Getting Over the Dollar
The thought of dumping their own yo-yoing currencies for the strong and stable U.S. dollar has made many beleaguered central bankers swoon. And we’re not just talking crisis economies such as Ecuador, which in 2000 jilted its inflation-prone sucre in favor of the dollar: Last April, Canada’s second-largest bank proclaimed that dollarization is the "only ...
The thought of dumping their own yo-yoing currencies for the strong and stable U.S. dollar has made many beleaguered central bankers swoon. And we're not just talking crisis economies such as Ecuador, which in 2000 jilted its inflation-prone sucre in favor of the dollar: Last April, Canada's second-largest bank proclaimed that dollarization is the "only viable option" to boost the country's ailing economy.
The thought of dumping their own yo-yoing currencies for the strong and stable U.S. dollar has made many beleaguered central bankers swoon. And we’re not just talking crisis economies such as Ecuador, which in 2000 jilted its inflation-prone sucre in favor of the dollar: Last April, Canada’s second-largest bank proclaimed that dollarization is the "only viable option" to boost the country’s ailing economy.
As is often the case with adolescent crushes, however, the dollarization craze may be more fad than substance. In a May 2001 National Bureau of Economic Research working paper, "Dollarization and Economic Performance: An Empirical Investigation," UCLA economist Sebastian Edwards considers the economic track record of dollarized nations and concludes that proponents have "either ignored the record, or embellished it." The numbers bear Edwards out. From 1970 to 1997, median per capita gross domestic product (GDP) growth in dollarized countries reached 0.5 percent per year, while nondollarized economies grew nearly four times as fast. The median fiscal deficit over the same period amounted to 4.6 percent of GDP in dollarized nations, compared with 3 percent elsewhere. The lone bright spot for dollarizers was median annual inflation, which totaled a mere 3.9 percent, less than half that of nondollarized countries.
Dollarization supporters usually highlight Panama — dollarized since 1904 — as their success story. But, according to Edwards, Panama’s low inflation and steady economic growth over the last 30 years have had less to do with the dollar than with its "serious addiction" to the International Monetary Fund (IMF). Since 1973, Panama has had 17 IMF programs, the most in Latin America. "It is not obvious that the IMF will be so friendly to future dollarizers that do not have Panama’s geopolitical importance," Edwards warns. In other words, unless you’re already tight with the United States, don’t expect a successful long-term relationship with the dollar.
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