change of the currency was taking place
  one of the issues that took place was that
  unskilled workers were getting pay in pesos while
  most of the stores require dollars.
• Another issue that affects the citizens is the
  reduction of tourism to El Salvador.