Global Policy Forum

The False Dilemma of Dollarization


By Alberto Acosta

Nueva Sociedad
March/April 2001

" When one country is invited to unite with another, the ignorant, star-struck politician may accept in haste; the young, beloved of fine ideas, may celebrate, and the venal or mad politician may view it as a favour, and glorify it in servile speech. However, he who feels deep concern for his country, and is cautious and vigilant, need investigate the natures both of the people extending the invitation and of that receiving it, and state, whether by reason of their backgrounds and shared customs they are pre-disposed to work as one, and whether the fearsome aspects of the former are likely to grow in the union it seeks, and endanger the latter. He must enquire as to the political forces of the people extending the invitation, and the interests at that moment of its parties and men, and any man who reaches a decision without such an investigation, who desires union without knowledge, who recommends it in empty speech or because he is dazzled, or who defends it out of scant feeling for his native land, will damage the Americas".

Jose Marti

The Illustrated Review, New York, May 1891

Ecuador surprised the world in 2000 when it took the official step of fully dollarizing its economy. It was the first country in Latin America to sacrifice its national currency and replace it with a foreign currency as full legal tender. Until that moment, Panama was the only country to have utilised the United States dollar, a decision taken under foreign pressure shortly after its separation from Columbia in 1903 . At the dawn of the third millennium, one year after Ecuador's action, two Central American countries - El Salvador and Guatemala - are moving towards the full dollarization of their economies.

In these circumstances the discussion as to whether or not the economies in the region should adopt the dollar is heating-up. As things stand, in most cases "the final decision regarding the imposition or rejection of full dollarization will not be taken on the basis of reasoned plans, but will be a response instead to the dynamic of the inter-locking framework of hegemonic political interests and the logic of international capital, supported by the dominant strata in the countries of Latin America" (Schuldt). In other words, dollarization reportedly will be more the result of political decisions and anxieties, and less the fruit of considered expert opinion.

It seems useful from this perspective to examine its scope and limitations. Dollarization, therefore, cannot solely be located in the economic sphere, but rather needs to be viewed as a multi-purpose tool in several spheres, because apart from being presented as a measure which will provide a sharp injection of confidence to overcome the loss of faith in national monetary policy, it has also been used as a political life raft by governments in crisis. It is also viewed as a means of bringing about even collective hypnosis to boost the pace of structural adjustment - for example, it could serve as a lever to free up privatisation, as well as to hasten labour flexibility. It is even hoped that it can anchor the Neo-Liberal model, whose continuity would be to some extent guaranteed no matter who is in power - the technocratic dream of depoliticising economics.

It is essential to understand not only the internal logic of each country but also United States interests and, certainly, the strategy of the multilateral organizations. Dollarization, moreover, cannot be examined exclusively in an economic policy vacuum, but must also be examined from the standpoint of political economy. Only in this way can there be a discussion of the "daring hypothesis" put forward by Jurgen Schuldt, one of the fiercest critics of dollarization, who fears that "full dollarization of our economies will already have taken place in a few years".

If we acknowledge, then, that dollarization serves certain interests and hegemonic alliances within and outside each country, and that its implementation is a response to the steam-roller-like processes of capital internationalisation, then analysis should be undertaken from different viewpoints, highlighting the different implications and main agendas involved, as well as a series of prejudices and that inertia which transcend any strategic rationality.

1. Dollarization in the context of "globalization"

The trend towards a growing global integration of markets for goods and services, as well as of financial flows, is driving the growth for schemes which will make it possible to drive down business costs, monetary uncertainty and extant exchange risks, encouraging closer links with the world economy. This leads, in one way or another, to a questioning of the international monetary system based on the existence of a currency for each country. Their externalities would be reduced through processes of monetary centralisation. As frequently stated, this would place the world on the road to the establishment of a few monetary areas, where the current cases of unilateral or asymmetrical dollarization would merely be early responses to an unstoppable movement.

These manifestations of "globalization", as is very well known, find expression in a continuous collision of centripetal and centrifugal forces, and both, in a complex dialectical relationship, echo the different dominant types of logic, as well as those which are structurally excluded. "Globalization", the product of the internationalisation of the centuries-old capitalist system, is ambivalent. On the one hand, it is a force for homogenisation and integration and, on the other, it heralds diversification and disintegration. As such, the opening up of trade co-exists with the establishment of areas of regional integration, in which schemes for monetary centralisation are being proposed. The most noteworthy case is the adoption of the Euro as the currency of at least eleven countries in the European Union, which, in turn, is reportedly studying incorporation of the remaining countries in Eastern Europe. A group of Arab countries, perhaps influenced by the European experience, is also analysing the possibility of setting up its own monetary unit. And while it is not possible to compare unilateral dollarization with the creation of an optimum monetary area, as in the case of the Euro, one has to recognise the influence of the latter in encouraging some Latin American countries to give up their national currency. Moreover, some countries are reportedly acting in this way for fear of being excluded from international trade since, by renouncing their own monetary and exchange policies, they are hoping for swift integration in a larger, successful economy, in the vain expectation of hastening "globalization". This mixture of factors to which one reportedly needs to add the "demonstration" effect based on the "successes" which may be recorded during this dollarization adventure, could boost and speed up the numbers giving up their national currency. In the international arena, in any case, it cannot be assumed that the moment will necessarily arrive in which only a few currencies will exist. In the current process of globalization and triadisation, apart from national currencies, which still number several dozen, it is possible to make out - although on the sidelines - many other currencies which are social in origin and alternative types of money. This means that the processes of monetary centralisation, on supra-national bases, are dialectically counterposed to decentralised schemes.

What is true is that, in the midst of these globalizing tendencies, the international exchange rates system is being questioned as a demand born of technological transformation and the creation of a new international division of labour. One manifestation of this is the polarisation between rigid exchange rates - clearing houses or dollarization , and freely floating exchange rates, while the other exchange rate regimes with a degree of flexibility, such as mini-devaluations or exchange rate bands - have all but disappeared. Having said that, even when it would seem necessary for Latin American countries to sacrifice their national monetary policies, by means of spontaneous or official dollarization, it is too early to say what the on-going changes are going to produce in terms of the exchange and monetary system which predominates internationally.

2. Dollarization as a tool for American integration

In the case of the countries of Latin America, in particular, it is necessary to view dollarization as part of the trends towards integration which have speeded up since the creation of the Free Trade Area of the Americas at the First Summit of the Americas in 1994.

Washington wishes to use the FTA to bring to fruition its old dream of economic and even monetary expansion, which it has been hatching since the end of the Nineteenth Century. Let us recall that on the 24th May 1888, the United States government invited the countries of Latin America and what was then the Kingdom of Hawaii to an international conference in Washington to study, inter alia, "the adoption by each of the governments of a shared silver currency, which would be used obligatorily in reciprocal commercial transactions between the citizens of all the States of America". The use of gold and silver, which would be tied, was to be the subject of consultations with other nations around the world, in what could have been a Universal Monetary Congress, as Jose Marti stated in his description of the origin, evolution and failure of this initiative.

A lot of water has flowed down the Potomac since then. Washington, as hegemonic power, has made several attempts to consolidate schemes for controlling the other economies in the Americas. Outwardly with a certain degree of caution, the United States is fostering an asymmetrical process of full dollarization, since, seemingly, there is a desire in Washington to forge monetary union without assuming the costs and responsibilities, which makes this attempt rather unique and quite unlike the logic of monetary union in Europe.

The International Monetary Stability Act (IMSA), promoted by Republican Senator Connie Mack, summarises the main arguments for this initiative: - With the aim of solving the problem of seigniorage of countries dollarizing unilaterally, who lose out when they give up their sovereign power to print banknotes, it is proposed that a share of up to 85% is negotiated with the Treasury Department, provided that the latter agrees with the said dollarization and, furthermore, that the country in question is not hostile to the USA and fulfils a series of pre-requisites (a new type of certification, this time of a monetary nature).

- Here it is hoped that the country dollarizing will co-operate with the United States government in the fight against the laundering of illicit money.

- Dollarization is viewed as an opportunity to expand United States exports and investments, to the extent that exchange risk is reduced as monetary union based on the dollar is consolidated.

- Additional benefits are equally expected if the Latin American economies recover, which would bring lower risks and costs for United States citizens in general.

- It is also hoped that this measure will favour United States banks, since they would not only provide the money to dollarize the countries which do not possess sufficient net international reserves to cover monetary requirements, but they would also act, to some extent, as lenders of final recourse in offering the "collateral", for which they would have Treasury Department certification.

- Obviously the Federal Reserve assumes no commitment in cases where problems arise in the economies that unilaterally adopt the dollar.

The above bill therefore promotes a suitable environment for increasingly more countries to take this decision. However, it should be pointed out that in reality this bill is reportedly only another excuse for accelerating dollarization, since the possible advantages provided by IMSA in terms of shared seigniorage would only be felt ten years after the agreement with the United States is signed. What is more important, also, is that without any doubt the loss of seigniorage is not the only or the main problem faced by an economy in which the dollar is adopted unilaterally.

With unilateral incorporation into the monetary sphere of the European Union, the chances of negotiating future symmetric monetary integration (if this were an option to follow) are reduced. A country which unilaterally adopts the dollar is filing away an important part of its economic sovereignty, namely its monetary and exchange policy, without obtaining anything in exchange.

While it is true that the Latin American economies are already highly dependent on the United States market, dollarization will mean them tilting much more towards the USA. A dollarized economy, therefore, will be much more closely aligned with an economic cycle different to its own, with scant opportunity to develop counter-cyclical policies when necessary, because of the very fact that it has given up its own monetary and exchange policy. Moreover, the regional economies do not have the same rate of innovation and growth in systemic productivity as the USA. This is worrying since the economy of the countries of Latin America differs from that of the United States not only in size and specific importance in the global context, but particularly in terms of its specialisation and of the global productivity of its factors.

This decision will makes the economies going down this road much more vulnerable to and dependent on the United States Federal Reserve (FED), and they will not have any opportunity whatsoever to influence its decisions. What would happen if the FED's senior executives give in to the temptation to print more money, as has occurred on occasion? If the FED makes a mistake, a country which has unilaterally dollarized would be entirely unable to call it to account. It is perhaps for this reason that Washington's position towards dollarization is ambiguous. On the one hand, they comment that the basic macro-economic conditions do not exist in some countries and, on the other, they are encouraging the IMF to help tailor this monetary reform. In the case of Ecuador, initial doubts were replaced by growing support, which has been evident in the case of El Salvador from the outset. This apparent opposition or indifference is being used by Washington reportedly to try to prevent an exacerbation of anti-US feeling, whilst keeping intact or even boosting its negotiating power if dollarization were to be adopted by some of the bigger countries: Brazil, Mexico, Argentina and Chile.

If - particularly in Ecuador - the dollarization adventure were to pay dividends, they would take advantage of it, and if it were to fail, they would not be obliged to shoulder any of the responsibility.

In conclusion, any variation in United States monetary policy would have a far greater impact on a dollarized economy than before, but for all of that the dollarized country could not expect any special consideration. A major crisis in the USA would have devastating effects, but the country would have no right whatsoever to defend itself, such as through devaluation. However, it should be said at the same time that an international financial crisis or a recession in the USA itself could spur Washington into accelerating the dollarization process, in an attempt to consolidate its "American" market. The response of the multilateral organizations has been varied, but it fits in, to some extent, with the logic described above for the government of Washington, even when these organizations seek to appear neutral on the outside. There was no official position at the IMF and the World Bank, but when the time came they imposed dollarization on East Timor and, after some initial resistance, they are supporting the government of Ecuador to speed up structural adjustment through dollarization. The contradictions in the IDB have been greater.

At the same time, dollarization affects the position of the dollarized country vis-a-vis the other economic blocs, which make up the globalizing triad, namely, the USA, Europe and Asia, headed by Japan and/or China. The situation of a country with a significant degree of economic integration with Europe or Asia, and which is not fundamentally dependent on the United States economy, must be the subject of particular study.

As we stated previously, the dollarization of Ecuador, El Salvador or Guatemala cannot be compared with the process of European Monetary Union. In the case of the latter, the decision was taken to create and share a new common currency following a complex, lengthy process of macro-economic policy convergence, based on fiscal harmonisation criteria and flexibility in terms of the factors of production. There was no giving up of seigniorage. Moreover, all the European countries are represented at the European Central Bank, which means that when they voluntarily agreed to give up part of their national sovereignty, they gained in terms of regional sovereignty. Furthermore, this decision was taken democratically in most European countries. The three Latin American countries, on the contrary, with their unilateral, authoritarian dollarization, are not sharing or deciding or winning anything, worse still, they are losing a great deal.

Moreover, if a growing number of countries, particularly without any preparation, signs up to this dollarization process, external pressures on the FED will rise and, in practice, confidence in the dollar itself could slip, at the same time as the degree of flexibility in the United States' monetary policy could be curtailed. This issue must be taken seriously, since the United States economy, which is the largest and most dynamic in existence (and in which there is blind faith....) has been running a chronically high current account deficit, as well as the world's largest foreign debt, namely one trillion dollars (its GDP is 7.5 trillion dollars).

The unilateral, submissive adoption of the dollar as national currency is a harsh blow to Latin American integration. It weakens the chances of horizontal union as a platform for possibly bringing in a common monetary unit allowing better terms in international negotiations, even with the United States.

A country which unilaterally dollarizes will have to pay a great deal of attention to trade relations with its immediate neighbours. The latter will benefit from the enormous trade advantage provided by exchange rigidity; a dollarized country, which meets its production and employment costs, would export "its" stability to its neighbours. This same situation can be observed in relations between Argentina and Brazil, a country which is reaping a major advantage in its fight against inflation from the supply of commodities from its Southern neighbour, which, additionally, has given important ground to Brazilian manufactured goods. The same situation again has emerged prematurely in trade relations between Ecuador and Colombia and Peru. As has been seen several times, a strong currency strategy has rapidly weakened the competitiveness of the country adopting it, a situation which becomes even more complex when a supposedly irreversible position is adopted, as with dollarization.

3. Dollarization as a lever for consolidating the Washington Consensus (WC)

Those wishing to promote dollarization describe it as a step towards a new economic model. It is presented as a general shift in economic policy. Without failing to recognise that it is more than a simple change in monetary approach, it is impossible to accept that dollarization is the beginning of a new economic model. There is a desire to attain a superior stage in the current model, inspired by the WC, by giving up the national currency. Dollarization does not represent a change in direction, at the most it opens the final chapter in the long, tortuous march to Neo-liberalism (in the case of Ecuador) or is designed as a means of underpinning institutionalisation of the socio-economic changes introduced following painful domestic conflict (the case of El Salvador and Guatemala). What is interesting, furthermore, is that it has appeared precisely when that model was showing clear signs of exhaustion.

In the above countries, those wishing to introduce dollarization openly have resorted to manipulation and even "economic terrorism". Also, at the same time that legal changes are being introduced to impose dollarization and bring about the other changes, which are needed for it, all out efforts are underway to break social resistance, either by authoritarian or even repressive means, or using clientele social policies.

In summary, although the adoption of dollarization is a result of the incompetence of the ruling elites, these same elites are promoting it as an innovation and even as the only available alternative for achieving economic stability.

These dollarization adventures are leading to a growth in United States influence in its "backyard". Unilateral dollarization stands out as part of an explicit strategy on the part of the United States, which is linked to the growing militarisation of its foreign affairs policy. The situation is critical if we consider that the priorities of that power do not coincide with those of Latin America. This is what led John Maynard Keynes to oppose the implementation of a convertibility programme in Great Britain in the mid-1920s, because, as he stated, it was "a mistake to believe that in the long-term the Americans were going to run their business according to British interests".

4. Dollarization and macro-economic management rigidities

From a technical standpoint, the rationale for dollarization lies essentially in the provision of macro-economic stability, which would be achieved with the disappearance of the money issuing function. This expectation has its roots in the view of the renowned Neo-Liberal Nobel Prize Winner for Economics, Milton Friedman, who has stated that "inflation is always and everywhere a monetary phenomenon". Following this logic, the Central Bank is the root of all problems, since its very existence is a "tragedy" (Lopez Buenano). Accordingly, they say, once this structural weakness, caused by the discretionary nature of monetary and exchange policy, has been eliminated, there will be a guaranteed recovery of the economy, through stabilisation.

The expectation in this monetarist argument is to guarantee healthy economic management - that is, in accordance with the rationality of the WC - which would be reflected in the much-desired price stability, fiscal equilibrium, reduction in interest rates, the elimination of speculation and the establishment of a growth-inducing economic regime - aspects which merit separate consideration.

Is price stability synonymous with macro-economic stability?

Without denying the stabilising potential of a fixed exchange rate in certain circumstances, it is important to distinguish between price stability and real stability. If stability is understood as an evolution in the real economy which prevents or at least mitigates successive booms and busts, flexible exchange rate management is preferable to the fixed exchange system, particularly where the latter is extremely rigid, and dollarization is the maximum expression of this. In the fixed exchange rate system, domestically a significant inflow of capital tends to boost the use of credit and internal demand, encouraging consumption, which does not necessarily benefit the whole population or the production system (which is normally weak), which will have to compete with growing imports. When an extremely rigid exchange rate is defended in the face of a current account deficit or capital flight, the result will be a rise in interest rates, with the aim of halting the flight of capital and a resultant economic downturn, to curb imports. Dampening down policies will be the order of the day.

In the case of the exogenous impacts on dependent countries producing a small number of commodities, particularly small open economies, the adjustments will be devastating. The repercussions will no longer be inflationary, since price changes will be minimal, but rather quantitative: wage cuts; rising unemployment; a rise in unused capacity or simply the closure of firms which do not manage to boost competitiveness. Here, labour flexibility takes on one of the roles of exchange policy.

Dollarization, then, clearly is an extreme measure, such as could be utilised in situations of hyperinflation - which has not been experienced by any of the countries which have dollarized, and nor were they close to it. There are low rates of inflation in both Guatemala and El Salvador. In the case of Ecuador, which is paradigmatic in many respects, in the year following dollarization there was sustained growth in inflation, which rose from 61% in 1999 to 91% in the year 2000 - which is the highest rate in the country's history. In this respect, dollarization was neither the best nor the only tool for tackling inflation. Friedman's well-known saying all too clearly conceals the socio-economic reasons, both endogenous and exogenous, for inflation, and specifically the causes of an increase in the money supply.

Yet, what is more serious is that price stability does not usher in growth. Argentina, recently, with zero inflation and a very deep recession, is proof of this statement.

Does an irreversible exchange rate guarantee fiscal equilibrium? Firstly, we should bear in mind that as monetary and exchange policies disappear, there is a simultaneous growth in the importance of fiscal policy. It is a policy which is extremely limited in scope, either because of the size of the foreign debt, the extent of planned budgetary spending, shortcomings in the tax system itself, lack of efficiency in the State itself or the inconsistencies brought about by the conditions laid down by the International Monetary Fund.

In a dollarized economy, there is a reinforcement in the state budget's role of principal political battle ground, which means that growing political pressure may be reflected in new imbalances. And, given that it will no longer have the financial support of the Central Bank, it will have to be financed by higher tax contributions and charges for public services. On the expenditure side, there will be growing pressure to eliminate subsidies, pare down the civil service and reallocate spending according to the political weight of the different groups in society.

Furthermore, faced with a loss of competitiveness, this import-promoting monetary approach could rapidly lead to new external bottlenecks. It will not, therefore, be surprising, if a dollarized country rapidly enters a continuous, accelerated process of foreign borrowing, made possible by the boost in its international credit rating, brought about by dollarization itself (and debt rescheduling in the case of a moratorium, as in the recent case of Ecuador. Once again Argentina is an eloquent example. There, an initial reduction in its foreign debt shortly after the introduction of convertibility, was followed by it soaring to almost three times its size before monetary reform. And Panama, with its 13 re-schedulings with the IMF, the body which has taken on the role of lender of final recourse, is further proof of the addiction to foreign borrowing inherent in this type of exchange rigidity 21 . We should bear in mind that, in the final analysis, dollarization itself will depend on fiscal equilibrium, and does not produce it automatically. Without it, sooner or later, dollarization itself will have scant chance of surviving, since a fiscal deficit will distort the system and, as a result, lead to a loss of credibility of the latter, unless there is continuous recourse to foreign borrowing.

Another point not to be overlooked, is the question of decentralisation and autonomy processes, which will be more aggressive in an economy without a national lender of final recourse, like the Central Bank. In this respect dollarization makes the establishment of decentralised structures with a sufficient degree of national solidarity more complex, and increases the trend towards concentration in terms of the appropriation of domestic savings by the richer regions which are better integrated in the international market. This monetary rigidity would, in fact, encourage pressures towards separation of "globalisation" and would deepen the concentration of wealth in the most developed parts of the countries on the periphery.

Can dollarization ensure that interest rates will come down? There can be not doubt that the potential usefulness of dollarization lies in the possibility of creating a more predictable environment that would encourage long-term saving, in the absence of exchange risk, particularly because of the apparent irreversibility of dollarization. However, this measure alone cannot eliminate country risk, nor uncertainty vis-a-vis third country devaluations.

While on the one hand, it is necessary to examine the differences between domestic and international rates, and compare them with those of the USA, in particular, more than ever before it is important to bear in mind the huge gap between our productivity and technology and those of our great Northern neighbour. What is even worse is that, in certain critical situations, higher interest rates may be required to attract the foreign capital which is vital to the proper functioning of the dollarized system, and particularly the financial system, which will be another of its key components. Furthermore, if anyone believes that in times of crisis it is possible continuously to turn to the international banking system for credit, they should know that potential lenders evaluate a country's payment capacity, that is its ability to service its foreign debt, and this has nothing to do with the exchange regime in force. Not all countries have the same relative importance as Argentina to be able to aspire, in the final instance, to financial armour-plating, which, without a doubt, is designed to protect its international creditors.

To reduce interest rates it is not necessary to take such an extreme measure, which has many secondary effects which are neither well known nor desirable. There are less perverse ways of achieving lower interest rates - we only have to recall that Costa Rica, with no dollarization, has recorded lower rates of interest than Panama with its dollarization.

Moreover, the subject of interest rates must also be considered in a wider context, rather than simply believing that the desired reactivation in productivity will be triggered simply by their decline.

Does an absence of devaluations eliminate speculation?

Dollarization would seem to bring to an end to speculative pressure on the exchange rate between the national currency and the dollar, since there would no longer be a national currency. But it is a mistake to expect that speculation in general would be wiped out. Speculation is not the exclusive result of the economic management of a country in isolation, and neither is it only caused by repeated exchange fluctuations. Speculation is fed on a large scale by the international financial market, and in many countries in the region, as we observe every day, it is a caricature of it. Dollarization would not bring an end either to the risk of runs on banks, such as those which have occurred in Panama.

As if the above were not enough, dollarization encourages the laundering of dollars from drug-trafficking, both because of the facilities provided by the surrendering of the national currency and the need to establish "financial integration" which in some way can guarantee macro-economic stability. It is easy to imagine the economic and even political effects on fragile societies of a growth in capital from illicit activities.

Is dollarization definitely the desired lever for promoting growth?

As has often been observed in economies which went into rigid exchange systems, what occurs, at least until inflation can be substantially reduced, is a relative growth in the cost of domestic goods and services. This will obviously have an impact on the production system of the country affected by exchange rigidity, since there will be an unquestionable reduction in competitiveness and growing upheaval in the structure of the economy which is affected by IMF adjustments.

The relative loss of export competitiveness is worrying in a world of imperfect competition, which is still dominated by variable exchange rates. If there is insufficient financial or labour flexibility the result will be more unemployment, a cut in the use of installed capacity and even a large number of companies going bankrupt. Therefore, it will be necessary to boost this competitiveness by sacking staff or cutting wages, as well as squeezing income out of nature at any cost.

In the case of small economies producing commodities, the advisability of an extremely rigid exchange rate must be the subject of extremely careful analysis. In any case, a country, which has dollarized, with an insufficient response capacity, could suffer traumatic repercussions if its neighbours were to devalue. The goods of the country devaluing would become cheaper, driving up those of the country, which has dollarized. This would be an advantage for the consumers of the dollarized country who have purchasing power, but it would seriously undermine the ability of the country's production system to compete. Brazil's devaluation in 1999 caused a massive upheaval in Argentina's economy. The latter's goods became so expensive that it even had to import Brazilian meat .... In addition, this, in turn, could bring about greater recessionary pressures and, as a result, a cooling on the part of foreign capital, which could even trigger a massive exodus of business, as in the case of Argentina.

A correlate of the above is that the pro-dollarizers expect to deal with the problem of unemployment through greater labour flexibility, an option that does not necessarily produce the expected results. Panama and Argentina show that the problem of unemployment has not been solved; on the contrary, in the case of the latter, unemployment has stabilised at an unprecedentedly high level. Moreover, even where the number of jobs were to rise (many of which would be of inferior quality), there can be no grounds for expecting real earnings of workers to rise: in Panama (a country which adopted the dollar over a century ago, and which has never been an economic role model for Latin America), while real earnings are stable in dollar terms, the wages of non-skilled workers, who make up the majority of the economically active population, are at subsistence levels (Moreno-Villalaz). In fact, the combination of an irreversible exchange rate and Neo-Liberalism will deepen the trend towards concentration and exclusion: one only has to see what is occurring in Argentina. Moreover, the arguments in favour of flexibility not only serve as an obstacle to equitable agreements between employers and workers, but will also deepen social conflict even more.

Without denying the importance of exchange stability for promoting domestic and foreign manufacturing investment, it would be well to be aware of its potential and repercussions, bearing in mind that investment is not solely a function of prospects for devaluation. There are other important conditions apart from monetary stability, such as the profitability of the relevant business, the country's payment capacity and even its growth, without forgetting the state of social peace and conditions of the legal institutions.

Based on the experience of Panama, we can conclude that the building of broad "financial integration" is clearly an essential requisite for avoiding major macro-economic jolts, a requisite which cannot be improvised. This implies that adjustments will often take place through the banking system's portfolio, a key means of access to the foreign capital market, which will act as an escape valve in cases in which there is a lack or a surplus of financial resources (Moreno-Villalaz). As a result, the financial system, which is de-nationalised and even more integrated abroad, will act as a pro-cyclical resource transmission belt, to which will fall most adjustments in a dollarized economy.

Finally, as a result of the new rigidity imposed by dollarization, there will be an increase in the trends towards structural heterogeneity of the production system, since there will be a rise in productivity in certain sectors of the economy, most of which are considered modern, thanks to intensive imports of modern technology, much of which use scant labour, to the detriment of traditional production sectors where jobs are low skilled, poorly paid, and low in security. In fact, this has been the case since the introduction of Neo-Liberalism, which has exacerbated even more the productivity difference between the modern and traditional sectors, a situation which will deepen the structural roots of under-development.

Scholars have described many requirements for the "success" of dollarization: a healthy finance system, which is integrated internationally; fiscal sustainability and ease of access to the international credit market; labour flexibility and greater social discipline, as well as a large number of stabilisation funds and mechanisms, endowed with suitable regulations to manage booms and deal with cyclical crises. These requirements, which could even have been brought about with a flexible exchange rate or a regional monetary unit, do not in fact guarantee the viability of dollarization, or of any economic regime, while the predominant institutions in almost all the countries in the region remain in place, characterised by paternalism, authoritarianism, corruption, and the feeding frenzy on the national currency itself...

In contradiction to the pro-dollarization discourse, the mere introduction of the dollar cannot guarantee better conditions for growth, savings, investment or economic essentials.

5. Conclusion

Finally, dollarization is an artificial, authoritarian decision which reduces a country's response capacity. It is a means of eliminating exchange and monetary management as opposed to the way in which this important price is set by the market. It represents an under-developed State's renunciation of monetary control in order to become subordinate to a larger State. Could it be that the pro-dollarizers are not as liberal as they say they are, and that they are only taking refuge in the dollar to complete or further embed WC-inspired structural reforms when, firmly attached to the essence of their ideology, they should, rather, be supporting a flexible exchange system? Despite the massive propaganda campaign for dollarization, its implementation, as part of the Neo-Liberal model, seems to represent official abandonment of the promotion of a development project, at least one with an inclusive orientation for domestic society in its entirety. This is serious, for in order to govern in a globalising economy, if there is really a desire to achieve collective incorporation of the society internationally, the last thing to do is to place the country in the straitjacket of a rigid exchange rate. It is worrying that some people are recommending abandonment of the basic tools of economic policy, such as monetary and exchange policies, and a tying of the economy in isolation to an inflexible system which may generate unsuspected problems. It would be one thing to adopt a rigid exchange system if the world's main currencies were operating on a fixed exchange model, but it is totally different to adopt it in a world in which the main currencies are fluctuating in relation to each other. Dollarization, far from being a type of automatic pilot or, if one prefers, a stimulating restriction, is tantamount to a new block, the voluntary, unnecessary amputation of the finger of one hand, which increases the work which the other four, which are also severely disabled, must carry out....

A country, which adopts the dollar, with the whole burden of curbs on its sovereignty which exist today, would see its response and management capacity curtailed. It would further weaken its ability to strengthen and protect its domestic market, and it would have to wait for development to be triggered externally. And, although it may seem paradoxical, if policies designed to promote the domestic market are shelved, there would also be a considerable reduction in the scope for designing and implementing a strategy to allow the country to play an active role in the international market. In fact, the complex process of economic readjustment which dollarization will bring about, will deepen the trends towards re-commoditisation and the de-industrialising pressures on the production system, which have been in existence for a long time, and which are generating an accumulation model to fit the new international division of labour.

Social conflict, as disputes over distribution deepen and the demands of excluded, disadvantaged groups increase, will find new expression, when the alliance clearly emerges between the pro-dollarization camp and groups opposed to it, the composition of which will vary in line with the appearance of exchange and social rigidities as a result of this marriage of convenience between dollarization and Neo-Liberalism...

In short, the introduction of the dollar will not give rise spontaneously to the changes needed to promote development nor extreme policies of openness and liberalisation. The challenge will be all the greater in a dollarized economy, for an economic policy alternative will also have to prepare the way out of the trap which is this extreme exchange rigidity, when suitable conditions arise. Old challenges will have to be met with fresh responses. These must be viable in terms of benefiting and actively involving people at the grass roots and including schemes for greater horizontal, regional integration. The time is ripe, therefore, for proposing responses aimed at overcoming the Neo-Liberal model, at least to "tame the beast of 'capitalism'", as Gunther Grass said. Responses, that is, which provide new macro-economic policy alternatives. Viewed from an integrated development perspective, it is not, therefore, a matter simply of solving the monetary and exchange policy issue. To adopt the dollar or not - that is not the question.

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